Meredith Whitney: Government Case Against S&P ‘Hard to Believe’

"They all are. They're all running at excessive expense ratios. Bank of America, in 2010 announced its cost-cutting initiatives, and two years later we're only starting to see results…It takes a long time…The point is, if you're not on top of it now, you will be behind the game."

On Bank of America CEO Brian Moynihan's management style:

"It is block and tackle, understated. People underestimate him, which is the advantage that every CEO should look for. It has cost him in the past, but I think it is really going to help him. I think he will look terrific this year."

On whether American banks could raise capital easily right now if they had do:

"They would get it done, but it is expensive. It would be very expensive for Bank of America and Citi, who are trading below tangible book. It is more penalizing to the stocks that you described that are on the bottom. The message that is not getting across here is raise more capital, but the banks can still make money with higher capital levels, they just have to reprice their loans and products. If you look at banks in Turkey, in South America, they have much higher capital levels, but they are lending at a higher rate, and they are pricing their products in a way that incorporate higher capital. This is what is frustrating for me about the U.S. system. Loans in the U.S. are still so underpriced. The financial markets are still so gummed up in many cases. And certainly in the consumer market, because banks are not pricing appropriately for risk."

On whether she can say all clear on municipalities and states:

"No, it is not all clear or better in any way. Governors go in to the fiscal year making expectations on revenues. For California, New Jersey, and other states, many times those revenue expectations are overly optimistic. You can say we will have a surplus in five years, but until that surfaces, it is meaningless. What is happening is a negative feedback loop that is so dangerous in this country.  When you have lower tax receipts, there's less money to spend on education and infrastructure. That has hit California and other states hard. And it breaks down the social fabric of the country. To suggest that tax receipts are above where they were in 2008 is just incorrect." On whether she has new confidence in the market:

"No, the correlation between the municipal bond market and the treasury market is over 90%. The fact that treasuries are yielding price up, yield down, it is a supply-demand issue. It has little to do with the fundamentals. In the central corridor, you have extremely strong demographic trends, tax receipts trends, but in the areas that you call post-developed areas—like California, Illinois, New Jersey—you have real strains in the economy. And New York to a certain extent as well. as Wall Street fires people, as FedEx fires people, that cost the states. Employees are contributing less to the tax base."

On what her biggest concerns are for state and local governments:

What I am most concerned about it is the lack of health of different states. This issue of state arbitrage where people are voting with their feet. That is very clear. You have net emigration from California for the first time in 150 years. Florida is going gangbusters in terms of attracting hedge funds, movement from people who are tired of having their taxes raised again and again. you have intense competition between states in the Midwest as Illinois raise their taxes and other states are trying to lower their taxes. Those are the issues. in terms of municipal bond credits, that is such a smaller market in terms of the overall economy and how it affects equity and companies."

On how her municipal bond call links to outright economic growth:

"I think I've gotten so much attention on a municipal bond call. That is not my area of interest. The municipal-bond area will be affected, as are pensions, as are social services. The issue is that the U.S. is rebalancing itself. Tax receipts are falling on the coast and rising in the central part of the country. You have 0.1% GDP growth, but you have emerging-market GDP growth in certain states. It is a rebalancing."