Whitney’s new gloomy doomy
Mark Gongloff of the Wall Street Journal‘s Marketbeat blog wrote this today about Meredith Whitney:
Professional scary person Meredith Whitney took to the op-ed pages of The Wall Street Journal this morning to sprinkle some more of her fear dust on the muni-bond market:
Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level. These are just the facts.
She makes some good points, frankly, and offers some alarming numbers.
I agree with Mark. Whitney has made some useful comments about the size of unfunded pension liabilities and the need for governors and mayors to address revenue shortfalls. Their need to balance budgets is not new, and most of them are aggressively finding ways to make cuts.
I also agree with Mark here:
The trouble is, the muni market is by now well aware of these concerns. Ms. Whitney’s message has also been muddied by how cagey she has been about her past pronouncements, throwing around mystical terms like “fifth-derivative dimensions” and declining to offer hard numbers or to explain herself in Congress.
Some of this is just squabbling. What makes financial markets fun and interesting is the variety of opinions and the back and forth of market participants. But there are two things about Whitney that really puzzle me and make me think she doesn’t know what she is doing.
The first is her presentation to the Chairman of the Securities and Exchange Commission on November 10, 2010. I assume she made a presentation to Chairman Shapiro and her staff members to seek an exemption from the SEC requirement that a rating agency provide credit ratings for three years prior to seeking recognition. Ten institutional investors must “attest to” (swear) that they use the applicant’s credit ratings in decisions about investments. Whitney’s firm is not three years old and would be unable to meet this basic provision of the law without an exemption.
In the November presentation she claimed that her new credit-rating agency would begin existence with approximately 200 analysts and “ramp up” to 650 analysts in its third year. Using her numbers, expenses would rise from $65 million in the first year to $166 million in the third year. To estimate her revenues she replicated Moody’s numbers, implying that she sees the business model for her proposed rating agency as “issuer pay.” This is the truly puzzling part.
Bond issuers and their underwriters “shop” the rating agencies to find the rater that will give them the best rating and lower their cost of funding. This is well known to the market, Congress, regulators and the academic community. Congress and the SEC have adopted some proposals to reduce this — a post for another day. To take business away quickly from the established raters Whitney would have to award higher ratings since issuers would not pay her to receive lower ratings. Her public comments, however, imply that other rating agencies are going much too easy on issuers and disregarding off-balance sheet pension liabilities and other future expenses. She implicitly criticizes Moody’s, Standard & Poor’s and Fitch for laxity but imagines that issuers will flock to her firm for lower ratings? This confuses me.
The second thing that really puzzles me about Whitney is her refusal to testify to Congress. She was asked to participate alongside very knowledgeable researchers in a hearing of the House Oversight Committee entitled the “State and Municipal Debt: The Coming Crisis?” What was Whitney afraid of? Why did she claim “scheduling conflicts” when given a chance to present her views to the people who write the law? Was she unwilling to defend her views while sworn in as a witness?
Whitney leaves me scratching my head. Her financial market commentary has enormous effects on the people of the country but she doesn’t seem willing to come out and defend her claims in a public forum. If she wants to compete with Moody’s and the other raters she is going to have to come into the sunlight. I’ll write about the substance of Whitney’s analysis another day.