Two-and-a-half years after financial banking analyst Meredith Whitney wreaked havoc in the municipal market by erroneously predicting hundreds of billions of dollars of defaults, she now says she never focused on munis.
Now Whitney is promoting her first book, “Fate of the States: The New Geography of American Prosperity,” which was released last Tuesday, but muni experts say she is irrelevant.
“You probably don’t want to hear this but in everything and anything I’ve done my target has never been municipal bonds,” Whitney told The Bond Buyer in an interview last week. “I never focused on the municipal bond market. I more focused on state arbitrage if anything.”
Muni market experts’ view of Whitney stems from her December 2010 interview with Steve Kroft on CBS’ 60 Minutes where she predicted there would be 50 to 100 “sizable defaults” of state and local bonds totaling hundreds of billions of dollars. Her faulty warnings led investors to pull $26 billion from muni funds.
Market participants immediately noted that her dollar amounts were way off base and, further, that she failed to distinguish between governmental obligations, which are backed by the full faith and credit of governments, and revenue bonds, which are backed by a stream of revenues. Conduit bonds default more than GOs. In conduit arrangements, governments issue the bonds for nonprofit and other borrowers, but are not on the hook for defaults.
Moody’s Investors Service, which rates about 8,000 local governments with 17,000 credits, said there were only 11 defaults on long-term bonds it rated in 2010 and 2011. Moody’s said that of the 71 of its rated bonds that defaulted since 1970, 66 were non-GO debt. Moody’s said there were only five defaults of its rated bonds in 2012.
Distressed Debt Securities Newsletter, which uses a very liberal definition of default that includes draws on reserve funds, found there were only 146 defaults totaling $28.78 billion in 2011 and 133 defaults in 2012 totaling $4.059 billion. Those defaults don’t even approach $100 billion and most of them were not GO debt.
“When it comes to municipal credit analysis, she is not even in our league,” said Dick Larkin, senior vice president and director of research at Herbert J. Sims & Co. “She is like a minor leaguer or a novice trying to learn it. She has gotten more credibility and attention than she deserves in a field that she knows nothing about.”
In her book, Whitney, chief executive officer of investment firm Meredith Whitney Advisory Group LLC, predicts the U.S. population is flocking to the central corridor states to take advantage of lower tax burdens and less strained state budgets. She claims the so-called “flyover” states like North Dakota, Indiana and Texas are experiencing economic booms having survived the Great Recession largely unscathed and that this is a likely trend to continue for the next 30 years.
Whitney, 43, claims there is no difference between her latest demographic shift prediction and her muni default warnings.
“It wasn’t as if they were mutually exclusive issues,” Whitney said. “They are all in one. Nothing has changed about my outlook and my outlook for a demographic shift. Look, a demographic shift exacerbates pain and imbalances in certain areas, which leads to more troubles in municipalities.”
“I am not focusing solely on the municipal market,” she added, when asked several times by The Bond Buyer about her 2010 muni default predictions or her latest outlook and concerns about the muni market.
“It is disconcerting that Ms. Whitney has such strong feelings about municipal finance and economics and yet failed to come up with any specific recommendations and observations,” said Chris Mier, managing director of analytical services at Loop Capital Markets.
Mier said her new book is “a fairly superficial treatment of a fairly complicated issue” of what makes people and businesses move. The locational decisions discussed in her book are not new ideas and have been studied extensively by academic researchers, he said.
“Her treatment is an inch deep,” Mier said. “It’s contradictory in its approach. It’s very fast and loose with the facts.”
For example, Whitney completely neglects to mention that North Dakota got 22% of its state tax collections in 2007 from severance taxes, Mier said. Agriculture and corn productions are other factors she also neglects, he added.
“The stuff that she ignores on the way to try and make her case is significant and does not give a full or fair treatment to the topic,” Mier said.
Larkin agreed with Mier and said his reaction to her book was, “Duh! [Mass migration] been happening for years and it’s not happening at the rate that she says is going to happen ..... I don’t think she has a real good grasp on what causes people to leave.”
Whitney denied she focused mostly on attributing favorable state tax policy to recent economic booms in the central corridor states and failed to take into account the massive oil production industry taking hold in North Dakota and Texas.
She said the demographic shift is “not going to happen overnight.”
“This is the point of the book,” she said. “If it were so obvious I wouldn’t have written this. I have other things to do.”
Whitney said she began to focus on state and local government finances in the depths of the financial crisis and continues to do so not only, “because it was something good to focus on” but also because it “was clear to me at the time that the areas that really drove the U.S. economy over the last 30 years would be the ones that would be the ones most hampered coming out of that.”
“The problem is that everybody is impacted and will have to take some type of hit,” Whitney said. “The taxpayers have certainly taken the first big hit. Pensioners are taking a hit. Bond investors will take a hit. It comes down to this issue of ability and willingness and the willingness is getting strained.”
When asked why she sought to clarify her 60 Minutes remarks in the book, Whitney said she was encouraged to do it.
Alexandra Lebenthal, president and chief executive officer of Lebenthal and Company, said it was too little too late.
“She could have clarified the day after the 60 Minutes interview aired,” Lebenthal said. “Even if it was taken out of context and it was over a five-year period or a 10-year period, it was still wrong.”
