Great Recession

Is Your Town About to Go Bankrupt?


Charles Gasparino just wishes he looked this fantastic.

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 the god Vulcan says Jefferson County Alabama is screwed.

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, 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:

NEXT: Ron Paul, Gearing Up

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  1. “Is your town going bankrupt?”

    Not if it is in Wisconsin:

    Wisconsin law taking away collective bargaining rights published, allowing law to take effect…..79954.html

    1. Wisconsin law taking away collective bargaining rights published, allowing law to take effect

      1. Can nothing stop this juggerkoch of union busting?

        1. Only if we’re lucky.

        2. Oh the humanity! Those evil Kocksucking bastards are going to pay once I put together this sandwich board!!

          1. Don’t forget the megaphone!

            1. And the bunny slippers!

            2. And the bunny slippers!

      2. those ratbagging teafuckers

  2. Oh man, this is gonna be great. All you money sucking, ass dragging, public sector workers can go fuck yourselves. Do the honorable thing and bail over the ledge like that loser did in Costa Mesa last week. Oh, and to the one or two that actually take their jobs seriously and respectably, I welcome you to the private sector.

  3. “Nouriel Roubini, who along with Meredith Whitney was a seer of the banking crisis before most”

    Oh jeez, both Meredith and Nouriel get far too much credit for doing far too little.

    Meredith only said that Citigroup would have to cut its dividend at the end of 2007 or face bankruptcy. She was looking right at it and still missed it.

    And Nouriel has said virtually everything under the sun related to the crisis. The guy seems to like to hear himself speak regardless of what he says.

    They both seem like media whores more than seers, not that this is in anyway a comment on the possible muni defaults.

  4. Meanwhile, GE paid no taxes last year. Good job, oligarchs!

    1. Helps to have friends in high places.

      1. Our company is very green now.

    2. At least I own stock in statism. Can’t really lose.

    3. We got a big write-off by claiming MSNBC as a dependent.

    4. Since half of the American work force no longer pays any federal income tax, I can’t fault GE for taking the same benefit. If we ever get a genuine flat tax, then we will have some fairness in the system. Until then, it’s every taxpayer for himself.

    5. Or the year before, or the year before that…

      I’ve used GE not paying taxes on this site and in several conversations. It’s one of my favorite go to arguments when discussing how evil oil companies that pay 6b in tax are.

      It’s worse than no taxes. GE receives as net gain from tax revenue in subsidies and carries over a tax benefit.

      1. GE also has what is considered one of the best accounting/legal tax departments and the more than one company is following their lead.

        Jeff Immelt, our environmental savior CEO and tax dodging job czar.

  5. There are conflicting reports from other experts informing me that the public coffers are actually overflowing with coin.

    1. 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.”

      But how can this be? Michael Moore assured everybody that we are rolling in moolah! How can the States and municipalities default???

      1. What would be fascinating would be to see states hitting upon the idea of issuing their own currencies.

        1. The Constitution prevents states from offering their own currencies — but not necessarily individuals. During the gold rush D.C. was happy to have reputable coin dealers putting out their own small-denomination specie, because the federal government wasn’t able to meet the demand for money in California. It was Sacramento that ultimately shut down the competing currency issuers.

          1. What does the Constitution have to do with anything that will plausibly happen in the realm of currency? The Fed will crush anyone that wants to offer an alternative currency, even if it entails a bizarre perversion of law and justice, because there’s so much of their power at stake. No one but a state has a chance.


            They call it trade or tourism coins and they can be used in stores

          3. The Constitution prevents states from offering their own currencies

            I don’t know — when the rubber meets the road, that would probably be a non-factor. Logically speaking, I see only a limited number options for an insolvent state:

               1. to issue IOUs
               2. to issue currency
               3. to shut down the state
               4. to receive aid from the feds

            The first is at best a temporary and partial solution, and even at that, likely suffers precisely the same constitutional difficulties as does the second, which is technically workable. The third cannot be considered a viable option, when stated as such. The fourth differs from the third only in terms of perception.

            In real terms then, I see two possible outcomes:

               1. the establishment of state-based currencies
               2. the end of states as even semi-autonomous entities

            I would lay odds on the second, both because of the constitutional and technical difficulty involved in a state’s issuing currency, and because my theory of government in general predicts it.

