Meredith Whitney: The credit crunch is far from over - Aug. 4, 2008
Meredith Whitney: The credit crunch is far from over - Aug. 4, 2008: "Whitney's current concern is that banks aren't slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years.
Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it.
By Whitney's reckoning, banks have laid off about 7% of their employees; she thinks the cuts need to reach 25%.
Time to get real
She also argues that banks need to 'get real' about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.
Whitney's idea of 'real' is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.
In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: "The consumer's ability to refinance his way out of trouble has diminished greatly."
Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk.
Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.
Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, 10 were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don't yet reflect it.
By Whitney's reckoning, banks have laid off about 7% of their employees; she thinks the cuts need to reach 25%.
Time to get real
She also argues that banks need to 'get real' about how they're valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar.
Whitney's idea of 'real' is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.
In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: "The consumer's ability to refinance his way out of trouble has diminished greatly."
Whitney's critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn't now how to measure the remaining downside risk.
Her response: If she has no idea how to properly value bank stocks now, it's because the metrics don't work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.
posted by atish.babu at 8/04/2008 06:28:00 PM
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