Equity markets were holding their heads above water on Tuesday, but bank analyst Meredith Whitney is warning banks will have a worse year in 2009.

Ms. Whitney, who recently started her own consultancy, predicted breakups and M&A's on a grand scale as rising unemployment this year leads to further borrower defaults.

The probability of more people going into default is higher, so the banks are going to have a tough time, she said.

I don't think this year is going to look any better than last year, Whitney said in an interview Tuesday on CNBC. In fact it will look worse because there's so much credit coming out of the system.

She also said that Citigroup's statement that it earned a profit in the first two months of the year might turn out bad once a fuller picture was presented.

Whitney said the government should focus on helping smaller banks ramp up their community lending to local businesses and homeowners.

You can re-energize the local lending scene and then supercharge those banks, she said. You supercharge those so they're able to gain critical mass and start getting loans on a super-regional basis to businesses, to homeowners that qualify. At least that mitigates some of the capital that's surely going to come out of the market.

In recent trade, the DOW was moving higher by 0.33%. The broader S&P was higher by 0.75% and the NASDAQ 1.35%.

The dollar was mixed as stocks remained in a range, with a loss of 0.08% to the euro while it gained 0.09% to Australia's dollar, 0.66% against the yen and 0.43% on sterling.

March crude oil was moving 2% higher while April gold was down 0.39%.