Municipal bonds thrive after predictions of disaster

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It’s reckoning time for Meredith Whitney.

A year ago, the star financial analyst -- who shot to fame when she predicted the 2008 financial crisis -- set off a stampede when she said that investors in municipal bonds were headed for trouble. Budget problems in cities and states, she told ’60 Minutes,’ would lead to ’50 to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.’

The time frame she gave: ‘It’ll be something to worry about within the next 12 months.’


Her prediction was scoffed at by municipal experts, who noted that Whitney had little expertise in municipal finances, but the call still led investors to pile out of municipal bonds, terrifying municipalities.

Now that Whitney’s 12 months are up, it is not surprising that analysts are holding Whitney to account with more than a hint of schadenfreude.

There were indeed two big defaults -- Harrisburg, Pa., and Jefferson County, Miss. -- but after that the list falls off. A few of the headlines that greeted the anniversary: Meredith Whitney Still Dead Wrong on Munis, Happy First Birthday, Terrible Meredith Whitney Call and Not Only Was Meredith Wrong....

Bloomberg has noted that investors who ignored Whitney’s call could have made millions investing in municipal bonds, which turned out to be one of the year’s best investments.

Whitney has been quiet in these anniversary events, but in the middle of the year she argued on CNBC that while the defaults might not happen this year, it is only a matter of time.

‘I can’t believe I’m the only person talking about it,’ she said.

But John Moussea, a municipal analyst at Cumberland Advisors, wrote in a note to clients this week that municipal finances have actually improved over the last year, making more defaults less likely:

State governments recently finished the seventh consecutive quarter of rising tax receipts. This followed five straight quarters of declines from the fall of 2008 through the end of 2009. To be sure, many states and cities are still struggling to rein in rising pension costs, as well as dealing with the loss of federal dollars. But many states have made deep cuts in expenses and, in most cases, budget gaps have been closed without reliance on one-time solutions.

Rather than gloating, Moussea closes on a note of holiday cheer, saying that municipal bonds have ‘made the long trip back from the despair of a year ago. And for that we are thankful.’


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-- Nathaniel Popper