When Meredith Talks, We Must Listen; Regulation Strangles
A: Why? Because she was dead on BEFORE any other analysts were! Meredith Whitney had the courage to say what others wouldn't and put out a research note warning of the writedowns and dividend cuts months before they occurred. Today, Whitney quadruples the loss estimates for Citigroup which comes one day after Goldman Sachs puts the total global subprime loss projection at 1.2 Trillion before all is set and done.
Back in late October, Whitney put out a research note on Citigroup; story via Forbes.com:
Citigroup (NYSE: C) dropped 7.5%, or $3.11, to $38.25 on Thursday morning after CIBC World Markets downgraded the stock on fears of an impending dividend cut.Hmm, Citigroup falling 7.5% to $38; seems like ancient history these days. So where is Whitney NOW after the entire financial sector has gotten beaten down? Well for Citigroup, she is revising her loss estimates up four fold!In a research note, CIBC World Markets analyst Meredith Whitney downgraded Citigroup to "sector underperformer" from "sector performer," saying that a dividend cut may be on the horizon in order for the company to raise capital.
According to Bloomberg's article, "Citigroup Estimates Cut by Oppenheimer's Whitney":
Citigroup fell 3.3 percent in Frankfurt trading to $22.65 after Whitney predicted the bank will lose $1.15 a share in the quarter because of potential markdowns of $13.1 billion on assets including leveraged loans and collateralized debt obligations. That compares with her earlier loss estimate of 28 cents, Whitney wrote in a note yesterday to investors.This comes one day after teflon IB Goldman Sachs sees total credit losses around the globe reaching as high as $1.2 trillion; and $460 billion for US levered institutions.
According to the story via Reuters:
Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses.We had our one week drug induced rally after the fed cut FFR & discount window and helped avoid a systemic financial meltdown by backing up a JPM buyout of Bear Stearns. The drugs are starting to wear off, and as usual, talk is now starting about the NEXT round of rate cuts. Oh when will the story end!U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday.
Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, they said.
Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer. "U.S. leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim."
If there is one thing to take from what Whitney & Goldman is saying, its that we STILL don't know how deep this writedown abyss goes! I certainly have no clue how deep the hole goes, all I know is that it continues to be deeper than most like to admit. We are about to enter a period where more writedowns will come at the same time economic data shows the effects of the credit storm; after all the fed admitted that unemployment & inflation will rise as the economy slows. We saw today's weaker durable goods number and now we must brace for unemployment data and Q4 final GDP and Q1 advanced GDP that could very well mark the official recession call.
Profit potential at investment banks need to get adjusted as the game is over for many revenue generating models:
The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?When the fed does what they are doing, you know regulation isn't far behind! While that is good for longer term sustainable growth without allowing for the same mistakes that were made in past few years, it will strangle profit potential.
In my view, future rate cuts will tell us how severe the recession will be. I would expect at least another 50-75 bps of cuts to the FFR over the near term, further weakening our dollar and boosting commodity prices. I hope that additional stimulus measures will limit the aggressiveness of future rate cuts. Should the fed cut more than this, or take the FFR below 1.5% or so, that is an indication that the recession is proving to be worse than original thought. How low will we go?
Comments (15)
Meredith Rosenblatt...I like the sound of that.
Posted by Noah | March 26, 2008 11:14 AM
And how many more people will continue to call bottom?
And how many more rate cuts are left?
Wall Street is running on empty. Word on the street is alot of guys sitting around doing nothing. How long will that last?
What is the count now on job cubs 34,000? How many more are doomed to fall?
And regarding the dollar:
"Argentina and Brazil are to scrap bilateral commercial transactions in U.S. dollars and start using their own currencies from August, an official in charge of currency settlement at the Argentine Central Bank."
Posted by Jose | March 26, 2008 12:05 PM
Hi Jose,
Where did you read the news about Argentina and Brazil?
Can you post or email me the link?
Thanks
-c
Posted by Chan | March 26, 2008 1:07 PM
Thanks Noah for what I think is a great deal of insight on your site. A couple of data points, however, with regard to the health of the investment banks' revenue streams.
If you review the first quarter results from GS, MS and LEH (when there was obviously little to no revenue from securitized debt), the banks actually managed to post pretty strong results in pure investment banking (M&A and underwriting). Advisory revenues were up, in some cases rather substantially, from 1Q07 and IB revenues weren't meaningfully down(LEH I believe was modestly UP). Debt underwriting was down substantially obviously (but remember: the investment grade debt markets are still wide open, which helped), but overall "investment banking" revenues were not horrible.
Now, I will admit that 2Q and 3Q will be harder comparables, but if you look at all three they all generated pure IB revenues at levels seen in all quarters of 2005 (mostly higher than 2005, in fact) and 2006 (at the lower end of 2006), both of which were very good years. So to suggest that the banks' revenue streams are falling off a cliff is simply wrong.
In any case, I agree with you the credit mess is going to have serious and longstanding impacts on the banks (and perhaps NY real estate), but I thought these facts merited mention. Further, though writedowns immediately impact net revenue and earnings, unless these securities are sold there is no cash impact. And a lot of these institutions are holding these securities, with the view that they'll ultimately recover. As the HY and leveraged loan indices have been over the last 4 trading days.
