The Analyst Who Rocked Citi

Meredith Whitney's dire predictions shook the financial giant to the core and brought death threats. But Wall Street seems to think she got it right

by Steve Rosenbush

Meredith Whitney

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Meredith Whitney probably will not be getting any holiday cards from former Citigroup (C) Chief Executive Chuck Prince. The CIBC World Markets (CM) stock analyst was a leading agitator for the ouster of the embattled leader of the $200 billion bank.

The company, already under fire because of its weak stock price, had run into even more trouble over its exposure to the troubled credit markets (BusinessWeek.com, 10/18/07). Whitney went out on a limb in an Oct. 31 report and said the bank, hard hit by the subprime market meltdown, was undercapitalized—despite its huge size.

The Frightening Forecast

Whitney's Halloween report downgraded the stock to market underperform, the equivalent of a "sell." But that was just the beginning. She predicted that Citi would be forced to cut its dividend and shed valuable assets to boost its ratio of tangible capital to assets, which had fallen to 2.8%, just over half the level of its peers.

Whitney began work on the report in early October, after Citi reported a dramatic decline in earnings and took a third-quarter writedown of $6.5 billion. She issued the report to coincide with the Fed's Oct. 31 meeting, which warned of slowing economic growth. That was bad news for banks, which already have reported huge writedowns related to subprime mortgages.

Whitney reasoned that given the current economy, the bank didn't have the means to boost its capital ratios through organic growth. She argued that cutting the dividend or selling assets was the only quick way to raise cash. She predicts that "in six to 18 months, Citi will look nothing like it does now. Citi's position is precarious, and I don't use that word lightly," she says. "It has real capital issues." Citi is likely to report an additional $8 billion to $11 billion in writedowns for the fourth quarter.

The report hit the stock market with the force of a freight train slamming into a brick wall. Citi shares fell 7% Nov. 1, as analysts at Morgan Stanley (MS) and Credit Suisse (CS) followed with their own downgrades. The broader market also dropped on the news, with the Standard & Poor's 500-stock index falling nearly 2.5%. Citi's board called an emergency meeting for the following weekend, and CEO Prince stepped down three days later, on Nov. 4.

Rebuilding Citi's Capital Ratio

Whitney, 38, has emerged as a key voice of concern in this year's increasingly serious credit market crisis. In her analysis of the credit meltdown, Whitney has focused on Citi, which has the second-highest exposure to complex and risky credit pools known as collateralized debt obligations. While Merrill Lynch (MER) took on more exposure, Citi's weak capital position makes it particularly vulnerable, according to Whitney. She says Citi has no choice but to boost its capital ratio through divestitures and a smaller dividend. "They don't have enough capital, pure and simple. They will have to address that, ASAP," Whitney said in a November interview (BusinessWeek.com, 11/1/07). She says Citi will have to sell higher-quality assets such as real estate and credit cards because no market for weaker assets currently exists. Those sales, she predicts, will depress earnings for years to come.

Citi declined to comment on Whitney's analysis. It maintains, however, that it can rebuild its capital ratio by the middle of 2008 without a dividend cut or massive asset sales. The company may be on the verge of a massive job cut, though. CNBC reported Nov. 26 that Citi could cut as many as 45,000 of its 327,000 jobs. Citi confirmed that it was looking at ways to become more efficient, but issued a statement saying any specific reported number was "not factual."