In Meredith Whitney We Trust?
By Sheelah Kolhatkar
New York Magazine
It’s a brisk morning, and Meredith Whitney, dressed in a tightly fitted plum velvet jacket and towering red patent-leather heels, is giving me a tour of her new ofﬁces. “This will be where our research juniors are, this room is gonna be sales,” the former Oppenheimer & Co. analyst says, gesturing grandly across the 5,000 square feet of raw space above Lexington Avenue. She could almost be describing a full-ﬂedged investment bank, which isn’t far from her aspirations.
“I joke that this has to be the Ken Chenault conference room, because he comes in and does an event for me every year,” Whitney continues in her breathy voice, referring to the chief executive of American Express. “I just want to make it nice! I’m also going to use this space to have writers, managements, thought leaders come in and entertain, like a salon series.” A drill goes off in the background, and Whitney pivots on her heel. “I’m fucking taking it on, right?”
It’s the ﬁrst day in business for Meredith Whitney Advisory Group, LLC, the rather ambitious and perhaps inevitable outgrowth of Whitney’s ﬁfteen-year career as an analyst covering ﬁnancial stocks. While working at Oppenheimer, Whitney became famous for issuing an October 2007 research report that said Citigroup would have to raise $30 billion by cutting its dividend or selling assets in order to survive. The subprime-mortgage market had already fallen apart, but the bankruptcy of Lehman Brothers and the paralysis of the ﬁnancial system were then still practically unimaginable. The thought that Citigroup might be insolvent seemed absurd. The day after Whitney put out her report, though, Citigroup shares plummeted. The company’s CEO, Chuck Prince, resigned a few days later, and the bank spiraled down.
Whitney wasn’t the ﬁrst to point out problems at Citigroup: The Deutsche Bank analyst Michael Mayo had urged investors to dump Citigroup shares two weeks before her call. But the combination of being right, being sure of herself, and being media savvy transformed Whitney into the most famous and feared woman in ﬁnance. Many of her predictions about Citigroup, Merrill Lynch, and Bank of America proved correct, and she said things would continue to get worse through 2008, which they did. She is now a regular face on CNBC and Bloomberg; bank executives take her seriously, and fund managers respect her. Such is Whitney’s inﬂuence that she is now in a position to help decide how the United States will ﬁx its banking system.
At the same time, she is trying to capitalize on her moment, and she’s so conﬁdent that she’s ﬁnancing the new venture herself. “I had people be like, ‘Oh, let me give you seed capital, yadda yadda,’ ” Whitney says. “I’m not working for anyone anymore. That’s full-stop done. I’m never going back.”
Whitney is an unlikely ﬁgure for the job of keeping Wall Street honest. For one thing, she’s a woman: “The funny thing is, in your twenties you try and look serious, and after your twenties, you just try and look hot,” she jokes. “I’m not an old white dude, so I stick out.” More important, her outsider status may have put her in a position to see what others didn’t, or at least to go public with it.
Whitney is also beneﬁting from a boomlet in doomsaying. The media loves anyone with a bleak forecast, turning obscure geeks like NYU economist Nouriel Roubini and The Black Swan author Nassim Nicholas Taleb into tabloid characters. On the day that Whitney announced the creation of her new company, she also declared that it would take years to resolve the banks’ problems but that nationalizing them would be a disaster, which led to an interview on CNBC with Maria Bartiromo. Two days later, Roubini pounded the drums for nationalization in The Wall Street Journal. And on it goes.
Whitney’s move has plenty of precedents on the Street. Ivy Zelman, who covered home-building stocks for Credit Suisse, now runs Zelman & Associates, and Dana Telsey, a retail-industry analyst at Bear Stearns for many years, now has Telsey Advisory Group. The ﬁeld tests even hard-earned reputations. Elaine Garzarelli, then an analyst at Shearson Lehman, predicted the stock-market crash of 1987 and rocketed to Wall Street stardom overnight. She launched her own business, Garzarelli Research, in 1995. If you haven’t heard of her, though, there’s a reason: She hasn’t replicated that feat since. The pressure is on for Whitney to continue to be right and prove her value in a world saturated with expert opinion. “You’ve got a superstar in a giant company who goes out on her own—it seems natural,” said an executive at a major ﬁnancial institution. But, he added, “We don’t know how they make money, period. If you have a Schwab account, you can get Goldman Sachs research. Why do you have to pay Meredith?”
