BRIAN LAMB, HOST, Q&A: Meredith Whitney, in Michael Lewis’ book, ”The Big Short,” he says, ”And then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for an obscure financial firm, Oppenheimer and Company, who on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup has so mismanaged its affairs that it would need to slash its dividend or go bust.”

Were you surprised at how much Michael Lewis relied on you for starting his book?

MEREDITH WHITNEY, WHITNEY ADVISORY GROUP LLC: I’m surprised that I would even be on, you know, on a page of Michael Lewis’ book, because, first of all, he’s an incredible author and probably one of the most important authors journaling the financial times as we know them. So, I’d always been a big fan.

And when he called me in March of ’08, I said, I remember saying to him, ”Michael Lewis? Is this Michael Lewis, the ’Blind Side’ Michael Lewis?”

And he said, ”That’s the first time I’ve ever gotten that. I usually get, ’Michael Lewis? Is this ’Liar’s Poker’ Michael Lewis?’”

So, you know him. He’s an extraordinary individual, talent, personality. And so, I wanted to talk to him whenever he called, and I was really open with him, because he – you know, whatever you tell him, you can tell him a story. He’ll tell you the story back, and you’ll learn something from his story. So, he’s amazing.

I was – of course, I’m surprised. But I was – I also never thought of myself as an obscure analyst at an obscure firm. The fact is that, prior to that time, people didn’t really care about financials. So, I don’t know that I was obscure within the world of financials, but financials weren’t on anyone’s radar screen.

Banks really weren’t something that people thought too much about. And certainly, from a risk perspective, banks were never associated with high risk that could bring down the system.

LAMB: Let me let Michael Lewis say it in his words, as he did when we talked to him about his book. .

”Yes, she’s a catalyst for me in this story. She was, until very recently, what’s called a sell-side analyst, which means she works for the Wall Street firm that’s offering stocks to the public. And she worked for a firm called Oppenheimer, and she was a bank analyst, a financial sector analyst.

”And Meredith Whitney, who I have never heard of, started saying things in late 2007, is when I first started paying attention about Wall Street that sounded differently from anything I’d ever heard. That she was saying they basically didn’t know, understand the risks they were taking. They didn’t understand their own balance sheets. She predicted Citigroup was going to have to cut or eliminate its dividend a week before they actually do. She seems to know more about what’s going on inside the places than the people who run them.

”And it’s almost her tone that was as interesting as what she said. She was actually kind of condescending to these Wall Street people. And so, I call her up, because it just seems she was just making a different sound. I thought, I haven’t been writing about this world, but I’m kind of curious who this woman is and why she thinks this is. And she made such sense that she persuaded me pretty early on.

”But she didn’t put it this way, but I put it this way, that the Wall Street firms had become the dumb money at the poker table, that somehow these firms which used to be the smart money when I left Salomon Brothers, the last thing you wanted to do if you were an investor was to be on the other side of one of Salomon Brothers’ trades. If there was some (ph) zero (ph), some bet to be made with Salomon Brothers, you did not make it, because you were sure to lose money.”

One more paragraph. ”And what has happened is, somehow, the firms had become – had turned stupid, or rather, institutions that had become the dumb money. And so then I was curious – that made me curious how something big had changed, and that the natural question of course was, ’Well, if they were the dumb money, who was the smart money?’

He says that you led him to Steven Eisman. And who is he, and why was that important to his story?

WHITNEY: I think Michael’s original tact was going to be different than what it turned out to be. So, he – we started speaking in March of 2008. And he came about – his perspective was fresh. And, I don’t know, he just wanted to learn.

And so, it wasn’t until September 2008 that Steve Eisman was even mentioned during conversation. He had asked me about investors who were involved in, you know, buying the brokers, investing in the brokers, and then had now become entirely demoralized and dispirited by the brokers, and would never invest in brokers again.

And I said, ”There is that group.” This is investing in the brokerage companies. ”But there’s also a group that invested and shorted a different type of game. And you should meet my mentor, Steven Eisman.”

So, Steve I worked for from ’94 to ’98. And he is really well depicted in Michael’s book – a character. Love him or hate him – I happen to love him – he is smart, and the hits keep coming.

So, when I worked for Steve, we wrote on the fall of Glass-Steagall. We wrote on the subprime home equity industry. I mean, we – he – I was working for him. I learned, you know, how to do this, and sort of his craft.

Hit every single turn and looked at what was happening in the world of financials from a point of history, from a cultural angle. And that got you into layers of the financial system that you would have missed otherwise if you had just looked at bank stocks.

And I think people who didn’t connect the dots missed this, missed the entire collapse of the system. People who were always looking to connect the dots through the story were people who got it. And it was a few who got it, but it was – you know, you had to have an unorthodox way of approaching the system.

So, it’s not just that Steve was really smart, because I think Michael Lewis meets a lot of smart people. It’s that he is – you couldn’t – if I didn’t know Steve, I would find it hard to believe what he wrote about on paper, because the guy is different.

LAMB: You mentioned selling short again. Define that.

WHITNEY: That’s when you bet against a – that’s when you bet a company’s stock price is going down.

LAMB: Why would they even allow that to happen?

WHITNEY: Well, there’s a market. So, there’s a buyer, there’s a seller. It’s – there are good reasons that that trade exists. And oftentimes, you know, a lot of the short-sellers tend to get into a story, see a company’s weakness before anyone else does, and ends up shining light – the greatest disinfectant – on what otherwise is a dubious company or story.

LAMB: As you know, for a generalist – and I actually have the analysis that was done by a law firm on the Dodd-Frank financial regulation legislation here, and I’ve read it. And you keep fighting as you’re reading it as a generalist – what does this mean, and all that. And I’m going to ask you …

WHITNEY: Oh, look. As a – working in finance, you still fight with it to see what it means.

