Meredith Whitney Scares Us All -- Again

Posted by: Ben Steverman on May 20

The credit crisis made Oppenheimer (OPY) analyst Meredith Whitney a star. Today demonstrated she’s still a force to be reckoned with.

Last fall, as credit markets froze up and big banks reported huge, unexpected losses, Wall Street had a credibility problem: Its fancy securitized products were self-destructing. Into that credibility vacuum stepped Whitney, the loudest of the analysts predicting disaster for Citigroup (C) and other financial giants.

Now, however, many believe the financial crisis is easing. Financial stocks have bounced back from the Bear Stearns (BSC) debacle.

Others might be optimistic, but Whitney hasn’t changed her tune. Today she released another gloomy prediction on the financial sector: “We believe the current credit crisis is far from over,” she wrote. “In fact, we believe that what lies ahead will be worse than what is behind us.”

The culprit, she says, is the breakdown in the securitization market, which ultimately will cause huge losses for banks on consumer loans. Large banks were hit with $70 billion in losses since July, but she thinks more than $170 billion in losses could be coming. The credit crisis could extend through 2009 and beyond, she said.

Pessimists like Ian Cooper saw the report as confirmation that market bulls have gotten ahead of themselves recently.

But let’s hope Whitney is wrong. She’s predicting some very tough times ahead for a large portion of the U.S. stock market.

And, yes, Whitney could be wrong: Just because someone was right in the past doesn’t mean she’ll be right in the future. After so much success predicting the worse, Whitney might be losing her ability to look on the bright side of things. Maybe the banking industry will catch some breaks, like a strong economic recovery.

And yet the market still certainly listens when Whitney speaks. On the day her report was released, banking stocks fell 3.6%.

That’s the kind of power you wield when you’ve earned investors’ trust.

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Reader Comments

Dave

May 20, 2008 07:41 PM

When you hear of the widespread fraud that banks, ratings agencies and other financial institutions have heaped on the American Investor, you have no choice but to listen to analysts who have an accurate track record. Banks have been terrible investments, from BAC, UBS, BS, WB and others of there ilk. I've never owned a US bank stock, but I'm glad to see the derivative sham is finally being exposed.

Clyde Williford

May 20, 2008 08:13 PM

I believe she is absolutly right. As a small business owner I fight with "Very High" interest rates on credit card. The Banks are relentless on charging higher & higher rates and the people get behind on their dills and it won't much longer before everything will be coming down. Folks will just walk away from the debt same as a large number of home owners. I had to sell my home of 14 years to pay my bills and try to earn a income to live on. At 62 it's hard to find a job to pay what is needed to live on here in Silicone Vally.
Banks, Credit Card Co. etc. are in my opinion are cutting their own throats, and for me it couldn't happen to a "nicer" group.
cw

Cedric

May 20, 2008 09:24 PM

Hmm. Eh, why bother with the finance sector? For the last several months, metal industries, like copper and steel, have done very well. For the last several *years* energy has done just fine. I'm glad my stock screens, courtesy of the Motley Foot Mechanical Investing discussion board, have done me as well as could be expected.

mp

May 20, 2008 11:01 PM

From the post: "After so much success predicting the worse, Whitney might be losing her ability to look on the bright side of things."

Are you a psychoanalyst as well as a business reporter?

quinka

May 20, 2008 11:03 PM

Understanding derivitaves, I can understand what she's saying and it's true.

vapordreams

May 21, 2008 07:20 PM

If what she say is fundamentally correct and sound. there is no reason for it not to happen. Law of cause and effect always applies

tony

May 26, 2008 11:55 AM

With the ratio of "economic assets(including OTC contracts) to "Tier 1 reserve capital assets" at 5/1 to 8/1 for the major banks and investment houses
,isn't it obvious that the banks will need 5 to 8 times as much capital as they have on their books to cover the risk in their portfolios? The banks have only recognized a small portion of losses that eventually must be recognized.

Toby

June 11, 2008 03:39 PM

you say, "After so much success predicting the worse, Whitney might be losing her ability to look on the bright side of things."

It is now 20 days after Meridith's prediction, and she is right as usual. How did you conclude that she "might" be losing her ability? Wishful thinking, eh!

kocha

June 18, 2008 10:20 AM

So here it is, Wednesday June 18, and Ms.Whitney's prognostications about the financial sector debacle continue to be incredibly prescient. She has been the only analyst who has seen with her own eyes and exclaimed, "The Emporer has no clothes!" She is that rare economic analyst that can be TRUSTED!

u paid what?

July 4, 2008 01:44 PM

C has about $2Trillion in diversified assests- that makes anything less than $100Bn a rounding error.

C is likely going lower after they cut the dividend- i see a worst case low of about $12ish.

markets reflexively overshoot in either direction- this has been true since before the tulips and now will b no different.

get nice while u can.

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Businessweek’s Lauren Young, Aaron Pressman, Matthew Goldstein, Emily Thornton, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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