Ooh! who are those from?” Whitney squeals, catching sight of a congratulatory box of cookies by her assistant’s desk. “That is so sweet!” She is working out of a bare room she refers to as the “fallout shelter” until the renovations are complete. Her assistant, Bobbi, is across the hall, and the room beside them contains two young men, both junior analysts. Whitney says that the company’s focus will be on the same type of research she was doing at Oppenheimer. She’ll have at least ﬁve analysts working for her as well as a chief operating ofﬁcer and a chief ﬁnancial ofﬁcer. She plans to hire ﬁve salespeople and is applying for a broker-dealer license, and because she believes the investment banks are distracted by their problems, she thinks she can grab a piece of the business advising banks on restructuring and acquisitions. She expects to grow out of her new ofﬁce within a year.
“I have a clear and evolving view of how things should go, and since a lot of banks are gonna need direction, I want to be the one to give it,” Whitney says. The phone rings. “Oy! Our phone system—we have these temporary phones,” she says, slightly ﬂustered. “I’ve got to answer my own phone!” Bobbi wanders in and hands her a stack of papers.
“What I love about this model is the simplicity. If clients want my research, they pay for it,” Whitney continues. “What’s frustrating for so many sell-side analysts is, your research goes off into the never-never land, and so many people get access to it and don’t pay for it. I imagine I’ll cut thousands from my distribution list. That’s cathartic.”
Whitney believes the problems in the ﬁnancial system are best addressed by doing two things—ﬁrst, “supercharging” some of the smaller banks around the country, the ones that aren’t mired in toxic mortgage debt. She thinks the government should inject them with capital, enabling them to make up for the lending that giants like Citigroup and Bank of America aren’t doing. Meanwhile, troubled institutions should hold a “yard sale,” selling whatever parts of their businesses they can for whatever they can get. Giving them more money is throwing it down a black hole. “The banks can’t hold on to their prized assets while being bailed out for their bad assets,” Whitney says. “These are simple solutions. And they’re politically viable.”
Whitney is unimpressed by recent declarations by Citi and Bank of America that they were proﬁtable in the ﬁrst two months of the year, which led a strong rally in the sector. These giants have massive problems coming down the pike, in the form of deteriorating loan portfolios and growing rates of credit-card defaults. The doubling of Citi shares is, in her view, no cause for celebration. “Most of their businesses don’t make money, and the one business that did [Smith Barney], they sold half of,” she says. All that’s left to do is salvage the viable parts, such as its deposit accounts and credit-card business, and merge them with a company like American Express. Whitney thinks that Bank of America, which is selling assets more aggressively, is better off.
She isn’t terribly inspired by Treasury Secretary Timothy Geithner’s handling of the crisis so far, though. “Obviously he overpromised and underdelivered,” she says. “But people will give him another shot. We need to give him another shot.
“These are not complicated solutions,” she adds. “This is why I write op-ed pieces, why I go beyond servicing my clients to provide solutions. It’s to be a good American. I know that sounds corny, but the onus is on all of us.”
At the end of last year, CNBC asked viewers to vote for something called the “Power Player of the Year.” The contenders were then–Treasury secretary Henry Paulson, Geithner, JP Morgan Chase chief executive Jamie Dimon, Federal Reserve chairman Ben Bernanke, and Whitney. John Tashjian, a close friend of Whitney’s, says she called him up as it was happening: “Meredith’s like, ‘Can you believe this?’ ” Tashjian recounts. “She got 67 percent of the vote. The next closest was Paulson, with 15 percent.”
Whitney’s darling status irks some of her peers. “I have heard of analysts with publicists,” sniffs an analyst at a major ﬁrm. “We don’t do that.” Adds another, “She’s very, very good. But I swear to God, she’s got Sallie Krawcheck’s PR”—a reference to the ex-Citi executive whom the press adored.
