Meredith Whitney and AIG Bamboozled Press?

G

Greg Richards

http://www.tavakolistructuredfinance.com/Reporting v PR_Meredith Whitney and AIG March 23 2009.pdf

Interesting post on Tavakoli's web site. Whitney's Citi call was late behind three other prominent analysts on Oct. 31, 2007. She knew Jim Rogers was short Citi in 2007 while the stock was dropping, but she still rated it "sector perform" a hold or buy depending on how you look at it. AIG played keep-away ball with the numbers even after Tavakoli outed them in August 2007.

Much of the financial media blows in the wind of PR machines. AIG, Washington, Congress, various former investment banks, banks and others worked overtime to spin financial information over the past several years forcing competent reporters to engage in time intensive research on complex financial products. Other times, the press simply misinterprets the facts.

Last week, Charlie Rose billed Meredith Whitney on his show as the woman who gave early warning about AIG. I found that surprising given that as far as I know, she did not. The L.A. Times’ review of House of Cards, a book about Bear Stearns, says author William Cohen gave Whitney credit for warning for some years that trading in credit derivatives and mortgage backed securities set us up for a credit implosion. This is not her expertise, but it is mine, and to the best of my knowledge she did not. Ironically, Whitney rated Bear Stearns perform and only downgraded it to underperform on March 14, 2008 as it tumbled 53% in one day. Whitney rated Lehman outperform in March 2008, while beleaguered Bear Stearns merged with JPMorgan Chase. She downgraded Lehman to perform towards the end of March 2008, and Lehman went under the following September.

Few specifically and publicly warned of the global financial meltdown in advance—when something could have been done about it—as far as I know, Whitney was not in that number. Warren Buffett, Jeremy Grantham, Jim Rogers, and I (among others) were. My early warnings of credit derivatives, structured products, and structured vehicles are well documented in articles and books over many years (see Bibliography). In August 2007, I spoke up about AIG to Warren Buffett, Jamie Dimon, and the Wall Street Journal.

Meredith Whitney seems best known for her analysis of Citigroup at the end of October 2007. Jim Rogers appeared with Whitney earlier in the year on Cavuto on Business and stated he was short Citigroup (he shorted C in late 2006/early 2007), and he said Citigroup was going to $5. Whitney rated it sector perform from October 3, 2005 until October 31, 2007. The stock lost 7.9% versus a 7.5% gain for the Philadelphia Stock Exchange/KBW Bank Index during this period (David Gaffen, WSJ, Nov 1, 2007). The following table summarizes the timeline to the best of my knowledge:
[The chart is better in the pdf or here: http://www.tavakolistructuredfinance.com/TSF20.html


Jan 3, 2007 - Oct 31, 2007
Citigroup is $55.66 on 1/3/07.
Steadily drops to $42.25 by Oct 31, 2007
Jim Rogers is short;says C will fall to $5 on Cavuto on Business.
Meredith Whitney rates Citigroup sector perform. Her outlook differs from Rogers' on Cavuto on Business.

Oct 31, 2007
C is $42.25
(Below $30 by Dec 27, 2007. Still falling.)
Jim Rogers is still short.
By now, prominent analysts: Richard Bove, Charles Peabody, and Michael Mayo have already told their investors to sell.
Whitney rates it sector underperform and says it could trade in the low $30s. She states Citi must cut dividend. Structured products had already ground to a halt (too late to warn).

Oct 31, 2007 - March 19, 2009
Stock drops steadily.
Hits $5 in January 2009; $3.61 on March 19, 2009 Whitney becomes more negative on Citigroup.
Jim Rogers takes his profit.


