Wednesday, May 28, 2008

Whitney: Credit crunch "far from over"

Meredith Whitney, the Oppenheimer & Co. analyst whose skeptical view of the investment banking industry has made her a star on Wall Street, says the credit crunch is far from over.

Whitney recently joined Bloomberg TV to talk about the credit crisis, consumer lending, the outlook for the mortgage securitization market, and the health of the US consumer.

In spite of all the highly-publicized problems that have plagued the credit markets since last July, Whitney feels that the crisis is "far from over" as many of those problems will "bleed into the consumer".

She follows by saying that bank managements will be caught off guard by problems associated with consumer credit losses and will have to "reverse a tremendous amount of revenues".

Problems associated with consumer credit losses will mark the second wave of this credit crisis. To quote from a recent Forbes article on Whitney's views:

"The first wave of the crisis affected trading books, but the second wave will hit lending. This is because consumers got accustomed to the same "a rolling loan gathers no loss" mentality, Whitney says. As long as housing values continued to rise, borrowers could refinance in perpetuity to avoid default."

Banks are expected to reign in consumer lending, removing $2 trillion of available credit lines in the process. This will, in effect, "extract...over $2 trillion of liquidity from the consumer balance sheet", Whitney noted in her Bloomberg interview.

The Forbes article sums up the problem:

"New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors," Whitney says.

Are rising consumer defaults and higher bank loss rates ahead?

See also:

Whitney says Credit crunch "far from over" (transcript).

Whitney: Credit Crisis will run into 2009.

The rise and rise of analyst Meredith Whitney: Michael Lewis.