Banking's Bear Roars Again

Portfolio.com

It's safe to say that no one has fewer friends on Wall Street than Meredith Whitney.

But the Oppenheimer analyst doesn't seem bothered by that fact, so she relentlessly continues to throw cold water in the face of her banking brethren.

Her latest report on the financial sector did just that. If you thought the worst is behind us, or that the credit crisis hit bottom in the first quarter, or that there are signs that the loan market is coming back, or that Wall Street firms are finished with their capital raising, Meredith Whitney has three words for you: You are wrong.

In fact, Whitney, who established a name for herself when she correctly predicted Citigroup's dividend cut last fall, believes the credit crisis will "extend well into 2009 and perhaps beyond." She predicts there are still more shoes to drop, that banks will need to cover another $170 billion in loan losses by the end of next year, and that the earnings expectations for Wall Street firms are currently grossly underestimated.

"We believe the real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything seen," she wrote in a report published last night.

Whitney says that the banks used "bad math" to finance mortgages, and they relied too much on the securitization market. Now consumers are left with very little liquidity, which will keep the market for new securities essentially closed for business. She says that regulators' too-little-too-late reaction to the housing bubble will lead to knee-jerk lending legislation that could end up hurting consumers instead of helping them. Whitney predicts that credit card lines will be reduced by 45 percent in 2010. And lower consumer liquidity will only lead to more losses for the banking sector.

Banking chiefs, of course, have not painted such a dire picture. In fact, many of them have suggested in recent weeks that the worst is over and that there are signs that the credit markets are being revived.

Who can you believe? Investors are hearing Whitney's voice loud and clear, much to the chagrin of Wall Street's leaders. Financial stocks are getting hammered today, with Citigroup, J.P. Morgan, Morgan Stanley, Wachovia, and Merrill Lynch all off more than 2 percent.