At the end of October 2007, Whitney said Citigroup needed to cut its dividend. It was a refreshing contrast to some of her competitors. She rated the dropping stock sector underperform, but said it “could trade in the low $30s.” (“Analyst Raises Doubts About Citigroup Dividend,” NYTimes November 1, 2007). To my mind, Whitney’s was not an early call; the stock had been dropping steadily throughout the year. Jim Rogers had been short the stock for almost a year. Citigroup had already reported a $6.5 billion writedown for the third quarter of 2007. Whitney was ahead of many analysts who missed Citigroup’s problems, but at least three prominent competing analysts had previously told their investors to sell.

When it comes to press coverage of our major financial institutions, the stakes are higher and the issues are not innocuous.

When I challenged AIG’s second quarter 2007 financial reporting (“In Subprime, AIG Sees Small Risk; Others See More,” David Reilly, Wall Street Journal, 13 August 2007.), it was based on my analysis of a $19.2 billion super senior credit default swap position. With respect to potential principal loss or a mark-to-market loss, AIG had problems (even if AIG positioned some of its other contracts as “insurance” it still had to post collateral).

This was after the implosion of Bear Stearns Asset Managements’ two doomed hedge funds brought about by investment banks challenging the pricing of their “highly rated” assets and making collateral calls. [I publicly opposed Bear Stearns Asset Management’s proposed Everquest IPO and cited a dodgy Citigroup CDO therein, among other issues, in May 2007. This was one of the triggers of the price inquiries. (Dear Mr. Buffett, P. 131)]

Yet AIG’s PR spin was so effective, that the financial press backed off for the time being. AIG spins its PR like a top. It realizes what an effective strategy this is in deflecting financial reporters from the truth.

AIG asserted that it could not imagine any scenario under which its positions would have losses. Despite evidence to the contrary, AIG claims the unimaginative employees in its AIG Financial Products unit are the “best and brightest.” In early 2008 it entered into retention bonus contracts for these employees, yet there were many structured products professionals in New York looking for work.

How the employees of AIG Financial Products came to be so exalted above other finance professionals, and distinguished like some new species, is worth inquiring into.

Looking back on true early warnings and how they were dismissed and discredited helps us understand the issues now threatening the global economy and the failings in our system. It is important to identify who provided thoughtful analysis when it mattered most, because that can be helpful as we work on solutions.
 
Whitney is a PR stunt/decoy. Look at her info on wikipedia. Within 5 years she is making important analyst calls, and then mysteriously sticks her neck out. She also looks like someone who'd get noticed on CNBC. All her interviews make her out to be a "self-made" person, but it looks like she was fast-tracked to a certain spot deliberately and then picked up by the media deliberately.
 
Has anyone done an analysis on Rogers calls.

All I ever see is how right he was about this and that. It's possible, but they also said that about Cramer until they stopped.
 
Quote from stock777:

Has anyone done an analysis on Rogers calls.

All I ever see is how right he was about this and that.
More...

That may be one of Tavakoli's future articles. Seems she did a new one on her web site what we needed to ask Goldman about its trades with AIG, and I will find it/post it when I have a chance.
 
Quote from stock777:

Has anyone done an analysis on Rogers calls.

All I ever see is how right he was about this and that. It's possible, but they also said that about Cramer until they stopped.
More...

He's been wrong, he admits it. He thought shorting treasury notes was a good idea for long term at the beginning of the crisis.

Obviously, though, he uses stops because his bad calls haven't made him poor.

Last I heard, he's buying farmland. That one is slightly harder to place a stop on.
 
Quote from Daal:

She blew it on lehman. Called a 'huge bargain' back in march/april 2008
More...

Today's WSJ DealJournal is pretty balanced: http://blogs.wsj.com/deals/2009/03/26/its-2009-do-you-know-where-your-bank-analyst-is/tab/print/

It’s 2009. Do You Know Where Your Bank Analyst Is?
March 26, 2009 by Heidi Moore

Research analysts have always had it fairly tough on Wall Street. For analysts covering banks, it is even harder now to maintain a bearish stance on the future of banking while taking paycheck from big banks.

