Oppenheimer’s Whitney Sees Credit Crisis Well into '09


The credit crisis will likely extend well into the next year and beyond, resulting in three years of multi-billion dollar revenue reversals, according to a prominent U.S. banking analyst, Meredith Whitney, who also slashed her earnings outlook for four Wall Street investment banks.

By the end of 2009, over $170 billion of reserve builds will flow through bank earnings on top of "business as usual" loan loss provisions, said the Oppenheimer & Co analyst, who in October correctly predicted that Citigroup would cut its dividend and go on a capital-raising spree.

"Either in the form of write-downs or reserve builds, we believe the effect is the same: revenue reversal from years worth of inherently flawed underwriting," Whitney said.

The analyst lowered her 2008 outlook for JPMorgan Chase, Citigroup, Bank of America and Wachovia. She, however, cut her second-quarter earnings view for Bank of America and JPMorgan while raising it by a cent each for Citigroup and Wachovia.

"When most talk about the shut down in the securitization markets, they more often focus on declining profits for the investment banks..., we argue the far more important consequence of the buyers strike in the securitization market is the impact on overall consumer liquidity, consumer spending and ultimately on consumer defaults," Whitney said.

She estimated that over $3 trillion of liquidity would have been extracted from the capital markets by the year-end, due to the considerable stress on consumer liquidity from the "buyers strike" in the securitization market.

"Over time, the bank lending model will reclaim lost lending market share over the mortgage market, but bank balance sheets simply do not have the capacity to provide the liquidity lost by the shut down in the securitization market," she said.

Whitney rates Citigroup "underperform." She has a "perform" rating on Bank of America, JPMorgan Chase and Wachovia.

Shares of JPMorgan Chase closed at $45.99 Monday on the New York Stock Exchange, while shares of Citigroup closed at $22.99.

Bank of America shares closed $36.10 Monday, while Wachovia shares closed at $27.36.