Thursday, September 11, 2008

Whitney: Worst Is Yet To Come For Banking

Meredith Whitney, the Oppenheimer & Co. analyst who called Wall Street's mortgage market meltdown last fall, now says the worst is yet to come for the global financial industry.

"What's ahead is much more severe than what we've seen so far," Whitney told Fortune magazine.

She submits that banks are facing dramatically larger credit losses than they have reported so far and thinks the economy is about to sink into an "early 1980s-style recession," that will "devastate 10 percent of the population," which became financially overextended during the housing boom.

"It feels like I am at the epicenter of the biggest financial crisis in history," she says.

"While my loss estimates are much more severe than those of my peers, my biggest concern is that they are way too low," she said.

Of the 14 financial stocks Whitney covers, she rates five as under-perform and the rest "market perform."

Whitney correctly predicted last fall that Citigroup would be compelled to bolster its leaky balance sheet.

According to Fortune, she followed that call with forecasts of more losses and write-downs at the likes of Bank of America, Lehman Brothers, and UBS, as well as some insightful tangents on how the implosion of the bond insurers would threaten banks' bottom line.

On a Merrill Lunch conference call in mid-July, she asked CEO John Thain why the company wasn't unloading damaged assets and boosting assets. Thain demurred, but less than two weeks later, Merrill did just that. It agreed to sell more than $30 billion of collateralized debt obligations for 22 cents on the dollar.

Whitney said that, while her peers are searching for some sort of light at the end of the tunnel, the tunnel "is about to collapse."

Some pundits, however, disagree with this pessimistic take.

In his weekly e-mail briefing to business reporters, analyst William Gamble, president of Emerging Market Strategies, says the financial crisis should be put into a global context.

"It is certainly true that the U.S. stock market has lost 20 percent of its value. Still this is tiny compared to the losses on other exchanges," he says.

According to Gamble, the Chinese stock market has lost over 50 percent while the Russian stock market has lost over 35 percent. Both markets have collapsed in the past six months. The Chinese real estate market is showing signs of strain. Sales of apartments in both Beijing and Shanghai are off over 50 percent.

Despite the present angst among pundits, commentators, and experts, the U.S. economy has shown surprising strength.

"It is not temporary and no coincidence. As the global economy slips into recession, there is one country that will be the first to recover," writes Gamble.

© 2008 Newsmax

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