Ever since Meredith Whitney downgraded Citigroup, I’ve been a fan… and for good reason. Like me, Whitney believes the credit crisis is far from over, despite the clamoring talking head buffoons that think credit woes and housing debacles are bottoming.
Whitney even warned last year, and continues to warn, that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.”
Here’s more from Forbes magazine:
“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change.”
“Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate.”
“A lot of the new homeowners were in over their heads, she believed, and would have trouble making their monthly payments when home prices started to fall and their teaser rates got bumped up.”
Her current concern is that banks aren’t cutting costs or losses in loan portfolios quick enough. “On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years.”
“Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don’t yet reflect it. “
“She also argues that banks need to “get real” about how they’re valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.”
“Whitney’s idea of “real” is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.”
“In fact, Whitney thinks the actual declines will be worse – closer to 40% – because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: “The consumer’s ability to refinance his way out of trouble has diminished greatly.”
“Whitney’s critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn’t now how to measure the remaining downside risk. “
“Her response: If she has no idea how to properly value bank stocks now, it’s because the metrics don’t work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values – which reflect underlying assets and liabilities – are moving targets.”
Well, that, and a lot of bankers and analysts, as compared to Whitney, don’t have the guts to tell it like it is.
