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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S MARIA BARTIROMO SPEAKS WITH MEREDITH WHITNEY, WHITNEY ADVISORY GROUP CEO, TODAY ON "CLOSING BELL WITH MARIA BARTIROMO"

Steffanie Marchese
Tuesday, 28 Sep 2010 | 5:40 PM ET
Meredith Whitney
Meredith Whitney

WHEN: Today, September 28th at 3:15pm ET

WHERE: CNBC's "Closing Bell with Maria Bartiromo"

Following is an unofficial transcript of a CNBC EXCLUSIVE interview with Whitney Advisory Group CEO Meredith Whitney today on CNBC's "Closing Bell with Maria Bartiromo" at 3:15pm ET

All references must be sourced to CNBC.

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BARTIROMO: I AM JOINED RIGHT NOW BY MEREDITH WHITNEY NOTED ANALYST OUT WITH A NEW REPORT WHICH REALLY IS VERY VERY SOPHISTICATED AND SMART REPORT I WANT OT GET RIGHT INTO IT. NICE TO HAVE YOU ON THE PROGRAM.

WHITNEY: THANKS FOR HAVING ME

BARTIROMO: I WANT TO TALK TO YOU ABOUT THE BANKS AND EVERYTHING ELSE WE TYPICALLY TALK ABOUT. BUT FIRST, LET'S GET INTO THIS REPORT. IT IS CALLED TRAGEDY OF THE COMMONS. LAUNCHING RATINGS ON THE TOP 15 STATES. WHY DID YOU THINK IT WAS IMPORTANT TO LAUNCH RATINGS ON THE STATES?

WHITNEY: WELL, THIS IS A -- AN ITERATION OF SOMETHING WE'VE BEEN WORKING ON FOR TWO YEARS AND SO AFTER THE CREDIT CRISIS OR WITHIN THE CREDIT CRISIS WE REALIZED WE BELIEVED THAT THE ECONOMY WOULD RECOVER WITH REGIONAL STRENGTHS THEN WEAKNESSES. SO WE'VE DONE WORK ON THIS FOR TWO YEARS NOW. THIS HAS BEEN -- I HAVEN'T SLEPT FOR DAYS. THIS HAS BEEN THE MOST EXHAUSTIVE PIECE ON THE STATES.THERE HAD TO BE CONSEQUENCE. LAST -- WHEN I WAS ON YOUR SHOW IN APRIL, WE TALKED ABOUT HOW WE THOUGHT THERE'D BE BETWEEN 1 MILLION AND 2 MILLION JOB CUTS AT THE STATE AND LOCAL LEVEL. AND THAT'S, IN FACT, HAS BEEN A HUGE HEAD WIND FOR THE ECONOMY. GETTING IN CLOSER INTO THE STATES, WE LOOKED AROUND AND THERE WAS NOTHING AVAILABLE TO TELL YOU ABOUT THE PROCESS OF STATE BUDGETING, HOW MONEYS ARE TRANSFERRED. IT REMINDED ME -- THE STATE SITUATION REMINDED ME SO MUCH OF THE BANKS PRE-CRISIS, THAT WE JUST KEPT WORKING AT IT.AND WE COULDN'T FIND ANYTHING THAT GAVE US A CLEAR STORY. WE COULDN'T FIND ANY INFORMATION THAT WAS TRANSPARENT. AND SO WE DID IT OURSELVES.

BARTIROMO: IN OTHER WORDS YOU BELIEVE THE FISCAL CHALLENGES FACING THE STATES RIGHT NOW COULD BE THE NEXT SYSTEMIC RISK FOR THE FINANCIAL SYSTEM AND FOR THE ECONOMY?