Thanks for the great work on your site, I enjoy reading it.
Posted by Chris | March 26, 2008 1:23 PM
Noah,
I agree with you on regulation. On a side note, the Bear debacle is forcing the Federal Goverment to (finally) look at how to overhaul the country's regulatory oversight of our finacial services industry. With at least 10 Federal agencies overseeing some part of this mess (the Fed, OCC, OTS, SEC, OFHEO, etc) it's very fragmanted and inefficient.
I understand Congress is looking into this now; hopefully this won't mean MORE regulation but a BETTER way to assess risk and adress it before the next Bear falls. The last thing we need is another knee-jerk piece of legislation such as Glass-Steagall or Sarbanes-Oxley.
Posted by Beth | March 26, 2008 2:23 PM
@chan
http://news.xinhuanet.com/english/2008-03/16/content_7800121.htm
Posted by Jose | March 26, 2008 4:37 PM
Chris - thank you so much for your insightful comment!!! Yes, I recall the revenues reported not being as bad as expected. I wonder what the full impact will be though. Perhaps its not falling off cliff, but it certainly will be affected in some capacity.
Also, how will future regulation further impede earnings potential? Lots of unanswered questions from this whole mess.
But you are right!! Thanks again for the comment and hope to see you around more often.
Posted by Noah | March 26, 2008 4:45 PM
I too was surprised that the brokers' numbers were not worse. My guess is that a backlog of people terming out investment grade debt (extending maturities so as to avoid the liquidity squeeze) and International I-banking gave them a pop, that won't be repeated. But the loss of earnings power does not look as dire as one might have expected. I was also surprised that writedowns wre not worse. My guess is that we have captured most of the sub prime damage on the Street (even the Chinese banks and Europeans have now fessed up), but we have the Alt A, Prime and Commercial Mortgage and Credit Card writeoffs still to come. Probably some futher damage in LBO loans as well. At some point all of this will be discounted and the question for stocks will be how bad will the earnings be hit by the recession, especially when > 100% of the growth is coming from international markets in the case of many stocks. New York City real estate? still an open question....I just gotta believe there is a little give back coming.
Posted by jeff | March 26, 2008 5:45 PM
Noah - Off-topic. I just read Doug Heddings blog, and he is seeing a serious shift to a buyer's market. His commentary is 180 degrees from the activity he spoke about 1 1/2 months ago or so. You say you're working with many buyers, but what are you seeing out there? What price ranges are your buyers targeting.
Posted by anon | March 26, 2008 7:22 PM
I wouldnt call it a widespread shift for the one fact that inventory is still tight, although seems to be rising in some price points.
RE Biz is very individual, I may be busy while Doug is quiet and vice versa.
My buyers range from about 600K to about 3.5M..Mostly, my buyers fall into the 1M - 1.5M 2BR range. I am still finding it hard to find quality products but I am seeing more options in UES 2BR market. Confidence is still affected by credit crisis and buyers DO expect a deal and are bidding cautiously. That is of course if they find the perfect place that proves to be priced right.
We would have to see inventory rise much more, say to 7500 or so, to start to see the options that characterize an environment of seller competition; to get there, buyers will have to ease off and sales volume to slow! So lets see how it plays out.
Posted by Noah | March 26, 2008 7:38 PM
There seems to be a lack of transparency in NYC Real Estate Market. If not for blogs like yours, we would really be in the dark about the state of Manhattan RE. Just curious as to what you think margin of error is in the inventory numbers provided by Street Easy. Also do the StreetEasy numbers include all the new condo development coming online.
Posted by anon | March 26, 2008 9:59 PM
$1.2 trillion; and $460 billion for US levered institutions?? I just don't buy it.
RealtyTrac reported 2.2 million foreclosure notices filed for 2007. But, if you look deeper at the numbers, the total number of homes was only 1,285,873. Let's say that number doubles, which i also don't believe will happen. Let's call it 2.5 million homes. At losses of 1.2 trillion, that would be a loss of 480,000 per home.
What am I missing or are the projections for losses way beyond possibility?
Posted by David | March 27, 2008 1:55 AM
David - the $1.2 trillion is global CREDIT losses, not just subprime. So GS is taking into account losses related to other debt classes, or subprime, heloc, optin arms, credit card, commerical, auto loans, etc..
Its an overall debt problem, not just housing, and these other debts were securitized just like mortgages were...the so called 'other shoe to drop' talk.
Posted by Noah | March 27, 2008 8:51 AM
anon 9:59 - Thx! Thats why Im doing it. I would guess the margin of error is +-5% or so, just a guess. Ive been comparing to Jonathan MIller's quaterly inventory reports and it seems the total inventory is fairly close to his. Lets see how it is the next round.
As for new dev, NO, it only picks up what is listed as available online or via direct feeds. Its a very difficult problem to handle and this is best we have for now
Posted by Noah | March 27, 2008 9:39 AM
tap tap tap children, you're all smarter than this. The moneylenders are strapped, the fat lady has finished the song.
mmm mmmm, savor that crow flavor.
Posted by undertow | September 30, 2008 12:12 AM