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60 Minutes – Meredith Whitney State Budgets Day of Reckoning

San Francisco, municipality, municipal bond

60 Minutes had a story December 19, 2010 called: State Budgets Day of Reckoning When municipal bonds may national TV, you know there is a major problem. They reiterated how Illinois was in terrible shape. Analyst Meredith Whitney even appeared to reiterate her negative view. She is best known for forecasting major problems for Citi in 2007.  Falling municipal bond values accelerated after the show, raising the profile of the municipal bond market to higher levels. Could a Government bailout be in the offing?

Analyzing Meredith Whitney’s remarks

Whitney has indicated that we could see 50 to 100 sizable defaults in 2011, amounting to hundreds of billions of dollars worth of defaults over the next two years.  Gregory Whiteley with DoubleLine Capital stated that the 100 largest county and city issuers do not have more than $100 billion in debt outstanding.

It appears that Whitney may have connected municipal debt a little too much to corporate debt. Whiteley goes on to state that “Municipal bankruptcy is quantitatively different than corporate bankruptcy. Vital public services provided by a city or county government cannot be easily replaced by a more efficient or better manage competitor.  Nor can a city or county function effectively without access to debt markets.”

Bond guru Bill Gross doesn’t agree with Meredith Whitney’s assessments. “Ultimately, municipal bankruptcies will be at a lower level,” Gross said today on Bloomberg Television’s “InBusiness” program. “I don’t subscribe to the theory that there will be lots of them.”

Whitney, 41, founder of New York-based Meredith Whitney Advisory Group, said she expects more than 1 million job cuts from state and local governments in the spring of 2011.

Whitney is seeking government permission to start a company to compete with Major rating companies: Moody’s and Standard & Poor’s. Whitney’s firm reportedly charges a minimum of $100,000 to become a client and view her 600 page report on state finances  and  municipal bonds. She is setting a new firm and is hiring up to 650 analysts at an average salary of $225,000. “At this point, Whitney’s rating organization is predictably small, with nine analysts looking at financial institutions, six at structured finance, and 12 at public project finance. It’s unclear whether that group of 27 researchers is distinct from the team that produces the equity research that generates the bulk of her firm’s revenue.”

A December, 2010 report from Bank of America Merrill Lynch indicated that there was $4.25 billion of municipal debt in default, representing only 0.15% of the entire municipal bond market.

Recently weaker states and municipalities have had their municipal bond prices fall far faster than stronger areas. It remains extremely important to hold high-quality municipal bonds.

Was Meredith Whitney hyping up future municipal bond problems a little too much?
Time to lighten up on municipal bond holdings?

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