April 22 (Bloomberg) -- Regional U.S. banks may struggle to pass government stress tests because of their commercial real estate investments, said Meredith Whitney, the former Oppenheimer & Co. analyst who correctly predicted a slide in shares of U.S. banks.

Commercial real estate will decline “hard and fast,” Whitney said in a interview yesterday on Bloomberg Television. “For a lot of the regional banks that have so much commercial real estate exposure as a percentage of their core capital levels, it’s going to be more difficult.”

Whitney, founder of New York-based Meredith Whitney Advisory Group, declined to name the banks and said the largest lenders would pass stress tests now being administered by the government. Many banks may start selling assets to raise money because it’s too late to sell stock, she said. “You will see what I describe as a yard sale,” she said.

The Federal Reserve is leading the assessments of the health of the 19 biggest U.S. banks, with results due for release on May 4. The tests are designed to ensure the companies have enough capital to weather a deeper economic slowdown over the next two years.

Whitney forecast “an amazing wave of M&A in very unlikely forms,” and private capital investments in disposed assets. “Within the labyrinth of some of these bank institutions, are fabulous growth entities,” she said.

Local Loans

Whitney predicted in late October 2007 that Citigroup Inc. would have to cut its dividend, which the bank did in January 2008. At the time, her call triggered the steepest tumble in Citigroup shares since September 2002.

Whitney said she would like loans to be made on local levels, a transformation that she said isn’t yet politically viable.

“You don’t underwrite good loans if you don’t know your customer, you don’t know the regional sensitivities,” she said. “The larger institutions will take on more of a trade facilitation, capital markets facilitation capacity.”

Unemployment will increase “well into the double digits,” Whitney predicted, from a 25-year high of 8.5 percent in March.

“When the government gets under duress and they can’t raise taxes, they have to starve the beast, Whitney said. “Jobs come out of the system.” Whitney also said consumer spending in April would be negative.

Ongoing changes in balance sheets have eroded trust in banks’ statements, Whitney also said.

“I don’t think anyone really trusts the balance sheets of the banks because they’ve changed every single quarter, the assumptions have had to be altered,” she said.

She retains the loyalty of investors such as Ernie Nounou, who invoked her name yesterday at Citigroup’s annual meeting when he decried Chief Executive Officer Vikram Pandit’s promise a year ago to retain the bank’s dividend. That payout was later suspended.

“I should have listened to Meredith Whitney,” Nounou said.

To contact the reporters on this story: Margaret Popper in New York at mpopper1@bloomberg.net; Jamie McGee in New York at jmcgee8@bloomberg.net.

Last Updated: April 22, 2009 00:01 EDT