Meredith Whitney returns: ‘There will be many fewer banks’

Meredith Whitney, once dubbed “The Oracle of Wall Street” for predicting the Great Financial Crisis, is relaunching her firm at a time when she predicts that, once again, a large number of banks may disappear.

Whitney said a combination of headwinds, including the US housing market and new bank regulation, will make it increasingly hard for many regional banks to survive on their own. This will weigh on their stock prices and make them attractive acquisition targets.

“There are good reasons investors don’t want to be in bank stocks right now,” Whitney told the Financial Times. “There will be many fewer banks.”

Whitney’s eponymous research boutique specialises in covering bank stocks, but also writes thematic pieces about the economy. It began offering access to individual investors for $257 a month earlier this month. Whitney said she will offer more bespoke research to a limited number of clients for higher fees.

Whitney predicts a wave of mergers that will cull the ranks of midsized lenders, especially in areas of the country such as Texas that are continuing to show economic growth.

“There are a lot of headwinds facing the regional banks right now,” said Whitney. “Just don’t know the type of loan pressure they are going to be under and also the capital requirements they may face.”

Whitney rose to fame in the wake of the financial crisis for her prescient call on the housing bubble and how it would cause significant problems for the nation’s biggest banks.

She is best known for warning in the autumn of 2007, almost a year before the financial crisis, that Citigroup, then the largest bank in the US, was headed for bankruptcy. Within months, Citi’s then-chief executive Chuck Prince was gone and the company was bailed out in 2008. Its shares plunged more than 95 per cent during the next two years. A decade and a half later, Citi’s shares have yet to fully recover.

Few of Whitney’s other public investment calls since have seemed as seer-like. In 2011, she predicted highly indebted cities and other local governments, and rising pension obligations, would cause a crash in the muni bond market that has never materialised. Whitney opened a hedge fund in 2013 that closed about two years later after poor performance.

Whitney thinks the large banks are generally in good financial shape and said they have the financial wherewithal to swallow the cost of new regulations.

“Large banks are sitting in a very good position. They have more than enough deposits so they don’t face the same pressure as regional banks.”

She thinks that if there is a recession, it will be mild. Her biggest call since relaunching her firm has been on the US housing market, which she thinks will enter a prolonged slump, but not a crash.

“The foundation for consumer banking is housing, and so I am not worried about the economy because homeowners have a lot of wealth in their houses right now,” said Whitney. “Over the near and medium term, things are great.”

Whitney said the US housing market benefited from having less leverage than it did in 2007, with the average US homeowner owning a mortgage that is just 30 per cent of the value of their house. That means few homebuyers will find themselves in a situation where they owe more than their house is worth, and either be forced to sell or go into foreclosure. Whitney predicts US housing prices will fall by about 2-3 per cent at most during the next five years.

She is also sanguine about commercial real estate. Questioning the productivity of remote work, she thinks employers will increasingly require their staff to return to the office. This will reverse the recent drop in the value of office buildings and other properties in city centres.

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She also thinks the regional banking crisis is over, even if the economics are still stacked against many smaller institutions. “Silicon Valley Bank and the others that have failed — I look at those as unforced errors,” said Whitney. “The banks reported decent first-quarter earnings and the market is not telling you that other banks have made similar mistakes.”

Since pausing her research firm nearly a decade ago, Whitney has taken a number of roles at start-ups, none of which have lasted long. Most recently, Whitney joined buzzy fertility care start-up Kindbody as chief financial officer in April 2021. She lasted just 11 months in the position, but has remained an adviser to the company, which earlier this year landed another $100mn in financing. Whitney declined to say why she left the role after less than a year.

“I stopped writing about banks a decade ago because banks had become boring,” said Whitney. “Now I have more than enough to write about. The banks are interesting again.”