Maria had Meredith Whitney on again yesterday. Meredith's view of the collapsing financial industry hasn't gotten any sunnier. Specifically:
- Credit crunch still less than half done
- Financial institutions need capital, and no one wants to give it to them (thus the Fed move)
- Companies still carrying assets at ludicrous valuations
- All the new capital financial companies are raising is just plugging holes, not funding growth. Thus, lending remains tight, putting even more strain on consumer.
- Soon the problems will spread to the corporate loan market
- Banks still drastically underestimating total fall in house prices: Futures say 33% peak-to-trough, most banks estimating far less, Fannie (FNM) and Freddie (FRE), too.
- Merrill (MER), Citi (C), et al won't see old highs for at least five years
- 25 companies will need to raise capital in next few months, including Wachovia (WB)
- Citi will cut its dividend to near zero
- Jury still out on Lehman
- Goldman, Amex CEO, and JP Morgan's Dimon real pros
Full interview courtesy CNBC:
Maria Bartiromo: WELCOME BACK. TODAY THE FEDERAL RESERVE EXTENDED THE EMERGENCY PRIMARY DEALER CREDIT FACILITY TO INVESTMENT BANKS TO AT LEAST JANUARY '09 AS OPPOSED TO THE EXPECTED EXPIRATION OF Trash THAT OPENING OF THE CREDIT WINDOW BY SEPTEMBER OF THIS YEAR. MERRILL LYNCH THIS WEEK BECOMING THE LATEST FIRM TO TRY AND SHORE UP THE BALANCE SHEET BY SELLING OFF TOXIC MORTGAGE INVESTMENTS AT A HUGE LOSS. ANNOUNCING AN $8.5 BILLION CAPITAL RAISE. IT'S A MOVE INVESTORS HAVE BEEN SCRUTINIZING AS THEY TRY TO ASSESS WHERE THE BOTTOM IS AND WHETHER THE WRITEDOWNS WILL END ANYTIME SOON. TAKING A LOOK AT THE FINANCIALS' FUTURE, IN A CNBC EXCLUSIVE RIGHT NOW I'M JOINED BY MEREDITH WHITNEY, EXECUTIVE DIRECTOR OF EQUITY RESEARCH AT OPPENHEIMER. MEREDITH, WELCOME BACK TO "CLOSING BELL ."
Meredith Whitney: THANKS FOR HAVING ME.
Bartiromo: GOOD TO SEE YOU. SO TELL ME ABOUT YOUR OPINION OF THIS FED OPENING THE DISCOUNT WINDOW AND EXTENDING THAT OPENING TO JANUARY OF '09. WOULD YOU SAY THAT THIS IS A POSITIVE OR DOES IT WORRY YOU THAT PERHAPS THINGS ARE EVEN WORSE THAN PEOPLE THOUGHT?
Whitney: WELL, EVERY TIME THEY OPEN THE WINDOW THEY LEAVE THEMSELVES LESS ROOM FOR THE NEXT CRISIS, RIGHT? SO THERE'S AN AREA WHERE THE BROKERS NEEDED THE WINDOW TO BE OPEN AND IT'S GOTTEN THIS EXTENDED NOW A COUPLE OF TIMES, A FEW TIMES. AND I THINK THAT'S BECAUSE THEY'RE NOT -- THERE'S NOT A LOT OF CAPITAL OUT HERE THAT WANTS TO RESCUE ANY OF THESE BROKERS, THAT WANTS TO COME IN AND BUY ASSETS, AND AS A RESULT THEY NEED TO BACKSTOP IT. THE BROKERS ARE PLAYING A VERY IMPORTANT ROLE HERE. BUT WITH THAT EXTENSION YOU REALIZE THE FED AT LEAST HAS REALIZED THERE'S NO QUICK FIX ON THE HORIZON AND THEY NEED TO GIVE THEM THAT MUCH MORE OF A LIFELINE.
Bartiromo: WHERE ARE WE IN THIS CYCLE, MEREDITH? DO YOU THINK WE'VE SEEN THE WORST YET OR NOT?
Whitney: I THINK THAT -- I KEEP SAYING WE'RE LESS THAN 50% OF THE WAY DONE. AND IT SEEMS LIKE WE'VE BEEN LESS THAN 50% FOR A REALLY LONG TIME. BUT WHAT YOU KNOW IS THAT CAPITAL TODAY, ALL THE CAPITAL THAT HAS BEEN RAISED, HUNDREDS OF BILLIONS OF DOLLARS OF CAPITAL, HAS JUST BEEN PUT ON HOLD. AND THE VALUATIONS AND THE ASSUMPTIONS THAT COMPANIES ARE USING IN CARRYING ASSETS OUT ARE STILL UNREALISTIC. SO THE CENTRAL ROOT OF ALL THIS ISSUE IS HOUSING PRICES. HOUSE PRICES CONTINUE TO DECLINE. AND THESE ASSETS ARE VALUED AT REALLY ASPIRATIONAL VALUES. SO THEY'RE GOING TO CONTINUE TO BE WRITEDOWNS. CAPITAL WILL CONTINUE TO BE RAISED, RECAPITALIZATIONS BY SO MANY OF THE FINANCIAL INSTITUTIONS.
