Muniland needs defenders when Meredith Whitney talks her book

February 23, 2012

Yesterday DealBook announced the dreariest news possible for muniland: Meredith Whitney is publishing a book entitled Downgraded: Why the Next Economic Crisis Will Be Local, which is due out in November. DealBook says:

In the book, Ms. Whitney — who shook [municipal] bond markets with a 2010 appearance on “60 Minutes” in which she predicted scores of municipal defaults –will “reveal why America’s cities and states are in deeper trouble than is commonly realized,” according to the publisher.

The truth is that when Whitney made her infamous muniland prediction, she spooked retail investors into fleeing the municipal bond market in droves. These investors suffered tens of billions of dollars in losses, thanks to her.

The biggest problem at the time of Whitney’s call was that no muniland market professionals stepped up to refute her “opinions.” There are several reasons for the lack of push back: Muniland professionals thought her call was so outlandish no one would believe it; the media didn’t have a deep bench of municipal bond professionals to call upon to refute her; and by tradition and compliance rules, most municipal bond professionals are hesitant to speak in public. So Whitney had the stage pretty much to herself to knock down the municipal bond market.

Now Whitney is altering her story. Whereas she previously proclaimed that weak fiscal conditions will cause hundreds of billions of dollars in municipal bond defaults, she now says only that horrific fiscal conditions are hidden away from public view. The truth is that practically every state and local entity is down in the trenches fighting the hard battles to right its fiscal position. Day after day local and national media are full of stories of program cuts, shrinking numbers of government employees, pension reforms and very low municipal bond issuance. For example Illinois, the nation’s weakest state fiscally speaking, commences its budget battle today with the governor releasing his proposal for the coming fiscal year. From the Illinois Statehouse News:

Illinois’ local governments, parks, prisons and police officers are going to have to fight over the leftovers of Gov. Pat Quinn’s budget proposal.

“There is no new money for anything,” said Quinn’s Budget Director David Vaught on Tuesday night. “Everything but Medicaid and pensions will be squeezed.”

It’s hard to know what new insights Whitney has developed about state and local government finances, but those who saw her previous research report of more than 600 pages were underwhelmed by its lack of new information. Debt levels for state and local governments are well documented and, with the exception of a few outliers (think Illinois, New Jersey and California), considered sustainable at 1 percent to 6 percent of state tax revenues. Government accounting standard-setters are crafting new templates for pension liability disclosure, and the Securities and Exchange Commission has taken action against New Jersey for faulty pension disclosure. Other states and municipalities have taken note and scurried to open the kimono.

Ex-Financial Times blogger John McDermott had a great pull-quote from Michael Lewis’s book, which was lavish in its praise of Whitney:

The point of Meredith Whitney’s investigation, in her mind, was not to predict defaults in the municipal-bond market. It was to compare the states with one another so that they might be ranked. She wanted to get a sense of who in America was likely to play the role of the Greeks, and who the Germans. Of who was strong, and who weak. In the process she had, in effect, unearthed America’s scariest financial places.

It doesn’t take a high-profile Wall Street analyst to rank the relative prosperity of U.S. states. It’s pretty well understood that those along the coasts are the wealthiest but have high social-safety-net obligations. The middle of the nation has more moderate social support burdens. With the exception of a handful of fiscally distressed municipalities, states and cities are slightly battered but addressing their problems and shrinking their employment rosters, pension liabilities and debt loads. America, apart from the federal government, is slimming down and getting itself in shape.

Muniland will need to prepare for the next onslaught with a strong bench of knowledgeable professionals available to speak publicly. I’ll be working up a media contact list, so let me know if you would like to be on call to defend against Whitney’s second assault.

Chart source: Thomson Reuters Municipal Market Data (MMD)

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