WHITNEY: THERE'S NO DOUBT ABOUT IT. AND THE SIMILARITIES BETWEEN THE STATES AND THE BANKS ARE EXTREME TO THE EXTENT THAT THE STATES HAVE BEEN SPENDING DRAMATICALLY, GROWING LEVERAGE DRAMATICALLY. MUNI DEBT HAS DOUBLED SINCE 2000, BUT SPENDING HAS ALSO GROWN WAY FASTER THAN REVENUE. SO SPENDING IN THE LAST -- FROM 2000 TO 2008 GREW 60% WHILE REVENUES GREW 45%.WELL, STATES HAVE TO HAVE CONSTITUTIONALLY BALANCED BUDGETS. SO HOW DO THEY DO THIS? OFF BALANCE SHEET LEVERAGE. SO IN TERMS OF PENSION FUNDING.

BARTIROMO: SIMILAR TO THE BANKS?

WHITNEY: IT'S INCREDIBLE. AND HOW ABOUT THE COMPENSATION SCHEMES? SO YOU BORROW FROM FUTURE DOLLARS TO BENEFIT THE PRESENT, BASICALLY, YOU KNOW, GENERATIONAL, YOU KNOW, ROBBERY. AND THAT'S THE BONUSES TO GET REELECTED. SO YOU HIRE STATE JOBS, YOU INCREASE SPENDING ON LOCAL PROGRAMS. AND THAT ALL GETS YOU -- THAT'S ALL GETS YOU ELECTED.

BARTIROMO: TALK TO ME ABOUT HOW THE RATING SYSTEM WORKS FOR THE STATES. AND WHAT THIS DOES FROM AN INVESTMENT STANDPOINT. HOW DO I WANT TO INVEST AND LOOK AT THESE RATINGS AND MAKE MY DECISIONS IN TERMS OF BUYING THE DEBT, BUYING INTO --

WHITNEY: OKAY. SO WHEN WE LOOKED AT HOW THE RATING AGENCIES -- S&P MOODYS -- ARE LOOKING AT THE STATES, WE COULDN'T FIGURE OUT WHAT INFLUENCED THEIR RATINGS. THERE WAS NO QUANTITATIVE-- SEEMINGLY-- NO QUANTITATIVE ANALYSIS. THE RATINGS WERE VERY VAGUE. OUR RATINGS ARE VERY QUANTITATIVELY BASED. SO WE LOOK AT THE ECONOMIC HEALTH, THE FISCAL HEALTH, MOST IMPORTANTLY. HOW IN DEBT IS THE STATE? HOW WE LOOK AT TAX FLEXIBILITY. NEW YORK, AS AN EXAMPLE HAS THE HIGHEST TAX BURDEN PER CAPITA IN THE COUNTRY. SO THEIR FLEXIBILITY ON TAXES OF RAISING TAXES IS LIMITED.

BARTIROMO: LIMITED.

WHITNEY: SO THEY WOULD RANK VERY POORLY ON THAT BASIS.

BARTIROMO: WHAT ABOUT CALIFORNIA WHICH YOU'VE GOT A HIGH UP IN TERMS OF A NEGATIVE RATING.

WHITNEY: I MEAN CALIFORNIA, THERE'S NO DOUBT ABOUT IT IS THE WORST STATE. BECAUSE THEY HAVE RATED PENSION PLANS, THEY'VE GOT THE LARGEST BUDGET GAP. THEY'VE INCREASED SPENDING DRAMATICALLY. AND MOST IMPORTANTLY, IT'S OVER 20% OF THE HOUSING MARKET. SO WE BELIEVE THAT THERE WILL BE ANOTHER DOUBLE DIP IN HOUSING AND CALIFORNIA'S REVENUES ARE REALLY GOING TO CONTINUE TO SUFFER.

BARTIROMO: IN TERMS OF THE BEST STATE, YOU'VE GOT WASHINGTON.

WHITNEY: NO, THE BEST STATE IS ACTUALLY TEXAS BY A MILE.

BARTIROMO: TELL ME WHY.