Whitney insists that she has no public-relations help, but maybe that’s because it comes naturally to her. She pulls off a winning high-low combination—a brainiac with an Ivy League pedigree (Brown) and a glammy party girl who’s married to a WWE wrestler. His name is John Layﬁeld, and in the ring, he plays an evil oilman inspired by J.R. Ewing, of the eighties hit TV show Dallas. He’s not the sort you’re likely to meet at Manhattan cocktail parties. He’s a postmodern jack of all trades, peddling something called Mamajuana Extreme, a “virility” elixir, online, and also working gigs as a stock analyst. In 2004, he was ﬁred from CNBC after he goose-stepped like a Nazi in a wrestling skit in Munich.
Next: How she coped with negative reactions to her Citi report.
Whitney’s unorthodox personal life may well be connected to her lack of concern about being a professional outlier. Analysts often get quite cozy with the companies they cover, and those that don’t sometimes pay a steep price (Michael Mayo was fired by Credit Suisse in 2000 because, it was speculated at the time, he had put negative ratings on the entire banking sector). “We dealt with so many sleazy managements I never relied on management for the truth,” Whitney says. “I relied on the numbers.” Her honesty has earned her an enthusiastic following among hedge funds. “When I read one of her reports, I pay attention, whereas I ignore other analysts because I think they’re shills for management,” says the hedge-fund manager Whitney Tilson.
After she issued her infamous report on Citi on Halloween 2007 (the title, “Is Citigroup’s Dividend Safe? Downgrading Stock Due to Capital Concerns,” now sounds tame), she was shocked by the intensity of the reaction. “I knew it would be a big deal, but I didn’t know it would be a market-crashing event,” she says. “It provoked fury amongst people. Rage, fury, and the dismissal of it, like, ‘Oh, what does she know, you know, who is she?’ I was just like, Whatever. If anyone ever told me that my math was wrong? That would have gotten me. That’s worse than telling me that I’m fat.”
Whitney received abusive phone calls and at least one death threat. Layﬁeld canceled a trip to Texas because he was afraid of leaving his wife alone: “I was a basket case,” Whitney says.
To cope, Whitney started working out with a celebrity trainer named Jay Cardiello, whom she’d met at Bikini Boot Camp, a ﬁtness retreat she attends every year with her girlfriends in Mexico. Cardiello put Whitney on a regimen that lasted for months: They met at the gym twice a day, once at 5 a.m. and again at eight or nine at night, for an hour and a half each time. “I made the right call!” she assured herself before jabbing into Cardiello’s boxing mitts. “I was right! I was right! I was right!”
Though the banking sector is melting down just as Whitney predicted it would, the ﬁnancial world remains crowded with Whitney critics. Institutional Investor published its annual analyst rankings for 2008 in October, and Whitney failed to place among the top three large-bank analysts, listed only as a runner-up, practically a snub. When I put in a call to a respected manager of a ﬁnancial-services investment fund to talk about Whitney, an assistant groans when she hears why I’m calling. “Hah! One of his favorite stories,” the assistant snorts, referring to her boss. “He calls her … I won’t tell you what he calls her. Let me just say this: She is always negative. I just wonder whose interest it serves. I’d love to see the day when she’s positive.”
It’s an implied critique that’s echoed elsewhere, the idea that Whitney or others like her are somehow aligned with the “shorts,” usually hedge funds, betting that stocks go down. “That’s ridiculous. I’ve saved long-only funds a lot of money,” Whitney says in response. “It’s so offensive to suggest I’m someone’s puppet. I don’t identify myself with a bear-market call. I don’t need a bear market to stay in business.”
Thus far, that’s how Whitney has made her mark on history. According to a just-published book about the collapse of Bear Stearns called House of Cards, by William Cohan, Whitney became convinced that Bear was insolvent during the week leading up to the company’s emergency sale to JPMorgan, in March 2008. She’d been cowed by the reaction to her Citigroup report, however, and decided not to publish a piece about Bear. “It was a conscious choice not to write anything,” she told Cohan. “Because I thought it was such a tenuous situation that I was going to get in serious trouble.”
The next big moment in Whitney’s career—the one that will seal her reputation, or possibly spoil it—is when she changes her mind about the future of the banks and says so publicly. When I suggest this to Whitney, that Wall Street is waiting for her to call the rebound in ﬁnancials, she gets prickly. “You hear that over and over again, as a way to disparage calls,” she says. “I have not missed a bottom yet. It’s just not the bottom. You know,” she adds, angrily, “I might do better when the market turns. When things go up, it’s a lot easier living.”