Tags: Meredith | Whitney | States | Credit | Crisis

Meredith Whitney: States May Be Next Credit Crisis

Thursday, 30 Sep 2010 08:00 AM

Banking analyst Meredith Whitney says states' fiscal problems pose a systemic risk.

“There’s no doubt about it,” Whitney told CNBC. “The similarities between the states and the banks are extreme, to the extent that the states have been spending dramatically, growing leverage dramatically,” Whitney said.

“I think the crisis in the states will result in at least the third attempt at a trillion-dollar bailout.”

Whitney says the problem lies with municipal, not states’ debt service.

She also notes that when her firm looked at states’ credit ratings done by Moody’s, the reasons for those overly high ratings were invisible. “Our ratings are quantitatively based,” she notes.

“(States) spending has grown way faster than revenues,” Whitney observes. State revenues have risen by 45 percent since 2007-2008, while spending has increased 60 percent.

State constitutions, Whitney notes, require balanced budgets, a feat they are accomplishing by using off balance sheet leveraged pension funding. She says Texas, which is a “small government state” is in the best fiscal shape, while California is clearly the worst.

On the other hand, Whitney says that U.S. banks “have capitalized themselves very well.” However, a significant percentage of banks’ revenues has come from Wall Street revenues, which “are horrible right now,” and that she is not recommending buying any bank stocks now, especially those of regional banks.

Whitney also expects 80,000 job eliminations in the U.S. financial services industry and says that VISA and MasterCard should be fine.

“They’re like technology companies,” she says. “I think they have been grossly over-punished … and they’re excellent business models.”

According to Reuters, MasterCard, the second-largest credit and debit card network, is planning to take hold of the debit processing business of its rival Visa during the next year or two due to the recently passed Dodd-Frank Act or Credit Card Law, which prohibits exclusive debit processing contracts such as the ones many banks have with Visa.

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Banking analyst Meredith Whitney says states' fiscal problems pose a systemic risk. There s no doubt about it, Whitney told CNBC. The similarities between the states and the banks are extreme, to the extent that the states have been spending dramatically, growing...
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