Muniland needs defenders when Meredith Whitney talks her book
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:
Munis are the star performer of 2011
Bloomberg had a great piece that rounds up the factors that made municipal bonds the best performing financial asset of the past year. The story is framed as a knock on Meredith Whitney for her scare call a year ago:
This was supposed to be the year the $3.7 trillion state and local debt market would be rocked by an exploding pension time bomb and “hundreds of billions of dollars” of defaults, according to analyst Meredith Whitney.
Whitney’s Armageddon never came. Instead, munis became the star performers of 2011.
An investor who bought $10,000 of munis the day after Whitney’s Dec. 19 prediction on CBS’s “60 Minutes” television program would have made about $1,050, based on the 10.5 percent gain in the Merrill Lynch Municipal Master Index, which calculates price changes and interest income. That beats U.S. Treasuries, stocks, corporate bonds and commodities. The muni return is better still because interest income is tax-exempt.
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When returns are adjusted for price volatility, municipal bonds returned about three times more than corporate bonds and twice as much as Treasuries, according to Bank of America Merrill Lynch and Bloomberg data.
More Whitney rebuttals
The media is full of municipal bond market participants rehashing Meredith Whitney’s prediction of muni collapse which began last September. From Bloomberg:
[Meredith] Whitney, the banking analyst who predicted Citigroup Inc.’s 2008 dividend cut, said on “60 Minutes” on Dec. 19, 2010 that there would be “hundreds of billions of dollars” of municipal defaults within 12 months.
Data from [John Hallacy, Bank of America Merrill Lynch’s head of municipal research in New York], Standard & Poor’s and Municipal Market Advisors show the opposite.
Debt-service payment defaults this year are the equivalent of 0.64 percent of municipal-bond sales, compared with 0.99 percent for 2010, Hallacy wrote in a report last week. About 99 percent of the defaults have been revenue bonds. Health-care accounted for the biggest chunk, at 39 percent. Hallacy included monetary defaults or missed payments to investors in his tally.
The largest default for 2011 is the Clare at Water Tower, a 53-story apartment building for retirees in Chicago with about $229 million of long-term debt, according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
Meredith Whitney’s anniversary
Two big events happened on Tuesday in the municipal bond market: it was the annual conference of SIFMA, one of the industry trade associations; and it was also the one-year anniversary when Meredith Whitney began her campaign of predicting the collapse of the muni market. Whitney was of course way off-base with her prediction of hundreds of billions of dollars in bond defaults. In fact less than $1 billion of muni bonds have defaulted so far . But many believe that she did cause substantial damage to retail investors, mutual funds and insurance companies, all of whom were caught up in the downdraft of selling that followed her words of doom.
The reason that her words were so damaging to muniland was that there is little natural elasticity in the ebb and flow of the market structure — or, in market jargon, there is little liquidity. When large sell-offs happen in the equity or U.S. Treasury markets there is always a ready pool of buyers standing ready to pick up those securities at lower levels. These markets are favorites for traders and fast money because they encounter little friction, meaning the price rarely moves against them when entering and exiting the market. In contrast, there are few pools of buyers that understand the muni market and are able to do quick credit analysis of bonds for sale, not to mention the lack of shared pricing data that would let participants see if they are transacting at updated, fair-market prices. Because muniland is not really liquid, when Whitney yelled “fire” there was no orderly way for the crowd to exit the theater.
Regulator wants to require “fair dealing”
Regulator wants to require fair dealing
In a far-reaching proposal, the Municipal Securities Rulemaking Board (MSRB) has asked the Securities and Exchange Commission for permission to impose new rules to protect municipalities. These rules would vastly expand the disclosures that dealer underwriters are required to give their municipal clients who issue bonds.
MSRB’s executive director Lynnette Kelly Hotchkiss said in a statement:
Is Meredith Whitney a ratings’ driver for CNBC?
It’s more than a little frustrating that CNBC continues to feature equity analyst Meredith Whitney as she talks about municipal bonds over and over again. I’m not really sure she evens knows what she is talking about.
Matt Fabian, managing director at Municipal Market Advisors, shined on this same topic in this interview with Tom Keene on Bloomberg Television in May. Matt Fabian of MMA or Daniel Berger of Thomson Reuters Municipal Market Data would both be far superior in terms of talking accurately about muniland. Both have analyzed muni bonds for over a decade and can talk about the unique conditions each issuer is facing. Neither of them work for a sell-side firm, so they would not be arguing for issuers that they favor or that their firms hold inventory in.
Save the $100,000 that Meredith Whitney charges for research
Just the numbers please
You can save the $100,000 that Meredith Whitney charges for her research. Reuters has the data on municipal bond issuers with the weakest profiles by bond-market standards. Puerto Rico leads the pack as the least credit-worthy issuer.
The roots of delusion
Flight three of muniland’s harpy
I had really hoped that Meredith Whitney had gone back to analyzing banks and trying to interpret how the new Basel 3 liquidity ratio would be phased in. Unfortunately, she is back touring the mainstream financial media with another shrill message for muniland.
Muniland’s loudest harpy threw out some real doozies yesterday on CNBC and in a Fortune interview. The most outlandish claims Ms. Whitney made related to the proportion of state’s budgets that were going to service their debts. The substance of her statements were expertly demolished by Nicholas Johnson of the Center on Budget and Policy Priorities:
Muni sweeps: Lockyer rides again
CA Treasurer launches another derivatives investigation
We often see Wall Street selling sophisticated products to state and local governments which are not appropriate for them — think interest rate swaps and Jefferson County. So it’s always refreshing to find a government official who actually tries to keep Wall Street in line.
Muni sweeps: How does $775 billion of bonds go missing?
How does $775 billion of bonds go missing?
There is a sleeper story in muniland about a big pile of just-discovered municipal bonds. The story has some odd twists and turns. John McDermott of FT Alphaville scooped the details yesterday:
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Resident Muniland expert
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