"I think there are so many people who are so hopeful about this administration, [but] what I thought was a mistake of this proposal was it underestimated the intelligence of the American people because it was built up to be this great 'saving grace' but somebody set those expectations and there was nothing behind it."
Instead, Whitney suggested that the government give loans to smaller banks to moderate the supply of credit. (See the accompanying video for the full interview with Maria Bartiromo.)
"If we at least moderate the supply of credit, that will make a difference. There are some banks that didn’t get in to a lot of the mess and want a loan," said Whitney. "The problem is, they have such a small market share that the government to supercharge the regionals and allow them to have the capital to go out and acquire other banks and make loans—that would be a fabulous idea."
Turning to the troubled U.S. bank names, Whitney said she would sell Citigroup's stock, adding "Citi to me is still the biggest risk position out there."
Citigroup's bond spreads widened significantly after Whitney's comments. The bank's 5 percent bond due 2014 widened 92 basis points to 938 basis points over comparable U.S. Treasuries, according to MarketAxess.
The cost to insure Citigroup's debt with credit default swaps also jumped to 410 basis points, or $410,000 per year for five years to insure $10 million in debt, according to Phoenix Partners Group.
The swaps had traded at 360 basis points earlier on Thursday, and closed on Wednesday at 345 basis points, Phoenix said.
—Reuters contributed to this story