Oppenheimer's Whitney Cuts Estimates on Citi

Updated from 10:07 a.m. EDT

Oppenheimer analyst Meredith Whitney foresees new writedowns leading to losses for the first quarter and full year at hobbled banking giant Citigroup(C Quote).

Whitney, who has been consistently bearish on the financial-services giant for months, including an early and accurate call that Citi would have to cut its dividend, now expects a first-quarter loss of $1.15 a share, as opposed to her previous prediction of a loss of 28 cents a share. She is forecasting writedowns of $13 billion and claims she is one of two analysts projecting a loss for fiscal year 2008.

According to Whitney, Citi has the highest levered loan writedown level among the banks she tracks at $2.2 billion. The increased credit risk for these loans has dampened investors' desire for them and has caused a backup in the pipeline and a buildup on balance sheets. But the exposure to collateralized debt obligations, or CDOs, is even higher at $9 billion.

Chris Whalen of Institutional Risk Analytics, in a note Monday, pointed to the low amount of bank loan charge-offs in 2006 through 2007 vs. previous recessions. He said Citi needs more than three times its current $85 billion to $90 billion in risk-based capital to address its economic risks. He has calculated that the maximum probable loan loss for Citi over the next 12 months is 400 basis points, or well above 1991 loan default levels.

"We will see significant bank failures later this year and into 2009," says Whalen. Back in 1991, Citi had 3.5% in loan charge-offs and the stock was trading at $9. The economic landscape is in much worse now than back then. If Citi's charge-offs rise to 4%, expect to see the stock plummet. Whalen noted the bank had more profits to throw at the losses back then, but they won't have the same benefit this time around.

Citi shares were down 5.8% in trading on Wednesday to $22.06.

Citi isn't alone in its pain. Whitney also predicted additional subprime-related writedowns at UBS (UBS Quote). She also cut her estimates for JPMorgan Chase (JPM Quote), although not as severely as Citigroup. However, Whalen is concerned that a calamity at Citigroup will undoubtedly affect JPMorgan as well. "JPMorgan's risk book is heavily weighted to commercial rather than consumer risk, like Citigroup," she said. "But banks can't sustain these losses."

Whalen thinks the predicament for banks is so bad, that the government will be forced to do more than just open the discount window. He suggests that the solution may be as drastic as back in 1989, when the Resolution Trust Corporation (RTC) was established to handle the savings and loan crisis. Back then, the government needed a way to resolve all of the insolvent thrifts, as well as the large number of threatened thrifts due to bad property loans. The mechanism had to be able to close, sell or merge institutions and dispose of vast amounts of assets. Between 1989 and 1995, the RTC closed 747 thrifts with assets of $394 billion.