Billions and Billions?

A couple decades ago Carl Sagan achieved lasting fame with his phrase that illustrates the countless stars, planets and galaxies in the universe. It became his catch phrase on the PBS series Cosmos.

But it’s likely to become the “Swan Song” for banking analyst cum municipal guru Meredith Whitney. In her famous 60 Minutes interview, she predicted 50-100 major municipal bankruptcies in 2011 totaling hundreds of billions of dollars. In response, millions of small investors sold billions of dollars of holdings in muni bond funds, protecting themselves from another financial crisis.

Only, it hasn’t worked out that well. So far in 2011 there have been two bankruptcies. 12 issuers actually defaulted, totaling $227 million. That’s down from 28 defaults totaling $1.2 billion last year. This is hardly the fiscal Armageddon that Whitney predicted. Maybe things will get a lot worse really fast. Maybe the state budget battles presage reduction in school aid and local support, leading to a raft of losses later in the year. Or maybe Meredith picked the number out of the air. I sure hope Mary Schapiro and the SEC are paying attention: Meredith Whitney’s firm has applied to become a government-sanctioned rating agency.

I’ve noted before how the municipal market is diverse and complex. It doesn’t lend itself to armchair analysis, and even if you understand the vagaries of state-level public finance, that does little to help you understand the myriad hospitals, sewer systems, toll roads, and school districts that comprise rest of the market. Yelling “default” in a crowded market is like crying “fire” in a crowded theater: a lot of innocent people get hurt.

Whitney should know better. 60 Minutes should know better. Municipal bonds, especially those with sound finances, are safe. Maybe, as Meredith said later, that’s a bigger call than hers. But ultimately, we think it’s the right one.

Douglas R. Tengdin, CFA
Chief Investment Officer
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