3/27/2008: Four largest US banks' outlooks slashed-Oppenheimer

Excerpt from Four largest US banks' outlooks slashed-Oppenheimer
By Jonathan Stempel

[Meredith Whitney wrote]: "Despite cutting estimates for financials by over 30 times since November, we are confident this will not be our last reduction in 2008. As key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."

Sabaziotatos says:

I find Meredith’s naïveté stunning. She genuinely does not seem to understand the events she is caught up in.

Meredith would have us believe that she is an analyst offering independent, objective observations on the financial condition of banks. There are two problems with this view.

First of all, her analysis is derivative, being to a significant extent merely a reflection of the movements of “key mark-to-market indices” (Markit.com’s ABX and CMBX, for example). As these mark-to-market indices have trended lower over Q108, Meredith has changed her estimates to agree with them. How, then, can Meredith’s estimates be viewed as an independent data point or as adding any independent analytical insight at all? Meredith is simply telling us that Mr. Market is in a panic. As if we didn't know that already! What she is NOT telling us is whether Mr. Market is right and, if not, how one should calculate the fundamental value of the banks.

Secondly, Meredith does not seem to realize that she herself has become an important actor in the events she is seeking to describe (George Soros’ “reflexivity”). This was unavoidable given the almost rock-star-like status she has achieved through her correct call on Citigroup late in 2007 and the kind of vicious cycle the market is in due to mark-to-market accounting. Here are the steps in this vicious cycle:

1) The mark-to-market indices fall.
2) Meredith predicts writedowns based on the mark-to-market indices.
3) The banks mark down their assets against the mark-to-market indices.
4) Bank writedowns induce more panic.
5) Go to step 1).

The most remarkable thing about Meredith’s predictions over the last 6 months is that she has been so consistently wrong. At first, she said that C could drop as low as $26 a share; then she changed her mind and said that C could drop as low as $16 a share; now she is changing her mind again and saying she anticipates "further downside to both estimates and stock prices." Doesn’t Meredith wonder why she has had to cut “estimates for financials by over 30 times since November” and is “confident this will not be our last reduction in 2008.” What could be the cause?

In my opinion, the cause is obvious: the market is caught in a self-reinforcing, pro-cycyclical, feedback loop caused by mark-to-market accounting. And Meredith doesn’t even seem to realize she is part of that loop.