LAMB: Well, I wanted to go back to where you started in this whole business. How did you train yourself in the first place? And why did you get into it?

WHITNEY: I was a history major in college. I went to Brown University. And in college I studied what was interesting, you know. The Berlin Wall was crashing. I wanted to study German history. It was the lynchpin to all of modern European history.

And then, when I graduated, I wanted to go – I grew up in D.C. So, in D.C., at 15, I worked on the Hill. I worked for Jack Danforth. And I worked tirelessly until I went to college, in politics.

And when I graduated from college, I wanted to go to the most competitive environment. In politics, obviously, the most competitive environment is D.C.

In New York – I wanted to go to New York. The most competitive industry in New York as I thought was finance.

I didn’t even know research existed. And so, once I discovered what research was, I really narrowed my search.

Anything else on Wall Street I didn’t want to do. I didn’t want to sell anyone else’s product. I didn’t want to – I wanted to make my own product and sell my own product, because that’s what I trusted.

And what research ended up being is a field of work where you get paid to learn. And it’s fascinating. And the access to information is incredible. So, it’s truly a meritocracy, that the harder you work, the more you can do, the better work you can do and the farther you can advance.

So, my first job in research was working for an oil and gas analyst who ended up firing me, because, as I learned later, he thought I was too aggressive and I wanted his job. But I was 23 at the time, and he was in his 40s.

But at any rate – so, then, getting fired by him was the best thing that could have happened to me, because then I ended up working for Steve Eisman.

Now, oil and gas is interesting here, because when I had my first job in oil and gas, people used to say, ”Remember the energy crisis in the ’70s.” And I would think to myself, in the back of my mom’s station wagon. I mean, not having any experience within oil and gas industry was a real detriment.

Getting into financials when I did in the early ’90s was the perfect time, because that’s when the securitization market was really getting underway. That’s when subprime was really getting underway. That’s when credit card lending was becoming a national business.

So, and that’s when, of course, Glass-Steagall fell. There was so much going on at that time, that I was growing up with the industry really growing up. So, I didn’t miss anything.

And, you know, from an accounting standpoint – as I said, I was a history major – you could learn on the job. Anything that was going on, you just, you know, dug into. And it was a level playing field for the people who really wanted to work. And I really wanted to work.

LAMB: What had your mother and father been doing?

WHITNEY: My mother was an executive recruiter, and my dad was in finance in different areas. But they didn’t have a lot of say in terms of me going into research. I’m the youngest of three kids, so I’m pretty strong-headed.

LAMB: Explain what a researcher does.

WHITNEY: A research analyst typically is siloed into an industry, and be it financials, you’re siloed into banks. And so, you cover, you know, let’s say the 10 biggest banks in the United States, and cover the banking industry. So, you’ll rate a bank stock – buy, sell or hold – and you’ll have relative ratings. So you’ll have, let’s say, three buys and three holds and – you know, three sells and four holds.

And that’s – you know, you’re just talking to investors. And the investors would be the people that you give your money to that run mutual funds and 401(k) plans, et cetera. And so, I’m advising those fund managers on what to buy, what to hold, what to sell.

LAMB: Michael Lewis referred to an obscure company called Oppenheimer. It seems like I’ve heard the name Oppenheimer for years. Is it still there?

WHITNEY: Oppenheimer is – Oppenheimer is a great old name, whether you look at it in the financial sphere to, you know, date it with respect to South Africa, date its roots.

When I joined Oppenheimer originally, it was a research boutique. And it was one of the best research boutiques on the Street – small, but things were small back then. This is the early ’90s.

And then, it went through a couple of iterations when you had consolidation in the late ’90s, and it became CIBC. And then, CIBC sold Oppenheimer back to, you know, another retail operation. It still exists, but it’s small, and it’s not what it once was.

LAMB: I’ve got a list here somewhere of all the things that happened to you after this prediction back in 2007. This is something called Buzzle.com. I don’t know …

WHITNEY: Never heard of it.

LAMB: Yes, it …

WHITNEY: If it says good things, I’ll like it.

LAMB: Well, here’s what it says. ”It may be said that Whitney has made great strides in a short period of time. That is the reason that she made Forbes’ list of the best analyst stock-pickers in addition to being included in the ’New York Post’s’ 50 most powerful women in New York City. She was also ranked in Fortune 500’s 50 most powerful women in business.”

I want to stop there. There’s more. But why do you have to be the 50 most powerful women? Why can’t you just be one of the 50 most powerful people?

WHITNEY: I don’t know. Write to them and tell them.

LAMB: I mean, where does that come from? Why do they still segregate men and women in these kind of lists?

WHITNEY: I think – I don’t know. I would say, from the Fortune most powerful women, I was just excited to be invited to the conference, let alone make the list. It’s a great, great group of women. And we have a lot of fun, and it’s a great networking opportunity.

So, women don’t typically network for some reason. I don’t know why that’s the case. They’re usually focused on the task at hand. So, that’s opened up a lot of doors in terms of meeting incredible people.

Why it’s segregated? It is amazing to me that there are so few women on Wall Street. It’s just a fact. I look around when I go to conferences or when I go to events, or when I have events. And it’s – you know, I call it a man zone. It’s just – they’re a bunch of guys.

It’s been a great advantage for me, because I’m different. And I don’t care about how I look, because I’m the only one there. I don’t have a lot of comparisons.

So, I think I’ll ask questions that other people won’t ask. If people under-estimate me, that always works to my advantage. So – which happens a lot – so, I don’t mind asking dumb questions.

But it’s sad to say that there are so few women in finance.

LAMB: Are they scared to mess with you, because of who you’re married to?

WHITNEY: I think that …

LAMB: Explain why I said that.

WHITNEY: OK. So, my husband is a retired World Wresting Entertainment champion. He’s 6’7”, 250. He will – he’ll go, ”No, I’m 245.” But he’s 6’7”. He’s a big guy.

