Meredith Whitney On Our Financial Future

November 5th, 2008

Whitney Fails to See How Obama Will Help Banks
by Cyrus Sanati

Meredith Whitney, a managing director and senior financial services analyst at Oppenheimer & Company, doesn’t see how President-elect Barack Obama could possibly bring his much-espoused “hope” to Wall Street’s beleaguered banks — or to the economy in general.

“I think the financials and the economy are so off the tracks right now it is difficult to see anything helping that much,” she said in an interview on CNBC on Wednesday afternoon.

She noted that both Mr. Obama and Senator John McCain favored some sort of “loan modification” plan to help homeowners struggling to pay their mortgages. Such a plan, she argued, would shrink bank profits, discourage lending and fail to create capital needed for the economy to grow.

Ms. Whitney contends that all the big banks are headed for another terrible year and that most bank analysts’ estimates for next year are “on Pluto,” because they are so high.

The Obama administration, in her opinion, is likely to increase regulation in the financial sector, making the banks look like highly regulated utilities that pay no dividend.

“You can’t cut costs fast enough to keep up with your declining revenue,” she said of the banks. “I think we are in for a rude awakening.”

Next year, Ms. Whitney said, the credit crunch will truly hitting Main Street hard as consumers find their spending power significantly reduced as banks severely cut back their lending.

“You are actually going to see a contraction in the overall mortgage market — that has never happened before,” she said. “For the credit card industry, you are going to see $2 trillion of available credit lines pulled out of the system.”

She added, “We have never seen that before in this country.”

This is an extremely dire prediction. If American consumers lose $2 trillion worth of spending power, the domestic economy would suffer greatly. Consumer spending supports roughly 70 percent of the United States’ economic output. If Americans spend less, the economy will contract, leading to hard times and higher unemployment.

To put that in perspective, if President Obama wanted to issue stimulus checks as President Bush did earlier this year to fill the hole created by the credit crisis, he would need to cut all 300 million Americans a check for $6,667 — more than 10 times the amount Mr. Bush issued.