MuniLand

Meredith’s clone?

By Cate Long
July 18, 2011

Meredith Whitney has made a reputation for herself in muniland as an analyst that came from the equity markets to predict an impending municipal bond cataclysm. Municipal bond experts were flabbergasted at the enormity of Whitney’s call, as well as the lack of data she had to back it up. Her bark ended up being many times worse than her bite, and now my antennae are on high alert for analysts who come out of nowhere and make big, unfounded calls.

While working this afternoon I noticed John McDermott, a Financial Times blogger, tweet the following:

@johnpmcdermott MF global write that Moody’s underestimates vulnerability of school districts to a US downgrade — http://cot.ag/odqdwL

Since when was MF Global writing about muniland? MF Global is an institutional firm headed by Jon Corzine, the former Goldman Sachs chairman, U.S. Senator and New Jersey governor. When I went to their website they didn’t seem to be making markets in or providing research on municipal bonds.

For muniland, there are many knock-on effects of Moody’s placing the credit rating of the United States on review. The federal government distributes tax dollars to states, who in turn deliver them to county and local governments. But this report focuses on a third-order risk of a U.S. downgrade. The tone was overheated and a tad shrill, and the premise seemed deeply overstated:

But we also believe that the Moody’s report understates the threat to issuers that rely on federal education funds to sustain their normal operations.  In effect, the problem might be even larger than Moody’s suggests.

Several pages later the report finally puts the numbers on the table:

[O]n average, schools rely on the federal government for 8% of their operating budgets.

So Moody’s missed the big issue that local school districts were at risk from having the credit rating of the U.S. placed on review because a tiny percentage of their operating budgets is provided by the federal government? Isn’t this sort of imagining a problem into existence?

I hadn’t heard of report’s author, Joshua Zeitz, before. NJ.com has a bit of his background:

Already on board at the firm is Josh Zeitz, Corzine’s personal aide and speechwriter, who is serving as the ex-governor’s chief of staff in his new job.

Now I see — Mr. Zeitz is a politico. I guess he isn’t a Meredith Whitney clone, just someone new to the business and making a big call without much data. Welcome to muniland, Mr. Zeitz.

Comments
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Insightful article… it does make you wonder whether keeping client funds separate in segregated accounts would have changed the outcome. This post suggest it would not: http://forexbrokersaz.com/au/all-forex-b rokers/brokers-with-segregated-accounts/ . However, I’d be curious to have someone’s take on this.

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