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Meredith Whitney Predicts Obama Bank Plan Will Pass (Update1)

By Lynn Thomasson and David Merritt

Jan. 22 (Bloomberg) -- Meredith Whitney, the banking analyst who forecast Citigroup Inc.s dividend cut in 2008, said plans to limit risk-taking at financial companies will probably be approved and may dramatically reduce trading profits.

The prospect of increased regulation makes bank stocks expensive, she said in a report dated yesterday. Whitney predicted the proposed limit on banks proprietary trading may send more orders to exchanges and away from market makers, benefiting companies like CME Group Inc., which runs the worlds largest futures venue in Chicago.

It is clear to us that the market is not overreacting, said Whitney, the founder of Meredith Whitney Advisory Group in New York. The possibility of this proposal going the distance is high.

President Barack Obama said yesterday that he wants to limit the size of banks and prohibit them from investing in hedge funds and private equity to lower risk and prevent a repeat of the credit crisis. New York-based Goldman Sachs Group Inc. and Morgan Stanley tumbled more than 4 percent yesterday as the Standard & Poors 500 Index slid 1.9 percent, the most since Oct. 30.

The ban on private equity businesses at banks may also apply to their individual corporate stakes in other companies, Whitney wrote. She doesnt recommend buying any U.S. banks and has neutral ratings on lenders including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., according to data compiled by Bloomberg.

Basing short sales on Whitneys bearish picks and buying companies she recommended would have lost an investor 30 percent during the past year as a measure of banks, brokerages and insurers in the S&P 500 more than doubled since March.

To contact the reporter on this story: Lynn Thomasson in New York at [email protected].

Last Updated: January 22, 2010 12:32 EST