Meredith Whitney, the Oppenheimer & Co. (OPY) analyst famous for her prescient financial sector calls during the ongoing banking crisis, has downgraded Wachovia Corp. (WB) to “underperform,” saying prospects are “bleak” for shareholders of the Charlotte-based commercial bank.

Whitney slashed her rating on Wachovia to ‘underperform’ from perform in a research note, as she predicts a $1.35 per share loss this year and a 35 cent per share loss in 2009. She also noted that the bank likely reduced its mortgage portfolio by $50 billion in the second quarter.

“We are hard pressed to find examples of financial companies that have successfully shrunk their businesses,” Whitney said, speaking of Wachovia’s asset reduction, Reuters reported.

Wachovia shares dropped after Whitney’s prediction, and were trading at $9.60 at 12:30 p.m. in New York.

Wachovia shares are down nearly 75% year-to-date as the struggling commercial bank has already raised $8 billion in additional capital and cut its dividend in an attempt to help offset the $13.7 billion in losses the bank has taken since the current financial crisis started to unfurl. Wachovia has also ousted its chief financial officer, replacing Ken Thompson with Robert Steel, a former undersecretary of the U.S. Treasury Department.

Whitney: One to Watch

Whitney’s Wachovia call is big news, in part because the Oppenheimer analyst has made quite a name for herself with her bearish, but highly accurate, calls on the global financial sector. Previous Whitney predictions that have come to pass include her accurate claim that Citigroup Inc. (C) would be forced to slash its quarterly dividend, despite repeated management promises, prior to installing Vikram Pandit as CEO, that Citi’s dividend was safe.

Even with $416 billion in losses and write-downs tied to mortgage-backed assets in the global financial industry thus far, Whitney sees more trouble ahead for the beleaguered financial sector.

"We believe the credit crisis is far from over," Whitney wrote in a research report in late May as Money Morning reported. "In fact, we believe what lies ahead will be worse than what is behind us."

Investors barely had time to recover from the devastating failure of The Bear Stearns Cos. Inc. (BSC), at the time the fifth largest Wall Street investment bank before witnessing the plunging market capitalizations of twin mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

It seems Whitney’s call of a deepening banking crisis has indeed to come to pass, but it’s still unclear how much further we have to go as national and regional domestic banks alike struggle to keep afloat. Other analysts and industry insiders have started to echo Whitney’s earlier prediction.

“We have seen a ‘too big, too important to fail’ instance,” William Gross, the chief investment officer of PIMCO’s bond fund, told The International Herald Tribune, referring to the government bailout of Bear Stearns and the recent plan to save Fannie and Freddie.

“The market wonders: which institution is too small to bail out? Where is the dividing line? They seem to have picked on the regional banks as potential candidates to be the ones too small to bail out,” Gross added.

Current analyst predictions say as many as 150 out of the 7,500 domestic U.S. banks could fail over the next year to 18 months, IHT reported.
Customers are already clamoring to withdraw money from regulated thrift IndyMac Bancorp. Inc. (IMB), which was seized by federal regulators prior to the weekend. Meanwhile, Ohio’s National City Corp. (NCC) is doing its best to keep from being the next failed financial intuition as it works to dispel rumors of a run on its own deposits.

“It’s about to start getting real bad,” Christopher Whalen, managing director at Institutional Risk Analytics, told IHT. The Federal Deposit Insurance Corporation should just move on with the process and “close not just one but a half dozen institutions at the same time.”

News and Related Story Links:

• Bloomberg News:
  Meredith Whitney Cuts Wachovia on ‘Bleak’ Prospects

• Reuters:
  Whitney cuts Wachovia, says shareholder prospects bleak

• The International Herald Tribune:
  Confidence in U.S. banking sector weakens

• The International Herald Tribune:
  Analysts say more U.S. banks will fail

• Money Morning:
  Major Lending Pullback Predicted by Maverick Wall Street Analyst Could Have Dire Implications for U.S. Economy

• Money Morning:
  Investors Bolt From Citigroup in Light of Suggested Dividend Cut or Asset Sale