More Bank Layoffs Coming: 'Bad as I've Seen It': Whitney

Banks have been behind the curve in terms of downsizing, with their employees paying for it now through a rash of furloughs, analyst Meredith Whitney told CNBC.

The industry has seen a recent spate of big layoff announcements, including 16,000 from Bank of America alone. Though banks already have jettisoned about half a million workers since the beginning of the financial crisis in 2008, Whitney said more are to come as the shrinking big institutions struggle to compete.

"The banks have been overstaffed for a really long time. If you think about all of the other industries that have gotten more competitive, more profitable, the banking sector and the insurance sector have been laggards behind it, and they employ a lot of people," Whitney said on "Closing Bell."

New banking regulations, particularly the Dodd-Frank financial reform bill, have seen the banks shrinking in order to avoid the too-big-to-fail syndrome that caused the industry to push the country into recession. Read more >>

Meredith Whitney: The Hidden State Financial Crisis

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.

The rapid deterioration of state finances must be addressed immediately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels. More...

Meredith Whitney: "Government Out of Bullets"

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The government is running out of ways to help the economy as the US faces major issues regarding credit and employment ahead, banking analyst Meredith Whitney told CNBC.

"I think they're out of bullets," Whitney said in an interview during which she reinforced remarks she made last month indicating she is strongly pessimistic about the prospects for recovery.

Primary among her concerns is the lack of credit access for consumers who she said are "getting kicked out of the financial system." She said that will be the prevailing trend in 2010.

Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace. The Federal Reserve said Monday that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline.

With consumer spending making up about 70 percent of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow could put a severe crimp in future growth.

"What's so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit," Whitney said.

"You're going to get a situation where you revert from a consumer standpoint," she added, "where those that had bank accounts for the first time, credit cards for the first time, homes for the first time get kicked out of the system and then fall prey to real predatory lenders."

The problems taken together also will pose difficulties for investors.

"I have 100 percent conviction that the consumer is not getting any better and there's not more liquidity," Whitney said. "So if everything touching the consumer is going to be represented in the S&P, then the S&P is going to be under pressure."

The solution, she said, is for the government to take proactive steps that will give consumers more money to spend.

"I don't think you can cut taxes enough to stimulate demand," Whitney said. "For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it's a real issue. You can't get around it. This has never happened before in this country."

Stocks Overvalued, Recession Will Return: Meredith Whitney

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany (TIF) to Bank of America (BAC) to Caterpillar (CAT) is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."

In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:

• She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.

• The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
• The banking sector is not adequately capitalized and will need to raise more capital in the coming year.
  
  
• The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

"I don't know what's going on in the market right now because it makes no sense to me," she said.

"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."