Some aren’t even trying. Three prominent analysts covering investment banks have left behind big banks to join boutiques: Meredith Whitney started her own firm, Deutsche Bank analyst Michael Mayo is headed to Calyon Securities USA–the U.S. arm of the French bank Calyon–and former Banc of America Securities analyst Michael Hecht just landed at San Francisco boutique investment bank JMP Securities. Another analyst, Richard X. Bove, left one boutique (Ladenberg Thalmann) to join an even smaller one (Rochedale Securities).

All have been bearish on banks for some time. It doesn’t take a stretch of the imagination to realize that even for the most independent-minded analysts, their dire pronouncements on the future of banking threaten to bite the hand that feeds them.

Yet there is no one reason for these moves. Mayo, for one, complained privately that Deutsche Bank limited his ability to speak freely. Whitney isn’t abandoning the idea of an investment bank–her new firm focuses on research, but may well open an investment-banking arm to advise companies on mergers. Bove and Hecht moved to new firms for different reasons.

The moves are part of the changing face of Wall Street. Many of the shifting analysts saw their expertise negated as the firms they covered were either acquired, re-regulated or went out of business: Bear Stearns and Merrill Lynch were acquired, Lehman Brothers Holdings collapsed and its pieces sold to Barclays Capital and Nomura Holding, while Goldman Sachs Group and Morgan Stanley became bank-holding companies. But things might not get a whole lot better for them at the smaller firms. Surviving banks aren’t providing much in the way of forecasts or financial targets, and ratings providers have their own credibility problems.

That means analysts are one of the few independent sources of information left. And the strain of that is beginning to show, through turf wars over who called the financial crisis. This week, consultant Janet Tavakoli, president of Tavakoli Structured Finance, wrote a five-page note to clients titled “Reporting v. PR: Meredith Whitney and AIG,” in which Tavakoli took aim at Whitney’s portrayal as a Wall Street prophet. “When it comes to press coverage of our major financial institutions, the stakes are higher and the issues are not innocuous,” Tavakoli said, adding, “Few specifically and publicly warned of the global financial meltdown in advance—when something could have been done about it—as far as I know, Whitney was not in that number. Warren Buffett, Jeremy Grantham, Jim Rogers, and I (among others) were.”

Tavakoli has written a book titled, “Dear Mr. Buffett,” which used her 2005 lunch meeting with Buffett as a jumping-off point for discussing the global financial meltdown. She is not an analyst, but helps banks settle disputes over structured products, acting as an expert witness or proferring perspective on valuation issues.

Of course Whitney–who declined to comment to Deal Journal–never billed herself as a prophet, though much of the press has. Even Fortune Magazine, in this glowing profile in August concluded that Whitney wasn’t a stock-picker, but a good analyst of the larger issues facing banks:

Whitney’s insights haven’t always translated into lucrative investment picks. Based on the performance of her buy and sell recommendations relative to her industry peer group–what analyst tracker Starmine refers to as an analyst’s “industry excess return”–Whitney’s stock picking ranked 1,205th out of 1,919 equity analysts last year and 919th out of 1,917 through the first half of 2008. That said, evaluating Whitney solely on the timing of her buys and sells misses the point. It’s not just that she’s bearish on the entire banking industry. What makes Whitney so interesting is the brutality of her arguments and the evidence she summons in making them.

For instance, Whitney made a good call in November on the banks, arguing that TARP capital infusions would soon be blown on writedowns. “Overall, we do not believe these capital raises will spur meaningful growth for the industry. We remain cautious on the financial institutions as they continue to face asset price declines and a prolonged weak economic environment,” Whitney wrote.

From the media exposure, Whitney may be the best known or the public face of all banking analysts, but Whitney’s influence does come from her blunt, forceful pronouncements, which often weren’t what bank officials wanted to hear but were well-reasoned and moved the markets. But journalists and investors read many analysts. The risk to the markets and investors is that, as Wall Street as we knew it erodes, more analysts may not be able to speak as freely.
 
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