Just because Meredith Whitney says it doesn’t make it wrong.
I’ve been pretty critical of Meredith Whitney. The bank-analyst-turned-municipal-guru predicted that 50-100 major municipalities would default on their debt, leading to hundreds of billions of losses this year. She said this on 60 Minutes last fall, and millions of retail investors have pulled billions of dollars out of the muni market at depressed levels. I think that it was irresponsible of her to make such a claim, and irresponsible of 60 Minutes to air her assertion without balancing it with an equally credible analyst on the other side.
But there’s an aspect of her research that should be considered: the mechanism. She expects that as states face fiscal pressures, they will cut back on support payments to towns, counties, and school districts. These cutbacks will cause severe fiscal pressure at the local level, and these localities will default.
She had it right just up until the end. States have cut back, but most towns have been finding ways to deal with reduced state aid short of default. Some localities still might, though. These will probably be small, unrated issuers. We will likely see some losses, but just not huge losses.
It’s an old rule of research: read the body, ignore the conclusion. Conclusions can be affected by all kinds of factors, but the reasoning behind them is often sound. It looks like Whitney’s report is useful in its analysis, but questionable in its final number, which she probably pulled out of the air.
I think Whitney is an intelligent, imaginative analyst. It’s too bad her latest report is likely to tarnish her reputation.
Douglas R. Tengdin, CFA
Chief Investment Officer
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