The shareholders will obviously be hurt the most, but the pain will ripple far beyond the financial sector. Have you been following the credit crunch so far? Businesses are already having difficulty getting loans, and bank failures will only make it more difficult for quite a while. Capital investment will slow significantly as a result. We might see widespread deflation as the money “created” by those banks disappears.
This doesn’t mean banks shouldn’t be allowed to fail (though it might be wise to modify the bankruptcy process to better accomodate large banks), but it will not be painless.