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

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."

Whitney's clients include major hedge funds, such as billionaire Steve Cohen's SAC Capital Partners, Fontana Capital, and Denver Investment Advisors. None of the firms was available for comment. But one client, a portfolio manager who oversees billions in assets, was quick to praise her work. "I think the world of her. She's bold and she nails it," said the manager, who declined to be identified.

Not everyone agreed with Whitney's call on Citi. Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, said it wasn't clear that Citi would have to cut its dividend. He noted that the bank had weathered a financial crisis in the early 1990s without taking such a step.

A Maverick on Wall Street

As a group, sell-side stock analysts have a reputation for being reluctant to call to task the companies they cover. But Whitney has made a career of such calls. She has issued sell ratings on stocks such as Enron, Providian, CIT (CIT) and Capital One (COF), which she downgraded twice during 2006. Her buy calls have been equally surprising. She issued a buy on Goldman Sachs Group (GS) in 2006 when its shares were at $130. The stock soared to $200, and is now trading around $207.

Whitney arrived on Wall Street 16 years ago with a bachelor's degree in history from Brown University. She didn't have an MBA or any formal training in financial analysis, but she landed a job as a junior analyst at Oppenheimer (OPY), covering Enron and other oil and gas companies. In 2001 she got a job with the hedge fund FrontPoint Partners, working with Steve Eisman, a well-regarded financial analyst. "Unlike a lot of sell-side analysts, Meredith is willing to question what companies say," says Eisman.

Whitney returned to the banking world two years ago after a stint as a commentator for Fox News (NWS). She wound up on television almost by accident. Whitney had left FrontPoint to join First Union, which was later acquired by Wachovia (WB). The move allowed her to run her own show, but there were differences and she left. A noncompete agreement kept her out of financial services for three years, during which she worked as a commentator at Fox. Whitney described the differences with First Union as "cultural." Wachovia didn't return a call seeking comment.

At Fox, she met John "Bradshaw" Layfield, a former professional football player and World Wrestling Entertainment (WWE) personality once known as "Death Mask." They were guests on an August, 2003, segment of Fox's Bulls and Bears. They disagreed over the prospects for Citi. Layfield was the bull. "She asked me why you would want to own a financial stock during a time of rising interest rates, and she was right. She humiliated me on national TV," the 6-foot-6, 300-pound Texan said. But friends at Fox set them up by placing them together at a table for eight at a Manhattan restaurant. Everyone else at the table had agreed not to talk to Layfield or Whitney. The ploy worked; they started dating and were married in February, 2005, on a beach in Key West, Fla.

Whitney received several death threats after the Oct. 31 report. She takes such threats in stride, saying "sometimes it's good to know that you are striking a nerve." Layfield, a private investment banker and author of Have More Money Now, says the people who threatened his wife were cowardly. He canceled a trip to Texas so he could see to her safety.

Pride Goeth Before a Fall

Whitney says she is fascinated by the way power is used and misused on Wall Street, adding that so many of the problems in the corporate world—from Enron to Citi—flow from ego. "So much of this is a human story. Hubris is the cause of management mistakes 90% of the time," she says.

Since Whitney issued her report on Citi, Credit Suisse, Morgan Stanley, and Goldman have followed with their own sell ratings, and Citi has lost $50 billion in value. It closed Monday at $30.70, down 3.2% for the day and 47% from its 52-week high of $57. It remains to be seen whether her predictions about Citi's dividend and capital structure will be vindicated. But so far, in the words of one senior investment banker, "the market is betting on her being right."


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