I really don’t get messed with that often, maybe because I …

LAMB: I was really kidding.

WHITNEY: It was a tough time after the Citi call, but …

LAMB: And talk about that. By the way, the other things that they say on here, the TIME 100 world’s most influential people, when it came along.

Did this all just happen overnight? And not your learning, but all this that – all these awards that you were given, names you’re – lists that you were put on?

WHITNEY: It happened within a period of about 12, 18 months. And a lot of these lists happened, it seems like, after a lot had already gone on. So, the TIME 100 list, which was another sort of pinch yourself list – great party – happened in May 2008. Sorry, 2009, rather.

So, so much had gone on by then, I had forgotten. And I’m not very self-aware, so I don’t think about the lists that I’m on. I’m just, again, sort of like, that sounds like a great group of people to be around. How cool. Hope they don’t figure out that I don’t belong here.

Yes, it happened pretty quickly.

Again, I remember in the late ’90s, talking financials, talking to investors. You couldn’t sell a financial stock to save your life. People wanted growth. People wanted tech, media, telecom, the Internet. People had zero interest in financials.

And it’s – you know, the high point was over 20 percent of the S&P. So, it was just not a sexy sector. And it got – you know, I think that’s why it caught so many people off guard. And so, when it hit, all of a sudden people were like, ”Oh, who’s this obscure analyst?”

I’d been in the business for, you know, over 15 years. People all of a sudden cared, and cared a lot.

And so, what I loved about the opportunity was, it doesn’t feel like work. I work all the time. And if I’m – I’m always on to the next issue. I don’t stay on one issue for too long.

A good analyst would market their thesis over and over and over again. My thesis, once I’m finished with the report, I’m on to the next one.

And time moved so fast during that period, that I just had it. I had the research. I had – you know, from the Citi call, then we moved to a big call, Ring of Fire, which was the regulatory capital was determined by the ratings of Moody’s and S&P on certain securities.

So, this is November 15th, November of ’07. That was a much bigger call than the Citi call. But I had that two weeks later, and that’s a huge call. And then, two weeks later, another call. And then, just a month later, a call on the monoline insurers.

I mean, it was staggering the amount of work that we were putting out. And it happened when – right at the time when people cared. So, that was – it was a perfect storm.

LAMB: Think back to the Enron situation. If I remember right, there was a short seller on a telephone call with Jeffrey Skilling that started that whole process down.

And here you are with a report that says – and I want you to explain what you said about Citi in 2007. Who is Citi, anyway? And what happened to it after you made your call?

WHITNEY: OK. Interesting about the Enron, if I could go back for one second.

During my brief time as an oil and gas junior analyst, I actually knew what Enron was. I didn’t know how – you know, I didn’t know how complex the organization had gotten, but I certainly knew how revered the company was.

And so, at the time, in 2001, everyone was worried about Argentina defaulting. And so, I remember writing a note on a Sunday, December 1st, and saying this will be bigger than anything you can imagine when Enron goes bankrupt. And at the time, you could see who the creditors were. And so, that was a big call.

With the Citi call, the Citi call was very straightforward. So, Citi was one of the largest banks in the world, with over $2 trillion in assets. And it had made so many acquisitions over the years, that you couldn’t really see what was coming or going with the company.

So, each quarter they restated. And when a company restates, it’s very hard to get a historical perspective on what’s really happening, because they’ll restate every line item so you don’t know what you’re really looking at.

LAMB: Let me note, just to make sure. So, put some names on it. Was Sandy Weill in charge at that time?

WHITNEY: No, Chuck Prince …

LAMB: Chuck Prince?

WHITNEY: … was in charge. Sandy Weill had gone. But Sandy Weill was in charge when they made the major deals between Travelers, Salomon, Citibank. I mean, he was the architect behind a lot of that.

LAMB: And was Bob Rubin there then?

WHITNEY: Yes, he was.

LAMB: And Bob Rubin was former secretary of the Treasury, was involved in advising Barack Obama when he went into office, and all that.

WHITNEY: Yes. And so, what I looked at – and I remember the summer of 2007, they had a new, appointed a new CFO – or, sorry – earlier in 2007, they appointed a new CFO, Gary Crittenden, who had come over from American Express, who I had a huge, and have a huge, amount of respect for. They had a meet-and-greet with Gary Crittenden. And for …

LAMB: He was chief financial officer.

WHITNEY: Chief financial officer. And that was the summer of 2007, so it was before all of this.

And I remember listening to one analyst who was – now, look. I work in a complete nerd factory, dork factory. If you went to some of the events with me, you’d be, like, why is everyone in black socks and sandals? It’s just – it is about as nerdy as it gets.

So, one of the nerdier analysts – and I mean that as like high esteem; the nerdier you are, the cooler you are in my field – said, ”You know, I’ve just given up on modeling” – modeling, which is predicting what’s Citi’s – a company is going to earn – ”modeling Citi, because it’s just gotten too complex.

And thinking at the time, but you can’t give up. That’s your job. That’s what you get paid for.

So, that in the back of my mind the whole time, I tried to make Citi and my model for Citi as simple as possible. And the rationale of downgrading Citi to a sell – which is a huge deal for an analyst, because you want everyone to like you, you want to get invited to meetings.

Putting a sell on a company turns out to be dangerous, and is highly unpopular.

LAMB: But why? Why dangerous?

WHITNEY: Because people own the stock, and you’re telling people to sell it, and people are losing – typically losing money. You anger a lot of people.

So, everyone likes you when you put a buy on the stock and they make more money. People don’t like it when you put a sell on a stock and you lose money.

LAMB: You’re talking about people. If I own …

WHITNEY: Investors.

LAMB: If I own Citi, just as an individual investor, would I read you? Or would this be an institutional group that would be reading it?

WHITNEY: It’d be an institutional group. But the way – the day I put this report out, pretty much everyone was reading it.

