It is not easy going against the grain on Wall Street, especially as a woman. But unabashed, Meredith Whitney did just that, making one of the great contrarian predictions by any financial analyst. Dubbed an ‘oracle’ by The Big Short author Michael Lewis, Whitney made a prescient downgrade of Citigroup and predicted the bank would be forced to do the unheard of-cut their dividend. This was late in 2007, when the financial system appeared to be booming. Even more remarkable is that it came from a sell-side firm, where analysts are engrained to be upbeat about stocks in an attempt to win investment banking fees from the client.
Ms. Whitney grew up in Summit, New Jersey, and attended Brown University for her undergraduate degree, majoring in history .1 After college, she began her Wall Street career at Oppenheimer in 1993 where she worked in the research department for Steve Eisman (also featured in Michael Lewis’s best-seller The Big Short). Under his tutelage, Whitney acquired a trait that would serve her well in her financial career and eventually make her famous-skepticism. She would go onto grace the cover of Fortune magazine and appear on CBS’s 60 Minutes.
The Citigroup Call
As an analyst covering banks at Oppenheimer & Company, Meredith was reviewing the financial statements of Citigroup when she came to the conclusion that the company was at risk for cutting its dividend, citing deteriorating credit conditions on its massive U.S. consumer real estate loan portfolio.2 On Halloween 2007, Whitney issued a frightful downgrade to ‘Sector Underperform’.3 The call was sheer blasphemy and caused a major stir. Not three months later, the company did indeed slash its dividend and eventually needed to be bailed out through the government’s TARP (Troubled Asset Relief) program.
At the time of her research report Whitney highlighted a deteriorating quarterly trend in tangible capital -31% year over year, resulting in Citigroup’s paltry tangible capital ratio of just 2.8%.4 The tangible capital ratio (tangible common equity divided by tangible assets) and is very important when assessing financial institutions. The ratio removes preferred equity and intangible assets (non-capital) like goodwill, brand, reputation, etc. so the analyst is left looking at actual capital which can be used to pay liabilities. It takes away the fluff on the balance sheet. Theoretically, it would take just a 2.8% decline in its loan portfolio or the value of other assets for the bank to become insolvent.5 She speculated that Citigroup would need to immediately raise $30 billion in capital, from a combination of asset sales and dividend cuts, which would be negatively affect the equity price. She was right.
Three months later, Citigroup slashed its dividend and the stock went into free-fall. To understand the carnage in the equity, Citigroup shares closed October 31, 2007 at $41.90. Exactly one year later, shares were $13.65, a haircut of over 2/3 of its market value. About four months further out, the shares were trading under one dollar.6 The stock has since undergone a 10 for 1 reverse split to artificially increase its share price.
Capitalizing on the famous call, Ms. Whitney started her own research firm, Meredith Whitney Advisory Group in February 2009, selling research and consulting services to institutional clients. The independent model is a difficult track to choose, as the model offers none of the infrastructure an established firm with an attractive brand enjoys. Still, there have been a few who have launched successful independent research firms, including influential former Bear, Stearns retail analyst Dana Telsey, who launched her Telsey Advisory Group in 2006.7
In 2010, Whitney’s appeared on ‘60 Minutes’ warning about another financial catastrophe-municipality defaults. This was another controversial call but this one didn’t pan out so well. For all the fame she received for her Citigroup call, the financial media began to turn on her when her municipal bond default calls didn’t materialize as she predicted. Over the next few years, her client base dwindled and Whitney decided to de-register her research firm in and take the leap over to the buy-side.
Kenbelle Capital, LP
Whitney launched her hedge fund, Kenbelle Capital, LP in 2013. Women starting hedge funds is quite rare but that certainly didn’t dissuade Whitney. Her ‘American Revival’ fund was to build on the theme of a dodgy municipal market but invest in companies involved in “the new geography of U.S. prosperity” according to Kenbelle’s marketing materials.8 Kenbelle was assumed to implement a long-short investment strategy where Whitney could capitalize on her bearish stance on coastal municipalities but also find investment opportunities based on this ‘new geography’ of the so-called flyover states of Middle America where energy companies who benefit from the U.S. shale boom would flourish. Long-short funds are market neutral and they seek to exploit both undervalued and overvalued securities to achieve absolute returns with lower levels of market risk.
At its peak, Kenbelle had close to $50 million at its peak, according to SEC filings, which is quite small by hedge fund standards, where $100 million in assets is often considered the Mendoza Line of being able to sustain over time.9 One of the main investors was BlueCrest Capital, who invested a reported $46 million into Kenbelle.10 This was a big stamp of approval as BlueCrest was one of the largest hedge funds in Europe, with $37 billion in assets under management.
Kenbelle had a rough 2014, down 11% gross of fees through November, according to BlueCrest.11 BlueCrest’s investment made up most of the fund so when things turned sour between the two parties and BlueCrest wanted to discontinue the relationship, Whitney decided to return money to shareholders and close Kenbelle in 2015. This is actually more the norm than the exception in the hedge fund industry and for every Ray Dalio, there are hundreds of other fund managers that struggle to cover costs and stay in business.
At just 46 years of age, Ms. Whitney still has a bright future in finance ahead of her, although she isn’t as much in the spotlight as she used to be. She has been married to WWE wrestler ‘Bradshaw’ for the past decade and last year took a position at a Bermuda insurer, Arch Capital, as a manager overseeing outside investment firms.12 An extremely talented financial analyst blessed with rare critical thinking skills is a rare combination. She should enjoy plenty of financial career options in the future. We wish her well.