WHITNEY: WELL, I THINK YOU CAN UNDERSTAND WHY THEY WOULD BE -- THEY WOULD COME INTO THE RECESSION BETTER POSITIONED.THEY WENT THROUGH THE OIL CRISIS DURING THE '80s. THEY'VE BEEN A VERY CONSERVATIVE STATE.THIS IS A VERY LOW GOVERNMENT STATE, ANTI-GOVERNMENT STATE SO GOVERNMENT SPENDING IS LOW.

BARTIROMO: SMALL GOVERNMENT. LOW TAXES.

WHITNEY: LOW TAXES. THEIR PENSION FUNDS ARE FULLY FUNDED, HOUSING IS NOT AN ISSUE IN TEXAS. THEY'VE GOT GREAT POPULATION TRENDS, GREAT EMPLOYMENT --

BARTIROMO: VIRGINIA'S ALSO POSITIVE.

WHITNEY: VIRGINIA'S ALSO POSITIVE FOR ALL THE SAME REASONS.

BARTIROMO: WHAT DOES THIS MEAN FROM AN INVESTMENT STANDPOINT, MEREDITH? HOW DO I WANT TO TRADE THIS?

WHITNEY: WELL, I THINK THIS IS A THOUGHTFUL LONG-TERM STRUCTURAL PIECE. I THINK YOU HAVE TO, YOU KNOW, I COVER THE BANKS FOR A LIVING. SO YOU HAVE TO LOOK AT THE STATES AND THE RISKS THAT THE STATE -- THE STATE POSE BECAUSE I THINK THE CRISIS WITH THE STATES WILL RESULT IN AN ATTEMPT AT LEAST FOR THE THIRD NEAR TRILLION DOLLAR BAILOUT. THAT HAS CONSEQUENCES ON THE DOLLAR, ON JUST ABOUT EVERYTHING. IT CERTAINLY HAS CONSEQUENCES ON THE U.S. RECOVERY. SO IT'S A MACRO CALL, AND YOU CAN ALSO PLAY MICRO IN TERMS OF WHAT'S GOING TO HAPPEN? WE DON'T THINK THERE'S A RISK WITH THE STATE DEBT SERVICE. WE VERY MUCH THINK THERE'S A RISK WITH THE MUNICIPAL LOCAL DEBT SERVICE.

BARTIROMO: WHICH IS WHY, I THINK, THIS IS SUCH AN IMPORTANT REPORT YOU'RE OUT WITH TODAY FOR YOUR CLIENTS OR LAST NIGHT FOR YOUR CLIENTS. LET ME TRANSITION INTO THE BANKING SECTOR RIGHT NOW. IS THE BANKING SECTOR WELL CAPITALIZED AT THIS POINT? LET'S TALK ABOUT YOUR LAST CALL,THE LAST TIME YOU WERE ON THE PROGRAM TO TALK ABOUT ALL OF THESE LAYOFFS COMING IN THE FINANCIAL SERVICES SECTOR. HOW BAD DO YOU THINK IT GETS?

WHITNEY: THE U.S. BANKS HAVE CAPITALIZED THEMSELVES VERY WELL.SO THE U.S. BANKS WHEN YOU LOOK AT A DOUBLE-DIP IN HOUSING ARE GOING TO BE BETTER POSITIONED. I THINK THE STATES ARE GOING TO BE THE ONES WHO REALLY ARE NOT PREPARED AND REALLY SUFFER FROM A DOUBLE-DIP IN HOUSING. BUT I THINK FROM AN INVESTMENT VEHICLE FOR THE BANKS, A BIG PORTION, THE MAJORITY OF THE PORTION OF THE PROFIT CENTER OF THE BANKS FOR THE LAST YEAR HAS BEEN WALL STREET REVENUES. AND WALL STREET REVENUES ARE HORRIBLE RIGHT NOW. AND I THINK YOU GO THROUGH YOUR THIRD YEAR, REALLY, WEAK EARNINGS, AND THE BANKS ARE WELL OVERSTAFFED.

