The Pundit Who Bruised Citibank
Bethesda Native's Analysis Triggered Stock Nosedive

By Tomoeh Murakami Tse
Washington Post Staff Writer
Monday, November 12, 2007

NEW YORK -- Late last month, a spirited analyst published a highly critical report on Citigroup, saying it was woefully undercapitalized and might have to sell off assets or cut dividend payments to shareholders.

The report by Meredith Whitney, a 37-year-old Bethesda native, triggered a 7 percent plunge in Citigroup stock, which helped to reignite broader investor fears about lingering weaknesses in financial markets from the summer's credit crunch. By the end of the day, the Dow Jones industrial average was down 362 points or 2.6 percent, its fourth-worst trading day of the year.

"Making a negative call on Citigroup was a major call, and I took it very seriously," Whitney, of CIBC World Markets, said in an interview last week. "I knew that it would be a major event. I'm not sure I expected the market event."

Whitney's downgrade of Citigroup to "sector underperform" -- Wall Street lingo for "sell" -- came after a long and painful decline of the bank's stock and followed similar downgrades by other analysts. Whitney's report captured the most attention, in part because it was published at a vulnerable time for companies in the financial services sector that she covers and also because of the grim picture she laid out for Citigroup.

In a matter-of-fact tone, unlike her sometimes colorful comments to the financial press and as a frequent guest on Fox News, Whitney made the case in her report that Citigroup's capital levels were worse than the market believed. In doing so, she employed a calculation of capitalization, tangible capital ratio, different from the measure used by Citigroup but one she argued was more accurate given the uncertainty over the true value of the assets on the books of financial institutions.

"Our thesis is simple," she wrote. "We believe Citigroup will need to raise over $30 billion in capital as a result of its tangible capital ratios falling to the lowest levels in decades, now standing at almost half their peer group average at just 2.8 percent."

Her report helped wipe out in one day $15 billion of the market value of Citigroup, the country's largest bank and whose stock is widely held among individual and institutional investors.

The spotlight on Whitney comes after high-profile scandals involving Wall Street analysts and subsequent regulation have diminished the pay and profile of financial analysts. At the height of the dot-com bubble, several analysts were accused of publicly touting stocks that they derided in private as junk in order to win investment banking business from favored clients. Subsequent lawsuits and settlements led to reforms, including a Securities and Exchange Committee rule that forbade firms from tying analysts' compensation to certain investment banking work.

But now, in an uncertain market landscape, some analysts like Whitney have returned to center stage as investors look for guidance in navigating the potential minefields on the balance sheets of major financial institutions.

While she could do without the angry messages, Whitney revels in the high-paced field of finance, where she holds conference calls with dozens of portfolio managers seeking her input and interviews chief executives extolling the virtues of their Fortune 500 companies. After all, Whitney, a graduate of Brown University and the Madeira School in McLean, got into the business precisely because it's a pressure cooker.

"In D.C., politics is the most competitive business," said Whitney, whose father worked in the Commerce Department in the Nixon administration. She interned on Capitol Hill as a teenager and volunteered for Bob Dole's presidential campaign. "I wanted to be in the most competitive industry, and that was finance. And so I moved to New York to do it. . . . All I've wanted from as long ago as I can remember is to be surrounded by very smart, competitive people, and to earn that right."

After 15 years in the business, Whitney, ranked No. 2 in her category on Forbes's stock picker list, says she gets a thrill out of making the right call. She reads five newspapers at the gym before arriving in her Manhattan office by 7 a.m. "It is incredibly rewarding to have your analysis be right, to make people money and help people from losing money," she said.

While the continuing drop of Citigroup shares may seem to vindicate her sell rating, there is much dispute about her analysis. Some of her peers at other brokerage firms believe her concerns about Citigroup's capital levels are overstated and do not envision the company cutting dividends. Robert Rubin, who is filling in as chairman of Citigroup after the resignation of Charles Prince, told analysts last week that the dividend would be maintained. Prince was the second head of a major Wall Street firm to step down in the face of large write-downs in the third quarter.

Still others think Whitney should have downgraded the stock sooner, noting that her report came only after Citigroup acknowledged big losses and after the stock had shed a fifth of its value.

Whitney said she had raised concerns about Citigroup before she downgraded the stock from her neutral rating.

"Capital ratios eroded to such an alarming level in the third quarter," she said. "It was catalyst driven."

Steve Eisman, a hedge fund manager who supervised Whitney when she was a junior analyst at Oppenheimer in the mid-to-late 1990s, said she did not shy away from making a call that might anger shareholders and management. He noted that she worked with him when his team downgraded several companies in the subprime auto-lending industry in the late 1990s. Many of those companies went bankrupt.

"Meredith is not afraid to say what she thinks," Eisman said. "I think her call on Citi was dead on. She stripped the company naked."

One day in 2003, when she was on a Fox News financial show, a guest recommended Citigroup. John Layfield, a former champion pro wrestler and stock guru, had come on the show to publicize his book. Whitney asked Layfield why he would be promoting Citigroup stock in a rising interest rate environment, which historically has not been friendly to financial stocks.

"She just absolutely dissected me on national television," recalled Layfield.

The two nevertheless hit it off at a dinner after the show. They married in 2005.