Tuesday, May 20, 2008

Pain is far from over for U.S. banks, Oppenheimer's Whitney says

Credit crunch to stretch into 2009: analyst

By John Spence, MarketWatch
Last update: 1:39 p.m. EDT May 20, 2008

BOSTON (MarketWatch) -- Shares of large-cap U.S. banking stocks traded lower Tuesday after analysts at Oppenheimer & Co. said they see the turmoil in credit markets lingering at least into next year.

"Our view is that the credit crisis will extend well into 2009 and perhaps beyond, and although the complexion will change, the net effect will be the same: three years of multibillion-dollar revenue reversals," the Oppenheimer analysts wrote in a note, led by Meredith Whitney. Whitney has built up credibility for her bearish and prescient calls on Citigroup Inc. and other Wall Street giants during the credit storm.

Oppenheimer warns of billions of dollars of additional asset write-downs and loan-loss reserves as a result of underwriting excesses. "We estimate that by the end of 2009, over $170 billion of reserve builds will flow through bank earnings on top of 'business as usual' loan-loss provisions," Whitney wrote. "Multitrillion dollars of loans were underwritten with the false assumption that home prices would go up in perpetuity on a national basis," the analyst said.

Other headwinds include "unprecedented leverage" and too much dependence on the securitization market for consumer liquidity.

Rather than keeping loans on their balance sheets, banks packaged them together and sold them as securities, such as collateralized debt obligations or CDOs. However, when credit markets seized up last summer as a result of the subprime-mortgage crisis, the market for these complex securities essentially died.

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