BARTIROMO: SO HERE WE ARE LOOKING AT THE END OF THE THIRD QUARTER. WHAT ARE YOU EXPECTING FROM BANKING EARNINGS WHEN WE GET THESE NUMBERS IN THE NEXT COUPLE OF WEEKS?

WHITNEY: I THINK THAT YOU'RE GOING TO SEE, JEFFREYS REPORTED LAST WEEK AND JEFFREY'S DESCRIBED THE TRADING ENVIRONMENT AS PAINFULLY SLOW. YOU ARE GOING TO SEE MORE OF THAT. I THINK YOU'RE GOING TO SEE AT LEAST A 25% SEQUENTIAL DECLINE IN EQUITIES TRADING. SOME BANKS WILL DO BETTER THAN OTHERS IN TERMS OF INVESTMENT BANKING, BUT VERY, VERY WEAK. VERY LOW, SINGLE DIGIT FOR ROEs.

BARTIROMO: SO THOSE BANKS WHO HAVE HEAVY TRADING OPERATIONS OBVIOUSLY THE ONES YOU WANT TO AVOID.

WHITNEY: ABSOLUTELY. WHAT I WOULD SAY ALSO IS THAT THIS QUARTER'S GOING TO BE UNIQUE FOR THE BANKS BECAUSE THIS WILL BE THEIR LAST QUARTER WHERE THEY CAN DODGE THE CREDIT BULLET. AND BY THAT I MEAN WITH HOUSING. CASE SHILLER CAME OUT TODAY AND IT WAS NOT A GOOD NUMBER, BUT NOT A BAD NUMBER. AS THE CASE SHILLER INDEX IS CALCULATED, IT'S A LAGGED ROLLING -- A ROLLING LAGGED AVERAGE. SO WE THINK THAT OCTOBER -- THIS WILL BE AFTER THE BANKS REPORT, YOU'LL SEE A REALLY UGLY CASE SHILLER NUMBER.WHICH MEANS THE FOURTH QUARTER WILL BE VERY VERY TOUGH FOR THE BANKS.

BARTIROMO: ARE THERE ANY BANKS YOU WOULD BUY GOING INTO THE EARNINGS SEASON IN THE FOURTH QUARTER?

WHITNEY: NO, NO.

BARTIROMO: YOU WANT TO SELL THEM HERE?

WHITNEY: IT DEPENDS. THE BANKS HAVE BEEN ALL OVER THE PLACE SO TO SAY AT THIS POINT AND TIME THE BANKS ARE OFF A LITTLE BIT. I DON'T THINK THERE'S ANY WAY TO MAKE MONEY ON THE BANKS. BUT IN TERMS -- THE REGIONAL BANKS FOR THE STATE'S REASON ALONE ARE IN AN IMPOSSIBLE SITUATION. I WOULD ABSOLUTELY SELL THE REGIONAL BANKS.

BARTIROMO: THE FISCAL CHALLENGES IN TERMS OF THE STATES, DOES THAT LEAD YOU TO THE CONCLUSION THAT WE'RE GOING TO SEE A DOUBLE-DIP BROADLY IN THE ECONOMY? OR ARE YOU LOOKING STATE BY STATE?

WHITNEY: I'VE AVOIDED SAYING DOUBLE-DIP ON THE ECONOMY BECAUSE ANYTHING CAN HAPPEN. BUT IMAGINE THE-- I CAN TELL YOU WHAT WILL HAPPEN. SO YOU'VE GOT 36 GOVERNOR SEATS UP FOR ELECTION IN NOVEMBER. I THINK THAT THE PRESSURE'S ON POLITICIANS NOW TO MAKE DECISIONS EITHER DO THEY BAIL STATES OUT? SO DO YOU INCREASE THE FEDERAL DEFICIT? DO YOU CUT PROGRAMS? SOMETHING'S GOT TO GIVE.SO IF YOU CUT PROGRAMS, YOU INCREASE UNEMPLOYMENT. IF YOU BAILOUT THE STATES, YOU WEAKEN THE U.S. BALANCE SHEET. SO NOTHING'S -- NOTHING'S EASY. WHAT'S MORE IMPORTANT IS ON THE BAILOUT ON THE STATE BASIS, IMAGINE YOU'RE A CONSERVATIVE FISCALLY SOUND NEBRASKAN AND NOW YOU HAVE TO BAILOUT CALIFORNIA OR YOU'RE A FISCALLY CONSERVATIVE TEXAN AND NOW YOU HAVE TO BAIL OUT MICHIGAN.

BARTIROMO: SOUNDS LIKE GOLDMAN SACHS BAILING OUT LEHMAN.

WHITNEY: RIGHT.

BARTIROMO: ON THAT FATEFUL --

WHITNEY: IF YOU HATE BANKERS YOU'RE GOING TO HATE POLITICIANS.

BARTIROMO: YEAH. WHEN DO YOU EXPECT SOME OF THESE LAYOFFS TO HAPPEN? IN YOUR REPORT, THE LAST REPORT YOU SAID UP TO 40,000?

WHITNEY: 80,000.

BARTIROMO: 80,000 CUTS IN THE FINANCIAL SERVICES INDUSTRY?

WHITNEY: AND I MEANT IN THE U.S., BY THE WAY.

BARTIROMO: JUST THE U.S. WHEN DO YOU THINK THIS STARTS TO HAPPEN?

WHITNEY: I THINK THAT THE BONUSES ARE GOING TO BE REALLY, REALLY BAD AT YEAR END. AND SO THEY'LL HELP -- THEY'LL HOPE FOR SOME ATTRITION ON THAT BASES. PEOPLE JUST LEAVING SAYING THIS IS NOT WORTH IT. AFTER THAT, THEY'LL HAVE -- I THINK YOU'LL SEE LAYOFFS CERTAINLY IN THE FIRST QUARTER.

BARTIROMO: FIRST QUARTER OF 2011. SO DO YOU THINK THAT'S PRICED INTO THE MARKET AT THIS POINT?

WHITNEY: NO.

BARTIROMO: OR DO YOU THINK THE MARKET TRADES DOWN ON THAT INFORMATION?

WHITNEY: WELL, LOOK, IT'S GOING TO BE A SITUATION OF NEGATIVE OPERATING LEVERAGE WHERE THE BANKS THEMSELVES DON'T CREATE ANY MOMENTUM IN TERMS OF EARNINGS MOMENTUM SO THAT YOU WANT TO OWN THEM. I THINK THAT WHAT THE SAD REALITY IS THAT THE FINANCIALS JUST DON'T HAVE A LOT OF BRIGHT SPOTS IN THE FUTURE. AND THERE'S NOT A LOT OF INVESTMENT POTENTIAL AT THE MOMENT.

BARTIROMO: IS THERE ANY AREA OF THIS MARKET THAT YOU WOULD BUY?

WHITNEY: I LIKE VISA AND MASTERCARD BECAUSE THEY ARE, YOU KNOW, INCREDIBLE MARGIN COMPANIES.

BARTIROMO:THEY'RE LIKE TECHNOLOGY COMPANIES.

WHITNEY: THEY'RE LIKE TECHNOLOGY COMPANIES. THEY DON'T NEED CAPITAL. IT'S TRULY A DUOPOLY. AND I THINK THEY'VE BEEN GROSSLY OVER PUNISHED FROM THE DURBIN BILL.THOSE ARE EASY NAMES. THEY'RE EASY BUSINESS MODELS TO UNDERSTAND AND EXCELLENT BUSINESS MODELS.

BARTIROMO: GREAT TO HAVE YOU ON THE PROGRAM. WE SO APPRECIATE IT. THANKS FOR THIS REPORT. CEO MEREDITH WHITNEY ADVISORY GROUP.

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