Merrill, UBS, Citi in Whitney's crosshairs

NEW YORK (Fortune) -- Oppenheimer analyst Meredith Whitney upped the ante on the banking sector Thursday when she predicted Merrill Lynch, UBS, and Citigroup would report worse-than-feared earnings and find themselves once again scrambling for cash.

The new report comes just two days after she cut first quarter, full-year 2008, and full-year 2009 estimates for Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), JPMorgan (JPM, Fortune 500), Wachovia and Wells Fargo due to estimates for mortgage- and CDO-related writedowns.

"We expect net losses for C, MER, and UBS of greater than $30 billion," Whitney wrote Thursday. "As many expected the fourth quarter to be the "kitchen sink" for the industry, we believe first quarter results, to be reported in two weeks time, will be a rude awakening."

Whitney's reports have been known to move markets, but midday Thursday Citi and Merrill (MER, Fortune 500) were trading slightly lower while UBS (UBS) was up about 2%.

Nevertheless, that would be cold comfort for investors who have come to take her predictions very seriously.

She also referred to a report she wrote last November, "Ring of Fire," that predicted Tier 1 Capital, the financial cushion banks must have in order to meet regulatory banking requirements, would fall more dramatically than anyone expected. "We believe this report is once again relevant and that the ratings agencies' actions in February will contribute to "Round 2" of financial recaps," she writes.

Her argument is straightforward and simple. Ratings agencies downgraded more than $370 billion worth of securities. "The indisputable truth about how this works is simply that when a rating agency downgrades a security held on a bank balance sheet, the regulator requires said bank to hold more capital against said security/asset."

According to Whitney, Citi is once again in most need of the swiftest and largest capital infusion.

Whitney has been one of the financial sector's biggest skeptics, a role that thrust her into the spotlight amid the ongoing Wall Street meltdown.

It began last October, when she downgraded Citi and said it would need to cut its dividend in order to raise much-needed capital. She was one of the first to paint such a grim picture of the bank's future, and she was proven correct.

Less than two weeks later, she released the "Ring of Fire" report, that said downgrades to asset-backed bonds would force banks to raise capital. That report hit on November 11 and by the end of January Wall Street's biggest firms including Merrill Lynch, Citigroup, Morgan Stanley (MS, Fortune 500), and the now defunct Bear Stearns were all working to raise capital from sovereign wealth investors.

Whitney was back in January, this time setting her sights on the bond insurers, a group that had been scrutinized because they insured risky asset backed securities and would likely not be able to make good on those contracts.

"While we had previously believed the monoline insurers MBIA and Ambac were too important to fail due to the threat of systemic risk and thus would likely be bailed out, we no longer think systemic risk is even realistic or a bailout of the monolines even viable."

Not since her October Citi report had she received so much resistance to a report. But the chorus of voices demanding the complete overhaul of the monoline industry shares many of her concerns.