The Most Outspoken Analyst on the Street

By Maria Bartiromo

Chris Casaburi

That red glow you see on Wall Street is the hot hand of Meredith Whitney, a banking analyst for CIBC World Markets who is fast making a name for straight talk amid the credit crisis infecting the financial markets. In late October of last year, Whitney predicted that Citigroup (C) would have to sell assets or cut its dividend. She also downgraded the stock to essentially a "sell." That report peeled $15 billion off Citi's market value in one day and, some say, helped usher then CEO Chuck Prince into an unceremonious retirement. On Jan. 15, Citi slashed its dividend by 41%. When I talked with Whitney on Feb. 6, she had just downgraded Goldman Sachs (GS) even though she's a big fan. And Whitney was expecting losses in the following week when major European banks report earnings.

MARIA BARTIROMO

Another wild week for the markets. What's upsetting investors so much?

MEREDITH WHITNEY

I think it gets tiring for investors to have bad news thrown at them for seven consecutive months. And so people a few weeks ago started to get optimistic, started buying stocks again. Then the bad ISM number came out. [The Institute for Supply Management's index fell on Feb. 5, registering a significant slowdown in services.] And also the massive disruption in the debt markets clearly is signaling that things are worse than people wanted to believe.

How tight is the credit market right now?
A major structured deal has not gotten done in seven months. People are afraid to do business because they're afraid to catch a falling knife. The receptivity of investors to buy anything that's not plain-vanilla high-grade debt is as bad as I've ever seen it.

What could turn this around?
The big disconnect is that there's no agreement between buyer and seller on any level. So sellers are holding on to aspirational valuations on securities. What we need to see is a true purging to get the system back to a state of restored liquidity. Because at this point there's no faith in prices because the financial institutions that hold most of these assets are in absolute denial.

In other words, they think there's a market and there really isn't?
Let's say people are holding on to a CDO they're carrying at anywhere between 30 cents and 50 cents on the dollar. But they're holding on to it and not selling it because they believe it's worth 60 cents or 70 cents on the dollar. To paraphrase [BlackRock's (BLK)] Larry Fink: An asset is only worth what you can sell it for. The fact that banks are not selling these assets and the fact that they have raised such dilutive capital to hold on to these assets at aspirational values shows how in denial they are. I mean, Merrill (MER), UBS (UBS), and Citi raised 20% in dilutive capital in the last three months.

Was it the right move for Bank of America (BAC) to acquire Countrywide?
On a longer-term basis, there's some franchise value there. On a short-term basis, it's less than ideal.

You called the dividend cut at Citi. What other dividends are in jeopardy?
You can't take anyone off the table because the loss curves have accelerated at such a pace from the third quarter to the fourth quarter that people's earnings are going to be in serious jeopardy this year. It's likely that many banks will have to take another round of capital raises, and Citi is certainly one of them. Wachovia (WB) just raised $3 1/2 billion last night. Bank of America raised over $13 billion last week. And at a certain point people might start to think, well, maybe it will simply be cheaper to cut our dividend.