One on One with Meredith Whitney, Banking Analyst for Oppenheimer & Co.
Wednesday, September 17, 2008
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SUSIE GHARIB: Earlier today I sat down with one of Wall Street's most influential bank and brokerage analysts: Meredith Whitney at Oppenheimer. I began by asking what are the ripple effects of AIG's problems on the financial sector.
MEREDITH WHITNEY, BANKING ANALYST, OPPENHEIMER & CO.: When AIG sells positions, when AIG puts a lot of product on the market -- and you know, Lehman, of course, is putting a lot of market on the product -- credit spreads widen. And just to boil this down in terms of Main Street's understanding, it just means the cost of borrowing goes up across the board. Assets are worth less. That means you and can get less credit, corporations can get less credits. And it's a very complex issue, but it's one that is gripping the financial markets, because it's taking that much more liquidity out of the system, and it's the last thing we need right now.
GHARIB: Meredith, looking at America's banks, is everybody at risk? I mean, what are the chances that Citigroup could fail?
WHITNEY: I think Citi is selling assets to make sure that it can stay in business. I think that there is no way for me to see who the next to go is. I think some are in more precarious positions. Citi is not an institution that I would say -- that I would put into a precarious position, the way I think that institutions like Washington Mutual or even Wachovia is.
GHARIB: Well, who is on your worry list? Who is in a precarious situation?
WHITNEY: Wachovia. In terms of they will need to raise capital to shore up this -- this -- what I think is faulty assumptions in their overall asset book, and it's going to be -- it's clearly increasingly difficult.
GHARIB: What about Washington Mutual? Is it going to pull through?
WHITNEY: It's in a tough spot now. The regulators are closely looking at Washington Mutual. That shouldn't be any secret.
GHARIB: Is it just a matter of times that Goldman Sachs and Morgan Stanley are also going to have to seek a merger partner, given all the events that have happened this week?
WHITNEY: It looks increasingly, you know, likely. You know, for Goldman Sachs to transform itself into a bank or become a bank is so again against the culture and the profitability model that is Goldman Sachs. So you know, if the regulators say, you know, we've had enough of this independent brokerage model and we want everyone regulated like a bank, then clearly, Goldman Sachs will be turned into a bank, whether they like it or not.
GHARIB: As you know, Meredith, Goldman Sachs and Morgan Stanley reported their earnings yesterday, big drops in their earnings. But what kind of financial shape are they really in?
WHITNEY: They have got strong balance sheets, but that didn't help Merrill Lynch. It didn't help, you know, other institutions. You know, Lehman had a decent balance sheet. It just was not carrying portions of its portfolio where the market wanted it to carry it. You Know, again, it's a fluid market.
GHARIB: Can banks ever dig out of this whole mess as long as housing is so weakened? And again today we got more grim news on the housing sector.
WHITNEY: The worse housing gets, the longer it takes for banks to dig their way out. But, sure, they can dig their way out. It just takes time. And so, you know, if you have -- you know, what this means in terms of lower house prices means higher losses, which translates into lower earnings, and an inability to grow your capital base to grow your way out of it.
GHARIB: We always hear that fortunes are made in times like this. Are there any companies in your sector that are great buying opportunities, or is it just too dangerous?
WHITNEY: The franchises of Bank of America, American Express, Goldman Sachs, J.P. Morgan -- those are fantastic franchises, very well-run businesses. Arguably expensive, all of them, even Goldman Sachs at $100. It's at book value. It has never traded at book value before, but these are unprecedented times. It may be the deal of a lifetime, but I'll be a little bit latent and safe.
GHARIB: Meredith, thank you so much. Thank you for your time.
WHITNEY: Thanks.