AND THE WHOLE COMPONENT OF – OR THE WHOLE NOTION OF EQUITY IS REALLY DESIGNED TO FUND GROWTH. THIS EQUITY'S JUST PLUGGING HOLES. IT'S NOT FUNDING ANY GROWTH. AND AS A RESULT THERE'S LESS AND LESS LENDING AVAILABLE. AND THAT MEANS THAT THERE'S MORE AND MORE STRAIN ON BUSINESSES AND MORE AND MORE STRAIN ON THE CONSUMER.
INTERESTINGLY, AMERICAN EXPRESS REPORTED LAST WEEK, AND THEY TALKED ABOUT HOW MUCH MORE DIFFICULT THE SPENDING AND CREDIT ENVIRONMENT WAS THAN THEY EXPECTED, AND ONE THING THAT THEY'VE SEEN AND ONE THING THAT EVERY CREDIT CARD ISSUER HAS SEEN IS THEY'VE CUT LINES OF CREDIT FOR CONSUMERS IN THE AREAS THAT HAVE HAD THE GREATEST HOUSE PRICE DEPRECIATION.
WELL, THOSE ARE THE GUYS THAT NEED THE CREDIT THE MOST. AND AS A RESULT YOU'VE SEEN THE STREAM AND REDUCED CREDIT LINES PUSH CONSUMERS OVER THE EDGE. SO THAT GETS WORSE. THE ON BALANCE SHEET CREDIT IS WORSE THAN PEOPLE EXPECTED, AND IT'S BEYOND THE HOUSING CRISIS. AND I THINK THE CORPORATE STRAINS YOU'RE GOING TO START TO SEE THE CORPORATE LOAN MARKET GET INTOXICATED AS WELL.
Bartiromo: IT'S REALLY BEEN AN EXTRAORDINARY PERIOD. MEREDITH, IS THERE ANY REASON TO BELIEVE THESE STOCKS RETURN TO THE HIGHS ANYTIME SOON? WOULD YOU BET ON THAT? EVEN IN THE NEXT TWO, THREE, FOUR, FIVE YEARS? CAN THESE STOCKS GO BACK TO THE HIGHS?
Whitney: IN FIVE YEARS I DON'T KNOW. IN TWO YEARS, NO WAY . THREE YEARS, NO WAY.I MEAN, THEY'RE EXPECTED TO MAKE SIMILAR PROFITS ON DRAMATICALLY SMALLER ASSET BASIS. AND THEY'RE NOT GROWING CAPITAL. SO YOU KNOW
MERRILL LYNCH, CITI, THEY'VE CUT -- REDUCED THEIR CAPITAL BASE -- OR BOOK VALUE PER SHARE BY 50% IN A YEAR'S TIME AND THAT'S NOT UNIQUE AND IT WILL NOT BE UNIQUE TO THOSE COMPANIES. SO WITH THAT MUCH LESS CAPITAL THEY CAN GROW THEIR ASSET BASE THAT MUCH LESS AND AS A RESULT HOW DO THEY GROW EARNINGS?
Bartiromo: LET'S TALK ABOUT THE MERRILL MOVE. $30.6 BILLION THERE. I'M READING YOUR REPORT HERE. MERRILL LYNCH ANNOUNCING AN $8.5 BILLION EQUITY RAISE AS WELL AS THE SUBSTANTIAL SALE OF A.B.S. AS CDOs REDUCING THE CDOs' EXPOSURE BY 11.1 BILLION.HOW DO YOU VIEW THE MERRILL MOVE, MEREDITH?
Whitney: I WAS ON THEIR CONFERENCE CALL, THE SECOND QUARTER CONFERENCE CALL ASKING THAIN TO DO THIS. AND EVERYTHING I HEARD ABOUT THAIN FROM PEOPLE WHO KNEW HIM WELL EXPECTED HIM TO DO THIS BEFORE, YOU KNOW, THIS WEEK. AND AS A RESULT I THINK THIS IS A MOVE THAT HE WAS REALLY COMFORTABLE WITH. THE BEST THING YOU CAN DO IS GET YOUR WORST PROBLEMS BEHIND YOU. AND I THINK THAT'S WHAT HE DID.