But to go back to that time, though, they had just reported – just a few weeks after they had reported third quarter numbers, and I looked just simply at leverage, how much debt they had relative to the equity they had. And I looked at the leverage compared to the other banks.

And so, the analysis was basic. If they needed to get to a tangible equity leverage ratio comparable to their peers, they would need to raise $30 billion, sell over $100 billion in assets. And, oh, as an addition, they weren’t going to make enough money to pay their dividend, to be able to pay their dividend.

So, it was a three-pronged report. The report was seven pages. Any generalist could have read the report and known exactly what I meant, and exactly how simple the problems of Citi were.

And that’s how I present things. You know, if I don’t understand something, I will work and work and work until it’s laid out in a way that an art teacher or a veterinarian can understand it, because it’s not that complicated. You just have to explain it – you know, have it explained to you in a way that is not in some crazy vernacular.

LAMB: But with the billions of dollars that’s spent in this town for analysts, and all this stuff, why were you the only one that figured this out?

WHITNEY: I don’t know. During that – during the next – I would say until now. So, from that point, when I felt like I got – was just starting to get a ton of attention for my work, I became very concerned that – not very concerned. I became concerned that not only were more people interested, but people would start working harder, and that anyone could do what I was doing. So, why weren’t they?

So, I remember starting to go on Bloomberg Television, because when I wrote a report, I wanted to make sure that people knew that I had written it first, as opposed to just being plagiarized for ideas.

I mean, information is everywhere. I wasn’t using information that anyone could not get that was proprietary to me. It was as simple as it could be.

And particularly then with the issue with the regulatory capital and the rating agencies, that was just a course of several conversations, conference calls with the FDIC. Anyone could have done that. And I remember looking behind my back thinking, like, why aren’t other people doing this?

And it happened. And it’s still happening, which is great for me, but I still think – it also makes you think, like, am I crazy to do this? Am I right? Am I – you know, is this – could I be that alone and be right on this?

I don’t know if that makes any sense. But being in a consensus is a lot more comfortable.

LAMB: I want to show you a headline on a ”Wall Street Journal,” which is a couple of weeks ago. And when I saw this, I thought of you, because one of the things I want to ask you about is regulation, and everything else.

But when the new credit card law came into effect, the ”Wall Street Journal” here has, ”Credit Card Rates Climb.”

Everybody watched these hearings on Capitol Hill and watched the bill being put together. And the last thing you expected to see was a headline like that – ”Credit Card Rates Climb.”

WHITNEY: Yes.

LAMB: How do you write legislation, and the first day it goes into effect, everything goes up?

WHITNEY: Well, unfortunately, that – so, this happened before the Dodd-Frank bill. This was part of the CARD Act. And what the CARD Act did was, it was designed to protect consumers.

So, all that fine print that you can’t really read, and you don’t really want to read, would explain to you that, if you’re over your limit, you get charged a fee. And if you are late on your payment, you get charged a fee. And so, they call those hidden fees. Or if you – there were some really bad things that were going on, which was double-cycle billing and excessive fees charged.

But the bad side of this was that they put into effect measures that prevented banks from repricing. So, a credit card loan – specifically, this is very interesting and very important – a credit card loan is an unsecured loan. So I’ve got no collateral behind it. So, if you go bust on your credit card line, I’ve got nothing to collect. That’s it. I’m done.

LAMB: You mean, you’re the banker, or …

WHITNEY: The banker.

LAMB: … you’re the credit card issuer.

WHITNEY: So, what’s so important is that I look at your monthly credit scores and your behavior on a monthly basis to assess the risk. So, if you’re late on your phone bill – and I’m smiling, because I’m about to get to my funny line here – if you’re late on your phone bill, or you’re late on your electric bill, I make a mental note of that.

But if you’re late on your cable bill – so, did you know that when people are late on their cable bill, that’s the biggest red flag to lenders, because men will pay their cable bill beyond, you know, any other bill.

God forbid, you don’t have cable TV. And so …

(LAUGHTER)

… your entertainment bill, you know that the person is – the lender knows that the person’s in trouble, or has a higher probability of going default.

So, what I’ll do is, I’ll reprice, or I’ll put in mechanisms. You know, I can cut the line. I can still cut the line, but I’m going to reprice on the fly. I need to have that, so I can effectively price for risk.

They eliminated that. So, if I now want to reprice your loan, and I’ve seen you spend a lot of time in Atlantic City gambling, and I’ve seen you be delinquent on a bunch of bills, I have to give you 45 days’ notice now to reprice.

So, what the lender does now is say, I’m not going to make that loan. So, I’m going to cut lines to individuals. Over $1.5 trillion of lines have been cut from the system. And …

LAMB: You predicted, like, $2.7 trillion …

WHITNEY: Yes.

LAMB: .. would be cut by a certain point. What, the end of the year? Or …

WHITNEY: Over the next three years. So, we’re over $1.5 trillion.

Oh, and when I made this prediction, it was May 2008. I got so much grief on it. People thought it was – they were so angry.

But the idea was, if you can’t price for risk, you’re not going to extend the risk. And that’s what’s happened.

So, then, for the existing cardholders that they still have, they have to figure out a way to make money. So, they charge you excessive fees. They’ll raise your rates, because they don’t have the optionality of repricing on the fly. So, it becomes expensive.

And what’s worse about this is, for the guys who get kicked out of the system, the less wealthy or poor people, it gets a lot more expensive to be poor. And now, what’s coming – you know, a consequence of this is the growth in prepaid cards and payday lenders. And that’s a very expensive way of, you know, paying for things.

LAMB: What is your basic feeling about the bill that was passed, the financial services bill that was passed in Congress a couple of months ago?

