Meredith Whitney, founder and Chief Executive of the Meredith Whitney Advisory Group, was a guest host on CNBC’s Squawk Box Wednesday morning. At the beginning of the show, she explained why now isn’t such a good time to be buying financial institutions.
“The banks â€¦ the large banks, which dominate most of the lending in the United States, are effectively zombie banks because number one, they still have sludgy assets on their balance sheets that they’re working off over time, and number two they are capital constrained because they are required to hold more capital so they have to de-lever. The U.S. consumer is de-levering therefore the banks have to de-lever because they’re not serving as many consumers and so you’ve got an expense structure, then, that just doesn’t match the revenue structure, and so it’s classic case of negative operating leverage, and so you don’t buy institutions that have negative operating leverage.”
She went on to say the banks are going through a multi-year cycle of business change.
Other highlights from this segment:
1:40 â€“ The big banks are too big to move right now. In 10 years, they will look very different.
2:25 â€“ Regarding Bank of America and the on the dissimilarity between today’s problems and 2007/2008: “This is not a liquidity issue for the U.S. banks, this is not a solvency issue for the U.S. banks. They know what the problems are, it just takes a long time to fix itâ€¦. Part of the problem in ‘07 was no one had any idea what the real issues were. We know what the issues are todayâ€¦.” She called Brian Moynihan the “right guy for the job” of fixing BofA, but said the work won’t be glamorous. She also said BofA isn’t going out of business.
4:40 â€“ Today’s markets remind Whitney more of “the ’70s” than 2008. “I think the market’s harder now than it was in 2008 because it’s a constant beat-down. These are structural economic problems that we face, which is nothing to do with â€¦ I mean obviously there’s been incredible volatility in the market, but huge swings in terms of uncertainty.”