Did celebrity banking analyst Meredith Whitney tell 60 Minutes in December that the United States would see between 50 and 100 big-city defaults in 2011? She did not, but a pastime has sprung up among muni bond Panglosses to make it sound like she did. At the Daily Caller, Reason contributor Patrick Courielche defends Whitney's honor against Fox Business pundit Charles Gasparino and others who are trying to exaggerate her claims.
Some of the evidence Courielche puts together to back up Whitney's pessimism:
Many have attacked Meredith Whitney on the accuracy of her call, Gasparino being one of the lead detractors. Since the publication of her report, much has occurred at the state and municipal level that has validated her thesis. Indiana began discussions on a bill that would allow municipalities to claim bankruptcy for the first time. Prichard, a town in Alabama, did the unthinkable and stopped sending monthly pension checks to retired public employees — breaking state law in the process. Detroit's mayor started discussing plans to eliminate vital services to 20% of the city, including garbage pickup, police patrols, road repairs, and street lights. Another Michigan town, Hamtramck, has been pleading for bankruptcy. California's comptroller warned the state would need to issue IOUs if spending cuts weren't enacted.
And even some on Wall Street have aligned with Whitney's thesis. Billionaire investor George Soros claimed state and local finance would be "the drama of the year," comparing the situation to the European debt crisis. He later flatly stated that, regarding state and municipal bonds, "there will be defaults." JPMorgan's CEO warned, "If you are an investor in municipals, you should be very, very careful." Jim Chanos, an investor with an early bearish position on munis, called Whitney's prediction an important call. "I think her general sense was correct," he told CNBC. The "King of Bonds," Jeffrey Gundlach, has admitted to seeing a collapse in the municipal bond market when stating to Barron's that, "There will be a panic at the margin, and muni bonds from the highest-rated on down will plummet." Nouriel Roubini, who along with Meredith Whitney was a seer of the banking crisis before most, predicted that as much as $100 billion of municipal bonds could default over the next five years. Even Bill Gates, not someone that typically weighs in on public finance, said that state and local government accounting was so bad that even "Enron would blush."
Even in this grim list, Courielche misses a few. Boise County, Idaho (which does not contain the city of Boise) filed for bankruptcy at the end of last month. An Alabama state representative is hoping to push Jefferson County (home to Birmingham, the state's largest city) into bankruptcy; a county official says the bankruptcy option is "always" on the table; and among readers of al.com, bankruptcy is the most popular solution to the county's shortfall. The City Council in Harrisburg, Pennsylvania is either seriously considering bankruptcy or using the threat of bankruptcy in negotiations.
As the reel-to-reel videotape playback shows, Courielche is correct: Whitney said that 50 to 100 municipalities could go bankrupt in the near future, and that the wave will be starting this year, not that all those would go down this year.
The relevant dialogue is Whitney's claim: "You will see a spate of municipal bond defaults." Asked to define "spate," she replies: "You could see 50 sizeable defaults, 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars worth of defaults." Later in the interview she says, "When individual investors look to people who are supposed to know better, they're patted on the head and told it's not something you need to worry about. It'll be something to worry about within the next twelve months."
More interesting than this exegesis is the sheer number of cities on the edge of insolvency. I spend most of my time buried in California's fiscal catastrophe, where this kind of crisis has become standard and the unions have been lobbying for restrictions on municipal bankruptcies ever since the city of Vallejo went bust. As governments all over the country keep agreeing to ruinous terms with their employees, and as the wealth of Americans continues to shrink, municipal bankruptcy can only become a more popular option.
Think Meredith Whitney's a pessimist? Dig former Los Angeles Mayor Richard Riordan predicting 90 percent of American cities will default: