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Whitney Reverses Citigroup Call: Is Financial Crisis Over?

Meredith Whitney, who made the prescient call in 2007 that Citigroup would cut its dividend, has now upgraded the very stock that brought her celebrity status among equity analysts during the credit crisis.

Meredith Whitney
cnbc.com
Meredith Whitney

Shares of Citigroup Tuesday rallied as news of the upgrade to a “hold” from “underperform” spread beyond Whitney's direct clients. The stock is up 34 percent so far on the year.

“C shares continue to trade well below tangible book value (70%), despite relatively lower mortgage and European exposures than its large-cap bank brethren,” wrote Whitney, who founded Meredith Whitney Advisory Group in 2009. “On the capital question, we believe C will handily make its capital target of +8% by the end of 2012.”

Whitney had a “Sell” or “Underperform” rating on Citigroup since starting coverage on the stock at her new firm in April 2009.

At the end of October 2007, while working for Oppenheimer & Co., Whitney made waves by predicting that Citigroup might have to cut its dividend payout to raise capital.

The call drew the scorn of the company and fellow analysts, but turned out to be right after Citigroup cut its dividend in January of 2008 as more of the subprime mortgage securities that Whitney had warned about went sour on the company.

The stock would go on to lose more than 95 percent of its equity value before bottoming at the depths of the credit crisis following a series of government injections of capital that ultimately saved it.

Citigroup reported better than expected earningsand revenue on Monday, which was the catalyst for Whitney’s call.

“Management also reaffirmed guidance for 2012 expenses, stating that operating expenses should be $2.5-$3.0B lower than the 2011 total of $50.7B,” wrote Whitney. “We continue to believe that expense management is key for C, as continued positive operating leverage will be an important support for the stock.”

This week’s call marks a sort of milestone for the credit crisis, given that Whitney was one its most outspoken prognosticators.

“The financial crisis is over,” said Rosecliff Capital’s Michael Murphy in response to the Whitney call. “There is a lot of money to be made if you can take your emotions out of the equation and focus on company valuations. Big banks will continue to cut spending, manage costs, & make money.”

Right or wrong, the media spotlight that followed Whitney in the wake of the crisis brought with it a ton of scrutiny of her current calls. The analyst didn’t help herself by making a controversial prediction in 2010 that “billions” in municipal bond defaultswere ahead, a forecast that has yet to come true.

Whitney was still negative on Citigroup in her most recent television appearance a month ago, which you can see above.

CNBC’s Maria Bartiromo asked the analyst what it would take for her to invest in Citigroup.

“A new brain,” answered Whitney.

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