WHITNEY: My basic feeling is that it’s going to take a long time to figure out what the results are going to look like. So, any of it – what was feared to be the toughest part of the bill was given a much longer runway timetable. So, in some respects, you know, many, many years to implement.

So, I think it’s very complicated. I think that they tried to put – I mean, it’s a massive bill – they tried to put a lot of, a basic outline together and let committees work it out. So, we’ll see. I mean, it changed on the fly. I mean, the Durban bill that was passed, what seemed like last minute, which pressures a lot of the payment companies, came out of nowhere.

So, it was heavily political. And I take it as – I take it fingers crossed. But it’s an outline, and some good things can come from it.

LAMB: I have this document here that was prepared by David Huntington, who is a partner in the Capital Markets and Securities Group at Paul, Weiss, Rifkind, Wharton and Garrison. Do you know him?

WHITNEY: No.

LAMB: It was published on the Harvard Law School Forum.

WHITNEY: OK.

LAMB: I figured that was somewhat credible, all of that. And it basically is a synopsis. And I don’t want to bore the audience, but I want to read what some of this stuff is and see if you’ve interpreted it. For instance, I’ll just pick out one.

”The act introduces significant, direct regulation of over-the-counter derivatives transactions. Among the most notable provisions affecting the OTC derivatives markets are clearing and trading. The act authorizes the CFTC,” which is the Commodity Futures Trading Commission, ”and the SEC” – the Securities and Exchange Commission – ”to mandate central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared.”

Again, I don’t have any idea what they’re talking about here, other than I know what derivatives are, based on all the chatter. Does that sound like something that’s going to work?

WHITNEY: I think that it will work. I mean, the more that can be put on a transparent clearing system, the better. I’m going to give you an example.

You know – when you wanted to get a stock price, a legitimate stock price, just from looking at a ticker, a bid or an offer 25 years ago, you would have to call a stockbroker. Today, you can pull it up on your computer screen. You can’t do that for a bond. And so, I think the bond market, the credit markets, need to move towards this.

So, they’re starting with OTC derivatives. I think more and more will move towards open exchange, and that’s so much better for the consumers, in my opinion, because there should be transparency. There should be – the difference between what someone’s offering for security and what someone’s willing to sell should not be so wide. And you think with transparency, it would be – you would narrow some spreads.

That’s less profitability for Wall Street, but I think better for the system.

LAMB: When you say bonds, to someone who’s never bought a bond, what’s the difference between a bond and a stock?

WHITNEY: A bond is a – you know, when we talk about collateral – a bond is going to be, you know, typically will be a collateral holding. So you get, actually, the first – if a company goes bust, the equity shareholders are wiped out. The bonds actually own the collateral of the company.

So, that is going to be, typically, an annuity-style payment, so you’ll know you’re getting a five percent coupon for a stated period. And it’s basically a company borrowing, and you financing the borrowing of the company.

A stock is getting a piece of the equity of the company, which is the growth prospects. So, you’re sharing in the upside. So, it’s a higher risk vehicle. The bond is a lower risk vehicle.

The bond market is far bigger and far more widely held than equities, but equities are more transparent than bonds. It’s kind of crazy.

LAMB: How did you learn that? When did you learn it?

WHITNEY: I think most people know the difference between a stock and a bond.

LAMB: No, I’m talking about – go back to the beginning where you’re in Brown. You were a history major. You came out. You went to work as an analyst.

When did you start learning the language? And how would you recommend somebody that just is totally confused by all this to learn it?

WHITNEY: Well, first of all, start with something that really interests you. And then you – let’s say you’re dying to go to Spain, because you love Spanish history. You’ll get to the point where you’ll learn the language. But figure out what you want out of the equation first and then get to the particulars.

There’s nothing about finance that’s like rocket science. This is probably the most frustrating thing for me about how – you know, you think about Ponzi schemes. The biggest Ponzi scheme for Wall Street is telling someone who’s worked really hard to earn a buck that they’re not smart enough to understand how that buck is going to be invested, which is utter nonsense.

Figure out what interests you. If you are an avid sportsman, find out what area of that you can invest in. And then you’ll learn the language, and you’ll learn the capital structure. It’s very interesting.

I think that there are stories within all of this. And if you do your homework, you can be just as smart as anyone. I mean, for crying out loud, I mean, look. I was a history major.

LAMB: But go back to ”The Big Short,” the Michael Lewis book, which is still on the ”New York Times” best-seller list. It has been all summer.

He says that you led him to Steve Eisman. What did Steve Eisman teach you? And where was it that he taught you? And what was he doing at the time?

WHITNEY: I would describe the way – so, Steve Eisman is a lawyer by training. And the only distinction I would make out of him being a lawyer by training is, he reads really well. And I remember being so impressed that he would read the – he would take a book review of the New York – not the ”New York Times” book review, the New York Book Review, which is some, I don’t know, 300 pages, and read it during lunch, and remember everything.

So, he is a prolific reader. So, to teach me – and I just learned this just from observation – read everything. You never know where you’re going to get ideas from.

I remember working for Steve thinking, man, this guy is so smart. Am I ever going to learn – am I ever going to be able to think for myself?

And I ended up learning to be able to think for myself. But he just – there was no rock unturned. He followed things that he thought were genuinely interesting. I’ll give you an example that is not mentioned in ”The Big Short.”

In 1996, 1995-’96, they were starting to do work on changing Glass-Steagall. And this would mean that banks, which were only allowed to have 10 percent or below of their revenues come from the capital markets business, would be able to increase that up to 20 – I think it was 20 or 25 percent.

And so, what for Steve that registered is, oh, my gosh, all these banks are going to buy the regional brokers and get that quick fix immediately. So, we initiated coverage of the regional investment banks and the call for the consolidation.

We launched that – oh, and just some fun for your D.C. audience. So, I was his junior analyst, working the phones. And I will work until the cows come home. I would call every – you know, I called D.C. until someone answered the phone. The head of the – the chief legal counsel for the congressional banking committee ended up not just taking my – like, picking up the phone, but then taking my call – I found out later, because I was the only girl who was calling him.

