Whitney Stands by Call on Municipal Defaults

Meredith Whitney, widely known as the first bank analyst to call to light the risks of the sub-prime market, is standing by her call that some U.S. states and municipalities remain financially vulnerable. In an interview with Bloomberg Television's "Risk Takers" program, Whitney cleared the air about her controversial view on the financial health of U.S. states and cities. In September 2010, Whitney and the firm she founded, Meredith Whitney Advisory Group, issued an almost 500-page report on the financial health of the 15 largest U.S. states. The report drew the ire of many participants in the muni bond market and prompted "60 Minutes" to interview Whitney. During the "60 Minutes," conducted by Steve Croft, Whitney proclaimed 50 to 100 "sizable" municipal bond defaults within 12 months. Whitney has been vilified for that call, perhaps on the basis that it has made muni bond analysts and fund managers uncomfortable or simply because there have not been 50 or 100 major defaults since the time of the interview. Bloomberg columnist Alice Schroeder said in the "Risk Takers" interview that Whitney was "trapped into putting out a number" on municipal defaults, but added that Whitney was "conceptually correct." For her part, Whitney said she's not "worried about being right on the call because it's (defaults) happening." She's right. In 2011, Jefferson County, Alabama and Harrisburg, Pennsylvania, the Keystone State's capital, defaulted on muni bond obligations. Earlier this year, Stockton, California defaulted. California, the largest U.S. state by population and the biggest contributor to U.S. GDP, is widely viewed as financially vulnerable due to soaring deficits. Betting against Whitney's view on municipal defaults is a tough call to make for several reasons. First, to this point, what she is wrong about is the exact number of defaults. She has been vindicated in that defaults have occurred. Second, with many state governments spending in excess of their revenue, the odds of municipal defaults are heightened. Finally, most investors remember that it was Whitney when she was still at Oppenheimer in 2007 that predicted doom for Citigroup C due to its high leverage and sub-prime exposure. As the "Risk Takers" profile notes, three months after Whitney's controversial report on Citigroup, the bank slashed its dividend and fired thousands of workers in an effort conserve cash. For more on municipal bond ETFs, click here.