Meredith Whitney: Credit Cards the Next Credit Crunch

Meredith Whitney, CEO, Meredith Whitney Advisory Group, fomerly of Oppenheimer, appeared on CNBC yesterday afternoon to discuss Citigroup's hopeful news as well as her observations about the credit card crunch that she says is the next shoe to drop. She was quite candid, and her comments are worth a close listen. We have also included the piece from Reuters about her warnings of a crisis in the credit card business. To watch the video, please click play:

From CNBC:

Citigroup Will Have To Sell More Assets: Whitney

CNBC.com

| 10 Mar 2009 | 04:31 PM ET

Citigroup will have to sell more of its assets to stay in business, well-known banking analyst Meredith Whitney told CNBC Tuesday.

Whitney made her comment after being asked about Citi's Chief Executive Vikram Pandit saying he was confident about the troubled bank's survival prospects.

 

"Citi's capital position is stronger relative to how it was," said Whitney. "But I wouldn’t call it strong."

Whitney, who is founder of Meredith Whitney Advisors, said that the bank has exposures across the board and said that "I'm not optimistic about them."

"Trillions of dollars of loans have been mispriced by Citi", said Whitney. "By my math, they don’t make money in any of their businesses."

Whitney says Citigroup will be forced to sell their "crown jewels" if they are going to get any more bailout money from the government. "They're going to have a 'yard sale.' They will be a smaller and less of an international business going forward," says Whitney.

Citi split off its prized Smith Barney brokerage on Janury 13th.

Since October of last year, Citigroup has received two federal bailouts, $45 billion of capital from the Treasury Department's Troubled Asset Relief Program, and a government agreement to cap losses on $300.8 billion of troubled assets.

 

On the topic of keeping mark-to-market rules, Whitney said that it's basically a non-factor and that the damage has already been done. Whitney says that the banks don't want to have it suspended because if for some reason, the market comes back "they don’t get the benefit of the newer market."

Whitney also said that the government is trying to sweeten deals for the private sector in order to get more cash infusions into U.S. banks. "The government cannot do it alone," said Whitney. "They need the private sector to come back."

Whitney also commented on the credit card crisis she's been predicting. She said that credit cards are the next credit crunch and said that banks' portfolios continue to shrink and when you shrink the portfolios for the banks, "credit losses eat into earnings and they have to peddle faster to collect on loans and they make less money and lose money."

 

Whitney revised her estimate for credit card line cuts to more than $2 trillion inside of 2009 and $2.7 trillion by end of 2010.

Whitney has previously said the credit line cuts would be $2 trillion by the end of 2010.

From Reuters:

Meredith Whitney says Credit Cards Will Be Next Credit Crunch, WSJ.com, March 11, 2009.

March 10, 2009 - (Reuters) - Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.

"Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending," Whitney wrote in the Wall Street Journal.

She said though credit was extended "too freely over the past 15 years" and rationalization of lending is unavoidable, what needs to be avoided was "taking credit away from people who have the ability to pay their bills."

Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.

"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney said.

Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon, she said.

"Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57 percent contraction in credit-card lines," she said.

Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool, she said adding that 90 percent of credit-card users revolve a balance at least once a year, and over 45 percent of credit-card users revolve every month.

Whitney said the five lenders which dominate two thirds of the credit-card market need to work together to protect one another and preserve credit lines to able paying borrowers by setting consortium guidelines on credit.

(Reporting by Ratul Ray Chaudhuri in Bangalore)

Copyright 2009 Reuters. Click for restrictions.