Mother, Meet Meredith

Meredith Whitney is today's E.F. Hutton: when she talks, people listen. And what she is saying today about four of Wall Street's biggest firms will not please shareholders. The Oracle of Oppenheimer describes the outlook for Merrill Lynch, Goldman Sachs, Lehman Brothers, and Morgan Stanley as "far more bleak than that reflected in the market." She has cut 2008 earnings estimates for the group in half and singles out Mother Merrill for an "underperform" rating.

Whitney first made a name for herself last October 31, when she pointed out that the biggest U.S. bank of them all, Citigroup, had insufficient cash flow to cover its dividend to shareholders. Unless it slashed the dividend, raised capital, or sold assets, it was on a path to bankruptcy. Within a week Citigroup's CEO was gone. By January Citigroup was implementing the measures recommended by Whitney, who by then had received death threats for telling it like it is.

This was a classic the-emperor-has-no-clothes shift in perception. Investors were forced to accept that valuations were spun out of thin air. Balance sheets were (and still are) stuffed with derivative dark-matter that is illiquid and hard to price--marked to myth, not to market. How can anyone figure out what these firms are worth? "You can't really know,'' says Whitney. "The financial disclosure is terrible. They're all either liars or they don't know--but I assume they really just don't know.''

And for that company executives have been paid mega-millions, way more than what Whitney makes as a lowly analyst.