LAMB: So that worked for you that time.

WHITNEY: It worked for me.

So, but there’s information all over the place. We were just doing the work, and we were focused.

So, we came out with this report, and people pooh-poohed it. They said, ”Oh, it’s not going to happen. There’s no way.” And the rest is history, because there was massive consolidation amongst all of the regional banks.

And that’s just one of the things that, going for, taking an idea and believing it, and having all the conviction, because you’ve done all the work, and being so out of favor and out of consensus, and then being right. The thrill of being right is the single biggest aphrodisiac of this business. You know, it’s not the – it’s nothing else. It’s being right and standing on your principles.

Something else, a bad story was that – on the flip side. So, this is when we were recommending stocks. On the flip side, we came out with coverage of – we came out with a short report on subprime auto finance. So, during the mid-’90s, over 30 companies, subprime finance companies went public. And today, virtually none are left. They all went bust. And a really interesting time.

There’s a murder involved – alleged. And at any rate, so we came out telling companies to – telling investors to sell short the shares of these subprime companies.

And the time of our report coincided with when one of these companies was trying to raise money. And this is a Bear Stearns deal, Olympic Financial. And so, the company’s trying to raise money.

We end up disrupting the deal and causing the company to have to pay 300 basis points, I think double what they would have had to pay prior to our report.

So, Steve got a letter on letterhead stationary, personalized letterhead stationary from a broker at Bear Stearns that said, ”Steve, your a blanking idiot” – Y-O-U-R – on his letterhead. And I remember thinking, OK, this guy’s a real idiot.

But that’s the equivalent of what I was getting, which was really vicious e-mails from people’s personal e-mail accounts. Anyway, but at any rate, I’m thinking, man, we’ve got to get this guy security. He’s going to get death threats.

So, I kind of lived through it with that report, too, and the highs and lows. And just, I think, feeling like there was a – it was OK to be in the minority, if you were right, and you were going to ultimately be proved right. That wasn’t scary to me.

And then, the standard which – his standards were my aspiration. So, that was so comfortable to me. And then, you know, if you had to say integrity, you don’t have it. But, like, he’s an ethical guy. He’s got loads of integrity. And so, I was so comfortable with that.

So, it just felt like I was – Steve is a very important person in my life, because he taught me, and he validated what I was interested in and believed in me. And so, for that I’m forever grateful.

LAMB: When did you start your own company?

WHITNEY: In February 2009.

LAMB: How did you start it?

WHITNEY: I funded it myself and opened the doors for business.

LAMB: But give me an example of what you had to do. How many people work there? How big are your offices? Where are they located? And what – and who are your clients?

WHITNEY: OK. Well, the timing is, I got paid on January 30th, so I got my bonus on January 30th. I started February 18th. So, it was – and I went on vacation for a week, and then I had a couple of things to do in the office.

So, how I started it. You know, you have to get legaled, you know, lawyered up, and form an LLC. I had – I soft-circled some clients to say, if I hypothetically were going to do this, would you follow me? And I had tried and, I think, made clients a lot of money, so people were willing to believe in me – so much so, that we were cash flow positive in the second week we were open.

LAMB: Who were – not to interrupt – who were the kind of clients that you have?

WHITNEY: I have clients from anywhere from mutual funds to hedge funds, long-only shops, meaning people who just buy, you know, go long securities, macro funds. We have some corporate – you know, at the time we had some corporate clients.

And it was – I mean, so we started out in temporary offices. And it was an internal hallway. I could hear someone opening a candy bar in the office behind me. It was really close quarters. And it looked like a fallout shelter. I mean, there were computer boxes everywhere. It was absolutely unglamorous.

The first person to visit my office was John Thain. The second person was Michael Lewis. So, the people I had working for me were so wide-eyed, they were like, is Elvis Presley going to walk in next? It’s incredible.

So, then we – it took us until June 1st we moved into our current offices, which are about 4,500 square feet on 57th Street between Fifth and Sixth. We converted the old New York Jets headquarters – beautiful, beautiful offices – edgy, young, new. It’s really cool.

And so, going back to in terms of how many people we have, I started the firm with four people. We have 14 now. I would have thought we would have a ton more. I think in the next three months, we’ll be hiring probably 10, because we’re building out our broker-dealer.

But we’re really careful about who we hire. And so, our – like, everything that I didn’t like about traditional Wall Street, which was I hated the culture. People were not nice. And they – it’s so easy to make people feel good about themselves.

I mean, Steve Eisman told me when I did a great job. And he didn’t have to tell me when I did a bad job, because I wore it. I really understood I did a bad job.

But giving people feedback and being nice to each other, and having respect, and throwing an ice cream and cake party when it’s someone’s birthday – it sounds really corny, but it makes all the difference in the world. So, we have a really – I mean, just so thrilled.

I have more resources now. So, in terms of the coverage that we do, it’s so much broader and better.

LAMB: The American people don’t think much of Wall Street. I think all the polls show that. Do they have a reason not to think much of them? And is any of this – and I haven’t read much of the other provisions of this – but is any of this going to work?

WHITNEY: It’s a step in the right direction. I think that the attitudes have to change on Wall Street to really reintroduce a level of respect for your customer, for the consumers, and to make it your business to empower consumers and customers, as opposed to intimidate and keep these guys in the dark.

Because it’s like playing tennis. When you play tennis with someone better than you, your game rises. When you have more intelligent and educated and informed clients and customers, you perform better.

There’s been a very dangerous, unfair and clearly perilous relationship between Wall Street and Main Street that came to a thundering crash. And that has to change. You’ve got to level the playing field, equalize, you know, information bases, and it’ll work out better for everyone in the long run.