      2. When Michael Moore says “we”, he doesn’t mean government, he means the people. Presumably he’s thinking of “those rich bastards”, but everyone will be paying the price for their covetousness.

        1. No, he means the government. Michael Moore is a big government socialist bastard.

          Too fat to serve? Athlete dies after losing 85 pounds trying to fit in with the military’s weight regulations.

    2. How many times have I told you not to go whale-watching?

  6. Who cares about towns?

    Our whole state is falling off the ledge!

    1. Which should move the beach that much closer to Arizona. Thank you. Faster, please.

  7. Meredith Whitney should’ve married Faarooq instead of Bradshaw.

  8. Isn’t it high time financial writers start to get the Meredith Whitney thing right and properly inform investors.

    Tim, she didn’t even make the Citi call first and moreover she disputed the same prediction by others before she finally caught on to the facts. But don’t feel bad. Months after her hysteria based prediction about municipal bonds, hardly anybody in the media has got the actual facts concerning Meredith Whitney right.

    Here are the facts: Whitney’s claim-to-fame, a bearish bank call on Citi, was over-hyped. Her Citi call was late. Jim Rogers, a world famous investor with a provable track record, appeared with her in early 2007 on Cavuto on Business and explained why he was short on Citi. Whitney immediately refuted him and continued to rate Citi sector “perform”, yet Citi underperformed the sector during this time period. It wasn’t until October 31, 2007, that she took Rogers’ hint and finally made her correct call.

    Likewise her Bear Stearns call was late, and her Lehman call was tardy and she or her PR people seemed to take credit for an apparently nonexistent early call on AIG. See: v PR_Meredith Whitney and AIG March 23 2009.pdf

    1. None of which has anything to do with this post.

    2. I’ve been on a conference call with her regarding some financial materials for a bank I worked at. To be polite, she doesn’t come across as thoughtfully bearish in the way guys like Jim Chanos or Dylan Grice do. I personally don’t listen to her prognostications because they feel too emotions-based. But she did make the right calls during late ’07 through ’08, and I don’t really know what you’d dispute. She didn’t get the timing and direction right on everyone? Who did?

      Whitney immediately refuted him and continued to rate Citi sector “perform”

      Since when was a “perform” an endorsement? It’s a euphemism for “weak sell.”

      Your education for the day, courtesy FINRA:

      A [company with business interest] in a stock has little desire to see an analyst put out a “Sell” recommendation on that security and possibly contribute to a sharp decline in its price. Hence the proliferation of euphemistic ratings ? such as “Hold,” “Retain,” and “Market Perform” ? which small investors may take at face value, but which professional and institutional investors know are often tantamount to “Sell.”

      The idea behind “hold” or “perform” is a fundamentally stupid one — if you have it, don’t sell it, and if you don’t have it, don’t buy it — and most institutional investors can take the hint.

      It wasn’t until October 31, 2007, that she took Rogers’ hint

      Your point? It was trading at like $40 then, and that was around the market top. There are worse sins.

      (And, fer Chrissakes, you cite the hyperventilatory Rogers, who regularly indulges in hysteria. I like him, but he’s dependable for direction, not magnitude.)

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  10. Interesting conversation with Riordan. I lived in San Diego for about ten years but was never particularly familiar with LA politics. I guess SD is enough of a train wreck, note that it is mostly Republican and still broke.

  11. Nah they just get the cops out to triple their ticket quota! they will make the money real fast.

  12. The Boise County, Idaho bankruptcy was not caused by typical government mismanagement, but is the result of a foolish legal battle against a developer. The county only has 8000 people, and they lost a 4 million dollar lawsuit. They foolishly filed for bankruptcy, which will probably cost them 1-2 million in legal fees, plus they’ll likely continue to have some liability in the suit.

  13. “The Boise County, Idaho bankruptcy was not caused by typical government mismanagement, but is the result of a foolish legal battle against a developer.”

    Half Moon Bay, CA is another example. The city flooded a field and tried to claim it was a ‘wet-lands’ to prevent development. And lost the resultant suit.

  14. Blah – Merdith Whitney – blah blah… The point is she did no (or little) fundamental (or in depth) analysis, as an analyst that is a no-no.

    Whitney’s honor is undeserving of Patrick Courielche support.

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