The credit-worthiness of specific muni bonds, particularly non-general obligation project bonds, has become a hot topic since "AAA" bond insurers imploded, partly due to mispriced risk premiums on protection they wrote on value-destroying CDOs for Wall Street banks.
Meredith Whitney provided no research to back up her call on a recent 60 Minutes segment of coming defaults by large municipalities amounting to "hundreds of billions of dollars" (50 to 100 defaults). (Corrected Feb 9). Bloomberg News revealed that her muni report was on the state level and didn't cover large municipalities. That's a problem, since muni credit issues are granular and the severity of the problem -- or non-problem -- depends on the specific situation. Her unsupported claim gives muni-problem-deniers ammunition to claim there is no substance to the argument that there are serious problems with certain muni bonds.
The Columbia Journalism Review made a valid point when it called out 60 Minutes for not making sure Whitney could back up her claims. Max Abelson and Michael McDonald of Bloomberg News debunked her "untarnished" track record and Spaceballs-worthy jabberwocky:
Bloomberg News reported in October that about two-thirds of her stock picks since starting her company in 2009 had fared worse than market indexes. A 2008 Fortune cover story ranked Whitney 1,205th out of 1,919 equity analysts the previous year, based on stock picking.
"A lot of this is, you know it, but can you prove it? There are fifth-derivative dimensions that I don't think I need to spell out to my clients," [Whitney] said.
"Whitney Municipal-Bond Apocalypse Short on Specifics," Bloomberg News, Feb 1, 2011 (excerpted and condensed).
In contrast, Matt Taibbi's Rolling Stone expose of Jefferson County, Alabama's sewer project is a hair-raising account of financial corruption, bribes, cost padding, pay-to-go-away agreements between investment banks, and fee slamming that wildly inflated the cost of a sewer project from $250 million to $3 billion. It saddled Jefferson County's taxpayers with a too-onerous debt burden and broke the financial back of the county. JP Morgan agreed to pay a $25 million fine to the SEC and $50 million to aid Jerrson County's displaced workers for its role in the devastation (updated):
The county, it turned out, was more than $5 billion in debt -- meaning that courthouses, jails and sheriff's precincts had to be closed so that Wall Street banks could be paid...Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town.
"Looting Main Street," by Matt Taibbi, Rolling Stone, March 21, 2010
Whitney might back up her claim by walking the media through at least one analysis -- if she has one -- of the specific problems of a large municipal bond issue, since it is beginning to look as if Whitney's claims are a series of PR stunts.
Whitney's claim-to-fame, a bearish bank call on Citi, was over-hyped. Her Citi call was late. Jim Rogers, a world famous investor with a provable track record, appeared with her in early 2007 on Cavuto on Business and explained why he was short (bearish on) Citi. Whitney refuted him and continued to rate Citi sector perform, yet Citi underperformed the sector during this time period. It wasn't until October 31, 2007, that she took Rogers' hint. Likewise her Bear Stearns call was late, and her Lehman call was tardy. I mentioned this in a commentary after either she or her PR people seemed to take credit for an apparently nonexistent early call on AIG. (See: "Reporting v. PR: Meredith Whitney and AIG," TSF, March 23, 2009 .)
Meredith Whitney's PR has more issues than Rolling Stone, but Matt Taibb^i provided evidence that he researched the substance of the problems behind a muni bond issue.
Endnote: (Feb 9, 2011): As I've mentioned in previous posts, there are serious fiscal problems that need to be addressed at state and local levels, but this varies by region and some issues are potentially solvable. For example, Illinois hiked personal income taxes from 3% to 5%. (I'm a resident of Chicago, Illinois.) The Chicago Mayoral race centers partly around steps, including budget cuts, needed to solve Chicago's serious fiscal issues: See also my previous post: "Third World America: 'Fast-Tracking to Anarchy;" HuffPo, August 25, 2010.
Further Reading: "Repairing the Damage of 'Fraud as a Business Model,'" TSF Address to the FHFA's Supervision Summit in Washington D.C., December 8, 2010.
^Feb 11, 2011 addition: Blloomberg News broke this story in September 2005 in an article titled "The Banks that Fleeced Alabama," by Martin Z. Braun, Darrell Preston and Liz Willen
Update: "Meredith Whitney Trips Over Her Muni Default Tale," by Joe Mysak, Bloomberg News, May 19, 2011.
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