Wall Street's grim prophet
One of the first and harshest critics of the financial sector, Meredith Whitney isn't afraid to take on the biggest companies.
NEW YORK (Fortune) -- Meredith Whitney, the Oppenheimer analyst who has become the Jeremiah of the financial crisis, says there is a way out of the wilderness for banks like Citigroup. But like many of her pronouncements over the last five months, it's grim.
"The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.
Given the fact that many large investment banks have lost a third of their value since the credit crisis began last summer (with Citi down by more than half), it's unlikely they'll take the pain. So Whitney fires off a worse case scenario.
"They don't purge and there is a slow bleed of capital and pressure on share prices for an extended period of time," she says. "We'll most likely see a combination of the two, with more of the latter scenario. It won't be pretty."
Whitney may be singing from the same hymnbook as most Wall Street pundits these days, but she has the distinction of being one of the first and harshest critics of the financial services sector. Throughout the credit crisis she has been willing to throw stones at banks, monoline insurers like MBIA and Ambac, and the alphabet soup of bonds (CDOs, SIVs, RMBS) that have taken down stocks and the economy, cementing her place as this era's star prognosticator.
As anyone who has ever spoken with her knows, Whitney always has one more thing to say to sharpen her last statement or find another way to make her argument airtight. She's witty and thoughtful and very thorough, but her considerable charm only goes so far if she thinks you're wrong. Then it's time to be blunt and unyielding.
She famously met her husband, former professional wrestler and stock guru John Layfield, by shredding his bullish Citi call while on live TV. (He's 6'6" and 290 pounds. She took him to the mat.) This quality of fearlessness is in part why her bearish calls have walloped financial stocks and earned her a reputation as the sector's axe.
Most recently, she issued a report Friday that said Citi, along with Wachovia, Bank of America, and Wells Fargo, would have to cut their dividends due to "earnings headwinds." It was a busy week for Whitney.
On Thursday she said first quarter earnings from Citi (C, Fortune 500), Merrill (MER, Fortune 500), and UBS (UBS) will be a "rude awakening" and that these banks would need to raise even more capital. And on Tuesday, she said Citi could post a first-quarter loss four times greater than previously anticipated if it is forced to write down a predicted $13 billion. She also cut her estimates on JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500), and Wachovia (WB, Fortune 500). After the report was released, all four stocks fell.
Such has been the pattern since last October when she told investors to sell Citi in the wake of terrible quarterly earnings. Other analysts, including Deutsche Bank's Mike Mayo, also took the bank's management team to task during the earnings conference call; and the stock had been falling all month. But Whitney was the first to say the bank was wildly undercapitalized and that "in six to 18 months, Citi will look nothing like it does now."
She also predicted Citi would have to cut its dividend or sell its best assets to raise at least $30 billion. For her efforts, the stock plunged 7%, then-CEO Chuck Prince was ousted, investing legends including Jeremy Siegel said she was wrong, and death threats rolled in.
The bank not only cut its dividend by 41%, it also decided it needed a $7.5 billion cash injection from the Abu Dhabi Investment Authority in November. Whitney told Bloomberg TV that the deal wasn't enough to shore up the balance sheet and sure enough the bank was back on the streets in January, hat in hand. It got another $12.5 billion from a group of investors including the Government of Singapore Investment Corp., Prince Alwaleed of Saudi Arabia, and the Kuwait Investment Authority.
"I think her call on Citi was dead on. She stripped the company naked," Steve Eisman, who runs the hedge fund FrontPoint Partners and was Whitney's former boss at Oppenheimer, told the Washington Post last November. And as detractors and admirers alike will say, she is not afraid to say exactly what she thinks.
Before the 38-year-old was the analyst to watch, Whitney was just another hard-charging Wall Street type, albeit it with a twist. Back in the May, when she was as sanguine as most of her peers about her sector, she launched her very own "Blond Ambition" tour.
"In the summer of 1990, Madonna embarked on a ground-breaking world tour called 'Blond Ambition' which some say changed the look and feel of world tours," Whitney wrote in the PowerPoint presentation for those summer client meetings. "While I have very little in common with Madonna other than a shared affection for hair color augmentation, I have chosen to embark upon my own 'Blond Ambition' Summer Tour of 2007."
While in 1990 Madonna sang hits including "Cherish" and "Like A Prayer," Whitney performed her own list of "hits" including "Ken Lewis Always Gets the Girl: Third Highly Coveted Deal in 3 Years" and "Capital One Financial: It Ain't As Good As it Once Was: Limited Capital Caps stock Thru Mid-2008."
But as trouble brewed over the summer, Whitney became more skeptical. She was bullish on large-cap brokers like Bear and Lehman during that tour, but she adjusted her outlook as structured bonds looked increasingly like troubled creations.
"My job is not about quantum physics. This is really basic math, making sure the numbers add up," says Whitney. "Accounting rules change fast. New information is presented. If you can't pick things up quickly, it doesn't matter what acronym you have after your name. You just won't get it."
Some may be surprised to find that the only acronym Whitney has after her name is B.A., and that it's in history, not economics, from Brown University.
"When I was in college in the early 90s, I didn't even know what research analysts were," she says. "But an MBA isn't necessarily an advantage in my job. Curiosity is an advantage. Being able to find a story is an advantage. It's what historians do. Everything happening now we've seen before, just with different characters.
"This is the human story of power and hubris. If you know Shakespearean tragedy, you understand what's going on [in the market]."
After graduating in 1992, it was straight to work at Oppenheimer as a junior analyst covering specialty finance, where she worked for Eisman, who was her mentor. From there she went to First Union, a bank later acquired by Wachovia. There she says she was the youngest analyst to build and run a financial institution's platform. She was only 28.
Because of the non-compete agreement she signed with Wachovia, Whitney couldn't return to the sell side for three years after she left the bank, so she spent 2002-2005 working as a commentator for Fox news. She met Layfield after he was known as the World Wrestling Entertainment personality JBL, a character based on oilman JR Ewing from the 1980s show Dallas. He was the author of financial planning book "Have More Money Now." They appeared on Fox's "Bulls & Bears" in 2003 and were married by 2005. Whitney, the bear, has inadvertently locked her husband into his Citi position. "He and my mom both own the stock and can't sell it because I cover it," she says. "Let's just say there was coal in my stocking this Christmas."
Oddly enough, there's not much coal from Wall Street CEOs. She says executives from the financial services sector are some of her biggest supporters. "My work has been diligent and accurate. I've been fair. I can't say Chuck Prince is a huge fan, but every report and acknowledgment has helped open a door," says Whitney. "But I have to work harder now because you're only as good as your next story."
Whitney's streak of prescient calls may not last forever, but she'll fight hard to keep it going. "All I ever wanted was to earn the right to be at the table with the smartest people, and that's a privilege you work for every day."