Whitney Defends Her Prediction of ‘Hundreds of Billions’ in Muni Defaults

Bloomberg | May 4, 2011
By Christopher Palmeri

Meredith Whitney, the analyst who correctly predicted Citigroup Inc.’s 2008 dividend cut, defended her prediction of “hundreds of billions of dollars’ worth” of municipal-bond defaults.

Whitney, 41, speaking today at the Milken Global Conference in Beverly Hills, California, said local governments in states such as California, Nevada, Arizona and Florida that are dependent on the housing and construction industries for higher tax revenue would continue to struggle financially.

“States have been spending at two-and-a-half times their tax receipts,” she said. “The states then are cutting off aid to their local governments which rely on them for over a third of their monies. The local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders.”

Whitney, who heads New York-based Meredith Whitney Advisory Group LLC, told CBS Corp.’s “60 Minutes” on Dec. 19 that municipal-bond investors could “see 50 sizable defaults, 50 to 100 sizable defaults, more,” that “will amount to hundreds of billions of dollars’ worth of defaults.”

Her prediction accelerated the flight of investors from municipal-bond funds and a decline in bond prices.

“There’s nothing controversial about that call, if you look at the numbers,” she said today, later adding: “This municipal issue, you can criticize me for anything you want, I’m numb to it, because I have more conviction on this than I’ve had on any single thing in my career.”

Solomon Disagrees

David Solomon, co-head of investment banking at Goldman Sachs Group Inc., speaking on the same panel as Whitney, said he disagreed.

“I don’t think we’re doomed,” he said. “I’d be more balanced on it. Ultimately tax receipts will have to go up and there’s only one way to do that and that’s increase taxes. The U.S. economy is going to perform better over the next year or two than the general consensus.”

Farm Belt states such as Iowa that are benefiting from rising agricultural prices and their logistics and transportation industries will see stronger growth than the rest of the nation, Whitney said.

“There’s myriad ways of playing every industry and each county,” Whitney said, when asked where to invest. “There’s opportunity-rich scenarios in every state and every market.”