Muni Blues

Meredith Whitney says hundreds of billions of dollars will be lost. Are the Chicken Little’s right this time?

Meredith Whitney is famous for going short Citibank stock in October of 2007 while Chuck Prince was still dancing. She was right on that call, and has since been one of Wall Street’s most powerful analysts. In September she published a 600-page report on municipal finance that she says took two years to produce. Recently she said that she expects 50-100 significant municipal defaults next year totaling hundreds of billions of dollars.

That’s a big number. Let’s leave the states out of it—even California and Illinois. There is no legal framework for a State to file for bankruptcy. Even Whitney doesn’t think they’ll go bust. She’s concerned about the cities, counties, and school districts that receive state aid. If that’s cut, they might try to save money by suspending debt payments.

But why would they bother? Debt service is typically less than 10% of their budget. Shafting the bondholders doesn’t save enough to make a difference. In the short run, it actually increases expenses: filing for bankruptcy is expensive. And the muni market is highly diverse: general obligations, water and power revenue bonds, housing bonds, and more. Saying that muni credit is in trouble is like saying there’s water in the basement. The particulars matter.

Shouting fire in a crowded theater is a great way to get noticed. But this time, it sounds more like a cry for attention from someone used to being in the spotlight. Perhaps she would have done better to stick to banking.

Douglas R. Tengdin, CFA
Chief Investment Officer
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