One of the rare inspirational subplots of our current financial panic has been the rise of Meredith Whitney. An obscure and little-noticed analyst of Wall Street banks, working for an obscure and little-noticed Wall Street bank (Oppenheimer and Co.), Whitney has become, in a matter of months, a woman who moves markets.
It all started on 31 October 2007, when she published her now-legendary report on Citigroup Inc. In it, she said the company’s dividend now exceeded its profits—the bank was handing money back to its investors faster than it was taking it in from its customers.
The US’s biggest bank was being managed to ensure only its bankruptcy. Citigroup would need either to raise capital, sell assets or slash its dividend—possibly all three.
Whitney now says “that call was absolutely straightforward, the easiest call I’ve ever made.” But at the time, none of her fellow analysts was saying anything like it.
It took seven weeks, for instance, before another Wall Street analyst voiced doubts about Citigroup’s ability to pay its dividend, and the expert response to Whitney’s report was dismissive.
“Concerns about Citigroup’s capital position and dividend policy, raised by a competitor, are overstated,” wrote Bear Stearns Cos. analyst David Hilder, who also said he expected Citigroup to outperform the market.
As it turned out, the market didn’t care what the other experts thought. The market took Whitney’s sceptical argument and ran with it. On the first day of trading after her report, Citigroup’s shares tanked. Four days later, Citigroup chief executive officer Charles Prince resigned. In January, Citigroup slashed its dividend and set out to raise more capital.
Since then, the 38-year-old Whitney has become the closest thing Wall Street has to an oracle. She’s still not referred to in the press as “the leading Wall Street analyst” (Merrill Lynch and Co.’s Guy Moszkowski routinely gets that honour) but she is right now, the most interesting one.
No one is more likely to torpedo a stock, or to publicize some shocking fact about Wall Street firms. Most recently, for instance, Whitney pointed out that Wall Street firms were now brutally exposed to the whims of the ratings companies: Every time Moody’s Investors Service and Standard and Poor’s downgrade subprime mortgages, the Wall Street banks that own them are required to reserve more capital against the securities—which both raises their cost of capital and dilutes the value of their existing shares.
In November 2007, when Whitney first pointed this out, they had just finished downgrading $100 billion (Rs4 trillion) in securities. This February, they downgraded more than $370 billion. (“I can’t believe I’m the only one talking about this, ” she says.)
But here’s the really interesting thing: Whitney herself. Last fall, as the panic heated up, hardly anyone had heard of Meredith Whitney. “I guess my clients knew who I was,” she says, “but the rest of the world—I don’t think so.”
Now, six months later, she’s probably the most feared analyst on Wall Street. The rise in her status is truly sensational, and due, largely, to a single prediction. On 31 October 2007, she was right, and the world was wrong.
How on earth does that happen? I can think of several possibilities.
1) Meredith Whitney is the only analyst on Wall Street willing to speak her mind.
People who analyze investment banks for a living don’t have the nerve to say what they really think, for fear of calling unwanted attention to their current employers, and offending potential future ones.
Like everyone else on Wall Street, they’re working to preserve the illusion, so they can continue to be paid more than they are worth. This explanation has the advantage of being emotionally satisfying. But it fails to account for the many instances when Wall Street analysts have crept out on a limb to speak ill of their industry.
Bear Stearns’s Hilder, for instance, was the lone analyst telling investors to dump Citigroup shares back in 2005, when everyone else was shouting “buy!” You can accuse him of being wrong, but you can’t accuse him of selling out—at least not in any straightforward way.
2) Meredith Whitney got lucky.
Seeing the world falling apart, she seized on her main chance. Working for a smaller firm, and largely unnoticed, she had nothing to lose from making wild, negative predictions. If she was wrong, no one would pay her any attention; if she was right, she’d be famous.
The trouble with this explanation is that Whitney has had a bit too much good luck to be merely lucky. Thrust into the limelight by Citigroup’s collapse, she’s moved on to helping other banks collapse, too.
Her point about the ratings companies is one example; another is her argument that Wall Street firms will drift to their tangible book value—or what you’d get for them if you sold them off, position by position. Several (Citigroup is still the prime example) still have huge amounts of goodwill built into their share price. Goodwill, Whitney argues, will vanish.
If you want to know the value of Citigroup, or any other big Wall Street firm, estimate what you’d get if you liquidated its assets. Citigroup’s tangible book value she estimates at $10 a share. (Which means it’s still got some way to fall.)
3) Meredith Whitney was the first person inside Wall Street to grasp that something important, but intangible, has changed in the relationship between Wall Street and the outside world.
This is my explanation. The central truth about Wall Street firms just now is that nobody knows what they’re worth.
Of course, nobody ever really knows. In the best of times, Wall Street firms cannot divulge their positions without exposing themselves to their market predators. In the worst of times (now), their positions are so complex that the people who run them don’t fully understand what they own.
Even if they did, those assets are illiquid, hard to price, and changing in value from moment to moment. If Robert Rubin didn’t know that Citigroup had written tens of billions of dollars of liquidity puts—or even what, exactly, a liquidity put was—how can he do anything but pity the poor fellow whose job it is, from the outside, to figure out what Citigroup is worth?
“You can’t really know,” says Whitney. “The financial disclosure is terrible. They’re all either liars or they don’t know—but I assume they really just don’t know.” For a long time now, this inherent opacity has worked to the advantage of big Wall Street firms. Their investors, and their analysts, gave them the benefit of many doubts. What Whitney has done is to invert this protocol. Instead of giving them the benefit of the doubt, she’s just giving them doubt, without benefits.
When a firm divulges the existence of another pile of subprime loans, it’s just another opportunity for her to write there must be even more behind those. When a firm raises new capital, it means, to her, that it’ll need to raise even more. When a stock price falls, she invariably says, “Well that’s nice, but it should have fallen a lot more.”
To describe Wall Street businesses, Whitney’s favourite word is “moribund,” and to describe the estimates of other analysts, it’s “unrealistic.”
The most representative first sentence of a Whitney report: “We head back to the chopping block.” (If she sounds like she’s having fun, it’s because she is. “Despite the fact that being an analyst is so uncool and you don’t make much money,” she says, “I’ve always loved it.”)
She has imported into Wall Street a new, sceptical predisposition toward its own companies. On 31 October 2007, everyone else was still thinking of these firms as they had since at least the early 1980s, when they became masters of the universe. Since then the markets haven’t seriously questioned whether the firms actually knew what they were doing with capital. Whitney realized, a moment before others, that in the relationship between Wall Street firms and the investors who bankroll them something fundamental had changed.