"We haven't really focused on the weakened state of municipalities and state budgets. So I think we're in for many, many job losses…"
In a little over a year, Oppenheimer (OPY) Managing Director Meredith Whitney has become one of the most influential voices on Wall Street. Her unvarnished views—especially about Citigroup (C)—have led to lots of ink and landed her on a list of the most important women in business. Earlier this week, Whitney wrote an unusual op-ed column in the Financial Times in which she said that as a citizen, she felt obliged "to offer solutions to this economic train wreck."
How much longer will this financial crisis last?
If I had to be specific, I'd say another 18 months at least.
For 15 or 20 years cheap credit was extended to a lot of people who were not worthy. Now you've got to resize that business back to traditional, normalized credit. Home ownership rates that peaked at 69% probably have to drift back to 66% or 65%. Remember, they had been 64% prior to 1994 for as far back as the eye can see. There are a considerable number of Americans who were homeowners for a brief period of time who will not be homeowners anymore.
In your FT column, you said you were more bearish than you've been for the past year and a half. Please explain.
I think we're entering a new phase of this financial crisis. The first phase was characterized by the shutdown of the securitization market, which hurt investment banks and large, super-regional banks. The next phase is going to be the impact on the U.S. consumer. And that is more significant. Two-thirds of the economy is dependent on the consumer. And we haven't really focused on the weakened state of municipalities and state budgets. So I think we're in for many, many job losses and considerable consumer pain.
Before we get to the consumer, tell me a little more about states and municipalities being weakened.
For starters, state and local governments contribute 12% of GDP. So their importance can't be underestimated. The major expansion in their budgets came from taxes on property sales. Those sales taxes are down considerably. Thirty-one out of 50 states are underfunded for their 2009 budget. State budgets are required to be balanced, and typically when this has happened in the past, states and municipalities have responded by cutting workforces and spending. That's going to have ripple effects on the economy.
You've said that the next shoe to drop is the consumer, whose credit lines will be turned off. Why will those credit lines get zapped?
The big issue is the accounting and regulatory changes on the horizon. A regulatory proposal already endorsed by three of the federal agencies that govern credit-card issuers and scheduled to go into effect in 2010 seriously restricts a lender's ability to [raise rates based on] risk it sees. You have $800 billion in revolving credit lines today, but $4.7 trillion of unused lines. Those unused lines represent potential real risk for the lenders. So if they can't reprice, I believe you're going to see $2 trillion of those unused lines cut from the system. Say you have a $10,000 limit, and you're only using $200 of it. You may think, "O.K., if I lose my job, if my kid needs braces, if my dog gets sick, I have all this unused credit at my disposal for a rainy day." A consumer's primary source of cash flow is his job. We argue that his secondary source of cash flow has become his credit-card lines. So when that's diminished, this could push a lot of consumers over the brink.
Let's talk about Citi. Will the bailout save it?
From a taxpayer's standpoint, there was too much risk in this deal, with the government getting too little. And I don't see it ending well for taxpayers. I thought that this Citi deal was such an affront to taxpayers that it motivated me to write the op-ed piece.
It's interesting because the government is only going to own some 7% of Citigroup, compared with 80% of AIG (AIG).
Well, no one's going to buy new capital of AIG, right? So the government now owns it and is going to have to fund it, and the way they structured that deal, they've put themselves in a real box. I think the way they've structured the Citi deal, they tried to give themselves more wiggle room by encouraging investors to come in.
Saudi Prince Alwaleed last week blamed much of the mess at Citi on Chuck Prince, and a story in The New York Times suggested Bob Rubin encouraged the bank to take inordinate risks. Are Prince and Rubin being unfairly pilloried?
I don't think so. And the board is equally accountable. But there's no doubt that as a steward of shareholder capital, Chuck Prince did a lousy job. Citi consolidated all of these different businesses but never did what Jamie Dimon did at JPMorgan (JPM), which was take three very unsexy, drudgery-filled years and integrate the system. So it's incredibly expensive to operate all these silo businesses. And then Chuck Prince made matters worse by gunning the acquisition engines and not focusing on generating capital or growing the equity base. It's years of mismanagement.
What do you think Citi will look like in a few years?
I think that Citi will be forced to sell businesses. And it will be left with a smaller, much less international business.
Are we getting close to a market bottom?
The market for financials is nowhere near a bottom.
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