By Gary Lamphier, Edmonton Journal September 30, 2010
Unless you're a stock jockey, a bank analyst or a CNBC watcher, you've probably never heard of Meredith Whitney.
But in rarefied financial circles, the former Oppenheimer bank analyst has built a formidable reputation as an astute iconoclast who isn't afraid to call it as she sees it. (Translation: she scares the hell out of investors.)
Back in 2006, when the U.S. housing market was red hot, Whitney smelled trouble. She was among the first to draw the links between the explosion in subprime mortgages, the proliferation of subprime-backed paper being peddled by the wizards on Wall Street, and the threat these toxic assets posed to the global banking system.
While her critics called her crazy, Whitney insisted that Wall Street's banks were on far shakier ground than most investors and analysts realized. She also predicted that bank giant Citigroup, an icon of the financial establishment, was about to slash its dividend.
Despite fierce denials from the suits on Wall Street and even some death threats, Whitney stood firm. She was proved right.
The ensuing credit crisis and the fear of contagion spread to financial institutions all over the planet, triggering a meltdown in capital markets and the first global recession since the 1930s. The U.S. economy has yet to recover, and the odds appear to be growing that it could slide into a double-dip recession.
So what is Whitney worried about these days? She's still bearish on U.S. banks, which have yet to come clean on all the toxic assets that remain hidden on their books. She's also worried about the U.S. housing market and fears it could be poised for another painful decline as millions of additional foreclosures swamp the market.
But this week, Whitney also began ringing the alarm bells over another threat, and it's a biggie. After completing a rigorous two-year study, her New York-based firm -- Meredith Whitney Advisory Group -- declared that many U.S. state governments are so broke, the feds will ultimately be forced to bail them out.
If so, the U.S. government, which is already facing a $1.3-trillion-US deficit for the fiscal year now ending, may soon have to absorb the cost of the third massive federal government bailout -- following last year's bank bailout and public stimulus program -- in less than two years.
If you're wondering why the Chinese are so worried about the value of their U.S. currency reserves, there's your answer. No wonder the Federal Reserve Board is suggesting another round of quantitative easing may lie ahead (banker talk for printing more money), which would add to the Fed's already-bloated, $2.3-trillion balance sheet.
California leads Whitney's list of financial basket cases, followed by New Jersey, Illinois, Ohio, Michigan, Georgia, New York and Florida.
Texas, Virginia, Washington and North Carolina earned the most positive ratings, based on an analysis of each state's economy, fiscal health, housing market and taxes.
After looking at the shaky condition of state finances, Whitney sees some alarming parallels with the U.S. banking crisis of 2008. "The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically," she told CNBC. "Municipal debt has doubled since 2000. Spending has grown way faster than revenues."
Whitney also complains about a lack of transparency in state finances -- an echo of what led up to the credit crisis. "It reminded me so much of the banks, pre-crisis, that we just kept working at it. We couldn't find anything that gave us a clear story, we couldn't find any information that was transparent. So we did it ourselves," she says.
Oh, one other thing. Whitney figures U.S. banks are in for a rocky fourth quarter. She figures they'll shed some 80,000 jobs by year's end as the impact of falling house prices and lower trading volumes hits.
Let's hope she's wrong. This is starting to sound like October 2008 all over again, and we can all remember what happened then.
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