Wall Street hates it when one of its own turns a spotlight on its dark practices, and the flap over Meredith Whitney’s call on the looming disaster in the municipal bond market is no exception.
Interviewed December 19 on 60 Minutes, Whitney, a financial services analyst, forecast the Coming Armageddon in the $2.8 trillion municipal bond market. She predicted massive nationwide defaults as pension and expenditure liabilities dwarf tax revenues. She said that “sizable defaults” could occur in 50 to 100 cities and towns in 2011. That could amount to “hundreds of billions of dollars” in failed municipal debts.
Wall Street gasped for a moment after the segment, which was titled “The Day of Reckoning”. It then unleashed its fury on Whitney. The large Wall Street firms who benefit most from lucrative bond underwriting fees apparently orchestrated an intense media campaign to trash Whitney in the days that followed.
They claimed her thesis was wrong and that defaults would likely amount to perhaps only $10 billion and that the crisis Whitney said was on our doorstep was small and far away. One municipal bond money manager said Whitney’s “numbers just don’t add up.” Another credit analyst said Whitney’s predictions were “ludicrous,” “irresponsible” and potentially “damaging” to investors’ portfolios.
Here’s a little background on Whitney, and the reason why her call on municipal bonds should be heeded. In 2007, she was one of the first analysts to predict growing problems at banks like Citigroup (C), and we all know how that ended. More recently, she predicted 300 bank failures in 2010. While a little more than half that amount, 157 have shut down, it is still a record number of bank closures.
Whitney is not alone in warning about the municipal bond market’s perils. On the same program, New Jersey Governor Christie said that his state was Exhibit A with unfunded liabilities in excess of $100 billion, with no hope in sight. Particularly vulnerable are large state bond issuers California, New York and Illinois.
Without question, the new Congress should investigate the scope of the municipal bond crisis as so many Americans are dependent on these bonds for their retirement.
Is Whitney right? We’ll see in 2011. But, beyond her call about the monstrous perils of municipal bonds, a big part of this story is Wall Street’s effort to shoot down a messenger with grim news rather than listen to the truth.