Whitney Says Stress Tests Will Be Harder for Regional Banks
By Margaret Popper and Jamie McGee
April 21 (Bloomberg) -- U.S. regional banks will have greater difficulties in passing the government’s stress tests, said Meredith Whitney, the former Oppenheimer & Co. analyst who gained fame by predicting a decline in the industry’s shares.
“For a lot of the regional banks that have so much commercial real estate exposure as a percentage of their core capital levels, it’s going to be more difficult,” she said in a interview on Bloomberg Television yesterday. She said “big” banks will pass the tests.
The window to raise equity capital has closed and banks will begin selling non-core assets, Whitney said. “You will see what I describe as a yard sale,” she said.
Whitney, 39, the founder of Meredith Whitney Advisory Group, predicted in late October 2007 that Citigroup Inc. would have to cut its dividend, which the bank did in January 2008, by 41 percent. At the time, her call triggered the steepest tumble in Citigroup shares since September 2002.
“If you have a key to Dean Wormer's office, you can pass the stress test,” she said. “If you don’t have a copy of the keys, then you will have a harder time passing the stress test.”
bloomberg.com
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.
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