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Monday, April 20, 2009


Meredith Whitney's a bear on banks

Michael Maiello, Forbes Published: Monday, April 20, 2009

Daniel Acker/Bloomberg NewsMeredith Whitney believes that the entire U.S. economy needs to be rebuilt from the ground up. Financial services were our greatest export, she said, and now we need to create something new for the ...

Bank stocks are still not safe, municipal budgets are under intense stress and the American consumer will now have to deal with a credit card crisis as risk averse banks yank credit lines. That's the sour economy that star analyst Meredith Whitney painted for Steve Forbes during a candid and spirited interview at the Forbes Townhouse in Manhattan's Greenwich Village.

"I am staying away from bank stocks still," said Whitney, who recently left Oppenheimer to start the Meredith Whitney Advisory Group, where she provides research and counsel to private and institutional investors.

Though Whitney was referring to larger banks like Citigroup, Wachovia and Bank of America, she's also sour on smaller regional banks that some analysts have suggested are safer bets.

In part, she says, it's because even if those banks have stronger balance sheets, they don't have enough reach to loan to a broad enough market to support public company multiples. Liquidity is an issue for individual investors, she warned.

Whitney's suspicion of regional banks is in line with a call made on Intelligent Investing by John Jacquemin, manager of the Mooring Capital hedge fund and a member of the Forbes Investor Team. Jacquemin believes regional bank balance sheets aren't as strong as they appear because they have exposure to commercial real estate securities that have yet to be written down to conform with economy reality.

Whitney also discussed credit card lines and how the country's biggest lenders are sucking liquidity out of consumer wallets.

"This is the most interesting topic for me out there, which is credit card lines," Whitney says. "So, there are about US$4.2-trillion in unused credit card lines. And there are about US$840-billion of used credit lines. In the fourth quarter alone, half a trillion dollars of lines were cut from the consumer -- half a trillion."

As Americans face layoffs and pay cuts, they're turning to their credit cards to make up the difference, says Whitney. These cuts in unused credit lines amount to cuts in compensation. Her gloomiest forecast is for a 50% cut in unused credit lines.

Finally, she argues that state and local budgets, under severe strain from losses in income and property taxes as well as their own inability to access credit markets, could dampen any prospects for a recovery. State and municipal spending accounts for 12% of gross domestic product.

"A misplaced assumption could be that something can change and you'll have a V-shaped recovery inside of 2009. I don't see that happening. I don't see an L-shaped recovery, either," Whitney said.

Whitney ultimately believes that the entire U.S. economy needs to be rebuilt from the ground up. Financial services were our greatest export, she said, and now we need to create something new for the world to buy. That process, she believes, will take several years.

link to article is here.

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