BUT AGAIN, RAISING A TREMENDOUS AMOUNT OF CAPITAL JUST TO PLUG A HOLE. SO MERRILL STILL HAS A LOT OF ISSUES IT HAS TO DEAL WITH ON A CAPITAL BASE THAT HASN'T GROWN. THEY STILL HAVE TO SHED ASSETS. I THINK IT'S DEFINITELY A MOVE IN THE RIGHT DIRECTION, BUT THEY'RE NOT OUT OF THE WOODS YET.
I DO THINK MOST IMPORTANTLY THAT WHAT THEY WROTE THEIR ASSETS DOWN TO EVERY INSTITUTION IS GOING TO HAVE TO FOLLOW IN LOCK-STEP, SO YOU'RE GOING TO SEE MORE INSTITUTIONS THAN JUST MERRILL IN A SHORT PERIOD OF TIME MARK ASSETS DOWN AND COME BACK TO THE CAPITAL MARKETS.
Bartiromo: WHO'S POISED TO DO THE BIGGEST CAPITAL RAISE AND HAVE THE MOST SIGNIFICANT WRITEDOWNS? YOU STILL BETTING ON THE BANKS DOING SO? WHICH ONES ARE ON YOUR LIST?
Whitney: IT'S ALL THE GUYS WHO GOT SO IN BED WITH THESE HOUSING-RELATED ASSETS. SO IT'S CITI, UBS, YOU KNOW, OBVIOUSLY MERRILL HAS TAKEN ITS WRITEDOWN. BUT CITI AND UBS HAVE THE GREATEST EXPOSURES. BANK OF AMERICA STILL HAS SOME EXPOSURES. TO A LESSER DEGREE. I THINK THAT WACHOVIA, NOT WITH THE SAME EXPOSURES, WILL BE IN THE MARKET SOON.
Bartiromo: WACHOVIA IN THE MARKET SOON TO DO ANOTHER RECAP?
Whitney: YEAH. LOOK, THEY'RE GOING TO BE -- THESE INSTITUTIONS ARE NOT ALONE BECAUSE EVERYONE WAS INVOLVED IN MORTGAGES. IT'S INTERESTING, WITH THAT CLIP THAT YOU SHOWED EARLIER, HOW MUCH OF WALL STREET AND BANKING REVENUES REALLY GRAVITATED TOWARDS THE MORTGAGE MARKET. I MEAN, THESE WERE LOPSIDED BUSINESS MODELS. AND AS A RESULT, BECAUSE THEY'RE SO LEVERED IN THE MORTGAGE MARKET THEY HAVE SO MUCH DOWN SIDE TO THE MORTGAGE MARKET. AND SO I THINK YOU'RE GOING TO SEE, YOU KNOW, 25-PLUS INSTITUTIONS COME BACK FOR CAPITAL INSIDE OF THE NEXT TWO MONTHS.
Bartiromo: DO YOU THINK THESE DIVIDENDS ARE IN JEOPARDY AND CONTINUE TO BE IN JEOPARDY? YOU SAID THAT THE LAST TIME, YOU SAID CITIGROUP WILL PROBABLY HAVE TO CUT THE DIVIDEND, OTHERS AS WELL. DO YOU STILL FEEL THAT WAY?
Whitney: I JUST DON'T UNDERSTAND WHY A COMPANY WOULD GO TO THE MARKET AND RAISE CAPITAL AND CONTINUE TO PAY ITS DIVIDEND. SO I STAND BY MY BELIEF THAT I THINK CITI ELIMINATES THE MAJORITY OF ITS DIVIDEND. LET'S SAY IT PAYS, YOU KNOW, 5 CENTS A QUARTER DIVIDEND LIKE WACHOVIA CHOSE TO DO. IT'S ABSOLUTELY IMPRUDENT FOR BOARD MEMBERS TO RECOMMEND A DIVIDEND PAYOUT WHEN THESE COMPANIES ARE SO CAPITAL CONSTRAINED.
Bartiromo: THE FANNIE AND FREDDIE STORIES ARE INTERESTING. AND OF COURSE THIS IS THE WHOLE FOCUS OF HANK PAULSON'S HOUSING PLAN. GIVE ME YOUR THOUGHTS ON FANNIE AND FREDDIE AND WHETHER OR NOT WE'RE GOING TO SEE FURTHER SHOES TO DROP ON THAT SIDE OF THE PAGE HERE AND WHETHER OR NOT WE'VE SEEN ANY INSIGHTS IN TERMS OF THE BOTTOM BEING REACHED FOR THESE TWO. REACHED FOR THESE TWO.
