MEREDITH WHITNEY: PREPARE FOR A “DRAMATIC” DECLINE IN HOUSING
9 July 2010 by Cullen Roche
23 Comments
Meredith Whitney is expecting big trouble in housing in the next 9 months and she thinks it could topple the banks all over again. She also elaborates on her macro outlook for the economy:
Could topple the banks ?? Will topple the banks !!
u got it willy…..another bunch of foreclosures added to what they are sitting on.
sorry to say.
If she ends up being right then I think now is the time that the administration prepares to take over the banks. This time hopefully they will be ready and companies will be better prepared in terms of their balance sheets.
What is a good investment play with housing tanking?
Bob Kimble
Cash. And patience.
Cardboard boxes
Save your Confederate money boys, the South will rise again! Cash, and more cash!
Get outta debt, fool!
Meredith Whitney’s insight should not come as a surprise. As of March 2010, there was approximately $900 Billion dollars in US negative equity floating around from “under water” residential mortgages. Bank of America alone is exposed to over $100 Billion of this butchers’ bill. Added to the millions of foreclosure actions still pending, such numbers should tell us clearly that the largest US banks are so bankrupt and insolvent that no “stimulus” action or FDIC takeover has a prayer of putting things right.
It is entirely believable that we will see the collapse of the US banking system, and with it, the world trade system, at some point in the next five years. Maybe sooner. If you thought the Great Depression was bad, I wonder how the world will deal with the outright starvation of millions of people in Asia who won’t be able to afford to buy seed. Or with millions of homeless in America who have been forced out of their homes, have no place else to go, and no jobs to take them there.
Yes, this note is doom and gloom. The real world sometimes produces such events when large numbers of people behave foolishly.
You are far too pessimistic. If all the banks fail, the FDIC could sell all that distressed collateral to the Federal Reserve for a sufficient amount to pay off the depositors. Then the Fed could go into the real estate rental business to make that money back over the next 50 years (I am sure the Fed doesn’t want this headache, but they will be stuck with it). The FDIC could create new banks from all those deposits, and the new banks would be absolutely healthy. This scenario would clear out all the bad assets and distressed debt, and allow for a robust recovery. It would probably be the best thing that could possibly happen. However, I think those fools in the White House would screw it all up somehow with some grand scheme to keep existing banks afloat.
Here is the Ratings from Weiss–
http://www.moneyandmarkets.com/bank-of-america-citibank-wachovia-hsbc-suntrust-regions-bank-rbs-citizens-and-many-others-still-vulnerable-39185
Merideth says “You can’t bail everyone out” but why not? It’s only electronic bookkeeping entries. And debt is measured in nominal not real terms. How much would it “cost” to pay down every underwater home mortgage to current market prices? As for bailing out the states, how can that work except temporarily?
States that elect Democrats will get bailed out in the Lame Duck session, this November. States that elect Republicans are on their own.
Wow F. Beard. You actually think that would be fair and prudent, don’t you? Sounds like a lot of the ideas from the people who spent the last 6 years insanely bidding up the housing market in the first place.
what about people who don’t own a house, yet, because they knew it would be a bad investment in the bidding war… they’re are still a lot of us waiting for housing prices to FAIRLY come down and for the people who did all this to pay the price.
what about people who don’t own a house, yet, because they knew it would be a bad investment in the bidding war… they’re are still a lot of us waiting for housing prices to FAIRLY come down and for the people who did all this to pay the price. P Ronan
You would receive an equal distribution of new legal tender too.
Meredith here doubling down once again on her all-too-wrong calls of over a year now.
Maybe for her new landlord’s sake her predictions will finally come to pass.
That would still not make her “right,” from an investment business perspective- it is way too late for that, since in this business being that early versus being plain wrong knows no difference- i.e., anybody actually investing for a living would most likely be out of business by now, from following her advice over the last more than twelve months.
Exhibit A here is consumer discretionary (see XRT, RTH, etc…) stocks, one of the very top-performing sectors over the last year, and only one for which Meredith predicted utter disaster about this time last year.
Predicting the future is very difficult, but that doesn’t stop people from trying.
The onset of human hubris, on the other hand, as in when respected sector analysts start believing their own press, and begin fancying themselves
macroecomonic prophets, is all-too-predictable…
John Kinnucan
Very well said
John K,
She has already admitted that she was wrong on the consumer discretionary call. She said that she did not foresee people not paying their mortgages and spending the money on other nonsense instead. In my opinion it’s hard to blame her for that. Or to blame someone for a bad call when the government and the TBTF banks change the playbook whenever they please.
She said that she did not foresee people not paying their mortgages and spending the money on other nonsense instead. In my opinion it’s hard to blame her for that.
That’s a fundamental mistake.
What the superbears get wrong is that deleveraging can occur, and in fact is occurring now, via much of the debt is being charged off, modified, and discharged through bankruptcy.
The decision early in the crisis to avoid mark-to-market accounting for bad mortgages was made precisely in order to allow these writedowns to occur gradually and in a more orderly fashion, deferring them to a later time when the lenders could take the hit to their balance sheets. Bad private debt does not necessarily need to be paid with cash.
Much of that debt isn’t being paid, and will never be paid. In fact, write offs are not an option but a necessity, because the destruction in asset value that occurred during the financial crisis literally destroyed much of the cash available to pay such debts. “Strategic defaults” were inevitable, as borrowers began to realize that there is no point in servicing debt that could not be paid without destroying every other aspect of their lives.
Anyone who understands the financial system should have seen this coming, as expecting all of this debt to actually be paid is the proverbial blood-from-a-turnip problem defined. Anyone who believes that we can’t fully recover until all of the debts have been paid by their borrowers simply doesn’t get it.
The bears are right on the problem but wrong on the outcome. Well before the banks fail the Fed will simply buy the mortgages off the banks at par. If you can print your own money profits or losses are irrelevant.
@ Angry MBA
Mark-to-Market accounting is necessary to relieve the system. The bad stuff is flushed away to allow new more productive capital into the market. Keeping the bad stuff in the market only strains the productive economy.(Japan) Allowing banks to defer write downs only encourages hording, and keeps uncertainty in the market.
Do you really think the banks are going to allow themselves to “take the hit”? I thought banks were in the business of making money, not taking hits.
Do you really think the banks are going to allow themselves to “take the hit”?
When borrowers can’t or won’t pay them, then they have no choice but to take a hit. They have some choices about the timing and accounting of the recognition of the hit, but the hit is going to be taken, regardless.
Mark-to-Market accounting is necessary to relieve the system.
No, it really isn’t.
He’s “Angry MBA” because he wasted those years and money getting an MBA. An MBA is like a cheap pair of shoes at the store. Anyone can get them with just a little money.
Also the whole “Mark-to-Market” bs, why would anyone want to deal in reality when fiction is so much more fun?! Why make people who made bad decisions suffer now, when they can not suffer or learn from this later? Silly people. Learning is for losers.