LAMB: Some time ago, you had a list of the seven most important people in the economy. I’ve got it here in my stack somewhere. I know – I remember one obvious one on the list was Tim Geithner and Barney Frank, and all that. Is that list the same today as it was? Do you remember the list?

WHITNEY: So, that was a long time ago.

(LAUGHTER)

It was probably …

LAMB: I’ve got it here somewhere.

WHITNEY: Look, it was probably nine months ago, and it seems like – or 10 months ago – and it seems like an eternity.

LAMB: Well, let’s just create a new list, then. Who are the most important people today in finance in the country?

WHITNEY: There is no doubt about it. I think that Barney Frank remains an extremely powerful force within finance.

I would say one person that is not on the list, that was not on the list then, that has clearly put himself on the list, is Al Franken. Who would have thought? The comedian from SNL, and now, the senator from Minnesota, with the Franken amendment on the rating agencies. I think that’s – the importance of sorting the rating agencies out is – it cannot be overstated.

So, I’m probably going to mention …

LAMB: Why should we pay – why should we pay any attention to the rating agencies, after what we found out about them?

WHITNEY: Well, you shouldn’t probably pay any attention to those rating agencies. But you need rating agencies in the system, because people need to have a guidepost on where the risk lies. So, there are individual investors that just need some standardization of, OK, I know I’m going to get paid this, but I know I’m going to assume that risk for it. That’s fine.

Rating agencies are fine in principle, they just have to be run right and done well. It’s like, why would anyone pay for any type of ratings? You know, I rate equities. Why would people – because you’re right. Because you protect people, and you make people money. Every business should be that same way.

The rating agencies, in terms of the credit rating agencies, have been a duopoly for 20, 30, 40, 50 years.

LAMB: I found the list. It’s Ben Bernanke, Tim Geithner, Sheila Bair, Elizabeth Warren, Larry Summers, Barney Frank and Chris Dodd.

WHITNEY: That actually turned out to be OK.

LAMB: Still the same? Would you – I mean – and where do you, you know, in this whole – by the time this runs, they may have made a decision on who’s going to head up the consumer agency. But where are you on Elizabeth Warren and somebody else?

WHITNEY: I think Elizabeth Warren, it looks like she’s – well, at least she’s, as of late August, she’s pulling together all of her lobbying power to get this job. She’s well respected. And I think she could offer confidence back to that role. And she seems to be very well liked, as well, and a good communicator.

I might take Larry Summers off that list and replace him with Al Franken, because it’s really been the Treasury’s game. So the White House has been – the White House was a big proponent of HAMP. It’s the Home Affordability Modification Program, which was a resounding disappointment. But they really left it to the Treasury to execute. So, the Treasury has really been, I think, very, very active, much more so than the White House.

The FDIC, I think Sheila Bair’s done a terrific, terrific job. Look, there are hundreds more banks to fail, but she’s doing it in an orderly process. And that is no small feat.

LAMB: You mentioned that you’d worked for Jack Danforth, a Republican from Missouri. By the way, was Clarence Thomas there when you were there?

WHITNEY: He was not there, I don’t think. I was 15. I can’t remember. You know, who was there, I worked for Susan Schwab, who is the former U.S. Trade Ambassador. I worked for her. I think I worked the – where she – you know, well above it. You know, I was really good at the autopen. I don’t know if you remember that.

LAMB: I do.

I bring it up, because are you very political today? And are you on a side? And do you see the Republicans or the Democrats doing a better job with this whole business of financial regulation?

WHITNEY: I’m a registered independent, and I have been ever since I could vote, so I’ve voted all over the aisle. I vote for candidates. I’m really not that interested in parties.

You know, pick your person. I think that the states have a really impossible job with their fiscal crises. And so, may the best man win, party or otherwise.

It is unfortunate now as we head into the midterm elections that you have a stalemate of policymaking, where we need stuff. We need stimulus. We need to extend Bush’s tax cuts in every, every income category.

This economy is in, you know, cruising towards a double dip in a bad way. And we have to do something about it. Housing certainly will take a double dip in the fourth quarter.

So, and that is – you just have to let that happen, I think. But you have to create structural reform, and that is – you know, that is nonpartisan. The partisan politics right now is maddening, and I think it’s costing our country a tremendous amount. And I think that’s why approval ratings across the board are so low.

If you underestimate your audience, your audience will turn on you. And I think politicians have grossly underestimated the American people. And that’s dangerous.

LAMB: Here’s something from the bill, Financial Stability Oversight Council.

The act seeks to mitigate the systemic risk of financial collapse through several legislative and regulatory initiatives, the most substantial of which is the creation of a 10 voting member Financial Stability Oversight Council – the Council, they call it – which will be chaired by the secretary of the Treasury, and will include the chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the director of the newly created Consumer Financial Protection Bureau, the chairman of the SEC, the chairman of the FDIC, the chairman of the CFTC.

I’m not going to go on there. There are a lot of other agencies.

Why won’t any of those agencies be able to fulfill this goal? Why is there another agency required in this process?

WHITNEY: You should know this better than anyone. Isn’t politics all about creating a committee to create other committees? It sounds like it.

All of – you know, one thing that is clear, no agency lacked the powers to prevent this crisis. They just weren’t doing their jobs. And they – you know, you’re lulled into a 15-plus-year period of economic Nirvana. And so, people are asleep at the wheel.

For the same thing – you can look at banks, why banks had such a difficult time at the beginning of this crisis, because the collectors in the banks had never seen a bad loan. They didn’t really know how to collect. They had to completely, you know, recalibrate themselves once they realized that the loans they made were not going to repay as easily as they had. And you see that for the agencies as well.

So, it sounds like – this is coming from someone who doesn’t want to work in politics – a committee to create another committee. I don’t know that that’s necessary. It’s more red tape. It’s certainly more expensive for people. And it’s going to require – at the minimum, you know it’s going to require banks to have to hold a lot more capital.