Whitney: FOR FANNIE AND FREDDIE, THEY'RE IN THE SAME SITUATION AS EVERY OTHER INSTITUTION IN TERMS OF THEY ARE BETTING ON THE ASSUMPTIONS THAT THEY MADE IN TERMS OF WHERE HOUSE PRICES WOULD DECLINE. THE FUTURES MARKET SAYS THAT HOUSING WILL BOTTOM RIGHT AROUND 33% PEAK-TO-TROUGH. NOW, EVERY INSTITUTION THAT I COVER, INCLUDING FANNIE AND FREDDIE ARE ESTIMATING A FAR LESS STEEP DECLINE. AND MY POINT IS THAT A 33% PEAK-TO-TROUGH DECLINE IN HOUSE PRICES WOULD GET YOU TO A NATIONAL AVERAGE BETWEEN 2002 LEVELS AND 2003 LEVELS. WHEN HOME OWNERSHIP WAS ACTUALLY HIGHER. THAT'S MATHEMATICALLY IMPOSSIBLE.
SO I THINK THAT THE PRESSURE FROM LOSSES FROM BAD MATH, EFFECTIVELY, IS GOING TO APPLY TO EVERYONE. THAT WILL INCLUDE FANNIE AND FREDDIE.
IF YOU LOOK AT BETWEEN 2005 AND 2007, 2.5 TRILLION DOLLARS WORTH OF MORTGAGES WERE SECURITIZED. SINCE 2000, 85 PERCENT OF LIQUIDITY IN THE MARKET CAME FROM THE SECURITIZATION MARKET. NO ONE INSTITUTION CAN REPLACE THAT TYPE OF VOLUME. AS A RESULT YOU'LL SEE FEWER HOMEOWNERS AND FEWER BUYERS MEANS PRICES GO DOWN.
Bartiromo: CAN LEHMAN SURVIVE THIS?
Whitney: I -- I THINK -- I DON'T KNOW. I DON'T KNOW.
Bartiromo: OKAY. FAIR ENOUGH. REAL QUICK ON THE SHORT SELLING RULES. I'VE GOT TO GET YOUR TAKE ON THIS. VERY HARD TO GET ANY INFORMATION FROM THE REGULATORS IN TERMS OF DEFENDING OR SORT OF EXPLANATIONS ABOUT LIMITING SHORT SELLS.WHAT'S YOUR TAKE?
Whitney: I'M VERY OPINIONATED ON THIS. IF YOU WANT TO HAVE FAITH IN THE SYSTEM AND FAITH IN THE CAPITAL MARKETS, THE LARGEST CAPITAL MARKETS IN THE WORLD, YOU HAVE TO HAVE TWO SIDES TO EVERY TRADE AND YOU HAVE TO HAVE OPTIONALITY ON EVERY LEVEL. PEOPLE HAVE TO HEDGE THEMSELVES, BE ABLE TO -- NAKED SHORTS, FINE, THAT'S ONE THING. BUT TO RESTRICT PEOPLE'S ABILITY TO TRADE FREELY I THINK IS GETTING INTO VERY DANGEROUS GROUND. AND WHEN YOU DO THAT, YOU'RE GOING TO HAVE MULTIPLE CONTRACTIONS. SO YOU'RE GOING TO HAVE THE OPPOSITE EFFECT OF PROTECTING THE MARKETS, I THINK YOU'RE GOING TO ENDANGER THE MARKETS.
Bartiromo: ANYBODY IMPRESSING YOU IN THIS ENVIRONMENT, HANDLING IT WELL?
Whitney: I WAS WITH JAMIE DIMON ON FRIDAY. ALL HATS OFF TO HIM. THE MORE HE ACCOMPLISHES, THE MORE HUMBLE I THINK HE GETS. I WAS WITH GOLDMAN YESTERDAY. THESE GUYS ARE ALL ABSOLUTE PROS. AND THEY'RE VERY CAUTIOUS AND THEY'RE VERY AWARE OF THE RISKS TO ALL THE OPPORTUNITIES THEY SEE. SO, YOU KNOW, KEN CHENAULT DID A STAND-UP JOB LAST WEEK. HE WAS ON THE CONFERENCE CALL FOR THE FIRST TIME I'VE HEARD HIM ON A CONFERENCE CALL AND REALLY LAYING OUT WHAT HE SAW. SO I THINK YOU'RE SEEING GREAT LEADERSHIP HERE. AND THERE ARE A LOT OF PEOPLE TRYING TO FIND THEIR WAY.
Bartiromo: CERTAINLY HAS BEEN A CHANGE IN LEADERSHIP, THAT'S FOR SURE. AN EXTRAORDINARY PERIOD. WE LOVE HAVING YOU ON THE PROGRAM. APPRECIATE IT.MEREDITH WHITNEY, OPPENHEIMER.