But as someone …

LAMB: Is that good or bad?

WHITNEY: That’s good. But it – I’m just going to steal a line from a friend of mine – this was supposed to – this was designed to make sure that too big to fail wasn’t an issue. Now it’s enshrined, you know, too big to fail.

LAMB: Here’s another one, treatment of certain former bank holding companies.

Any company that was a bank holding company having total consolidated assets of $50 billion or more as of January 1, 2010, and received financial assistance under, or participated in, the Capital Purchase Program established under the Troubled Asset Relief Program, will be treated as a non-bank financial company, supervised by the Federal Reserve, if such company ceases to be a bank holding company at any time after January 1, 2010.

What in the world did that just say?

WHITNEY: I think what it said – people call that the Hotel California provision.

LAMB: They do. Very good. It’s in parentheses.

WHITNEY: I call it the fatal attraction provision. I mean, once you go there, there’s no getting out. There’s no easy way of getting out.

And what it was designed to do is, people that sought shelter under the bank holding company during tough economic times can’t all of a sudden then be free of responsibility during better economic times, you know, using …

LAMB: Special assessment. The act mandates the newly created Financial Stability Oversight Council to impose special assessments on the nation’s largest financial firms …

WHITNEY: And the tax to prevent, you know, to …

LAMB: … to raise up to $19 billion to offset the cost of the act. The assessments will be imposed on financial institutions with more than $50 billion in assets.

The $50 billion figure is magic in this whole process. What’s so special about $50 billion? Who got there? How did they get there with that figure?

WHITNEY: The $50 billion is the top – well, the top four commercial banks and the – you know, it’s the major recipients of TARP.

What they wanted to do was – it’s very hard to be a small community bank at this point. And what’s – I’ll explain it simply.

Over the last 20 years with the onset of securitization, so much of the lending in this country became – you know, was consolidated up to a national level, so it was controlled by the top six banks. So the top six banks control over two-thirds of the credit card market, control over two-thirds of the mortgage market.

The little banks really became adversely selected business models.

Now, the little banks are critical to small communities. So, if you endanger the little banks, you have communities go under. They’re the primary lender to commercial real estate, to small businesses, et cetera, in those communities.

So, the small bank lobby lobbied like crazy to protect the community banks. And so, they can’t afford a special assessment. As it is, to get now, FDIC, certain FDIC insurance – I think this has just changed, this law was just changed – they had to opt in and pay another assessment fee.

So, the fees for small banks are becoming prohibitive to stay in business. So, they wanted to eliminate those, and they wanted to tax the guys who could afford it. It sounds like the consumer tax policy.

But also, they’re never going to let the guys who took TARP forget that they took TARP.

LAMB: All right, we’re about done. We have a little bit of time. This is probably grossly unfair, but I have to ask you about this.

How did someone who deals in integrity and truth end up marrying a guy that dealt in show biz in World Wrestling Entertainment? And when I read on Wikipedia his background, I just had to ask you about this.

It says, in late 1998, Bradshaw, I guess was what he called himself – what’s his – John …

WHITNEY: John Layfield.

LAMB: … Layfield …

WHITNEY: But it’s – he was JBL towards the end of his career.

LAMB: … teamed alongside Nation of Domination member Faarooq to form the tag team of Hell’s Henchmen, managed by The Jackyl. After The Jackyl left the WWF, World Wrestling Federation, Faarooq and Bradshaw joined the Undertaker’s new Ministry of Darkness under the name The Acolytes. I could go on. I won’t.

WHITNEY: It’s more interesting than the Dodd-Frank bill, huh?

LAMB: Well, it is interesting. But what is it? I mean, he dealt in show biz, and a lot of people believe that that stuff isn’t rigged.

WHITNEY: Well, as he would say, the story lines are scripted. The physical activity is not rigged.

He retired in April 2009. He had a broken back. I mean, he is banged up. So …

LAMB: Why do they go through that?

WHITNEY: I don’t know. I don’t know. I mean, there’s – he’d been a wrestling fan when he was a kid. He was a pro football player. He played for the Raiders. Then he played for the World Football League, the San Antonio Riders.

And so, he’s been in contact sports for a really long time. He’s a tough, tough guy.

He’s a tough, tough guy. But despite the packaging, he’s one of the nerdiest guys that I know. He’s got a photographic memory. His dad was a former bank CEO in Texas. So, he’s almost more interested in stocks than I am.

So, there’s – you know, you wouldn’t – I would never have expected that – I would never expected to marry someone with that packaging, but I expected to marry someone like that, who is – he’s 5,000 times a better person than I am. And if we read something, I’ll give him – if it’s something really important, I’ll give it to him, because he’ll remember all the details of the particulars, and I zoom through things.

We met when he was promoting a book – this is a funny story – when he was promoting a book, and we were on a Fox television program. And it came to the point when you had to recommend a stock. So, this is August of 2003. So, the stock he recommended was Citigroup.

And I turned to him – and I hadn’t watched wrestling before. I mean, I’d passed it on a – flipping channels, but I just remembered, like the fat guys on Saturday and the trunks wrestling. I wasn’t into modern wrestling.

But I – nothing, you know – I didn’t know him. And I just said, ”Why would you recommend a financial in a rising rate environment,” taking all the wind out of his sails. And here’s a guy who doesn’t work in finance. And I just gave him such a low blow, that I don’t know why I did it. I wasn’t thinking. There was no surprise why I was single, clearly, at the time.

But then we went to dinner next door at Del Frisco’s. And the group that we were on the television program with wanted to set us up. So they sat us right next to each other. I’m sure I was terrible and offensive in every way. And then a year later we got married.

LAMB: On that note, we’re out of time. Meredith Whitney of the Whitney Advisory Group. Thank you very much for being with us.

WHITNEY: Thank you so much.