Bank analyst Meredith Whitney—who made a name for herself with a prescient call about Citigroup’s write-downs during the financial crisis—is again drawing notice for a bearish prediction.
Lately, however, she has turned her sights from debt in the corporate sector to debt in the public one: municipalities.
In an interview broadcast on “60 Minutes” Sunday night, Whitney, who runs the Meredith Whitney Advisory Group, argued that the $3 trillion municipal bond market faces the immediate threat of hundreds of billions of dollars in defaults.
That notion has put the investment community on the defensive Monday, as bankers and analysts scramble to reassure investors and clients that the market isn’t about to fall to pieces.
“She’s being alarmist,” said one of the largest municipal bond portfolio managers in the country, saying that Whitney’s appearance drew immediate concern from both his portfolio and research colleagues when it aired on Sunday night.
“I can’t make the numbers work,” Ben Thompson, a portfolio manager Samson Capital who oversees about $7 billion in tax-exempt bonds, said on CNBC’s “The Strategy Session” Monday. “You’ve got to basically have New York, Chicago, Phoenix, Los Angeles—these cities start to default…the numbers just don’t add up.”
Still, a number of municipal bond funds, including iShares Muni Bond ETF and Blackrock’s Muni Intermediate Duration Fund, took sizable losses in early trading on Monday.
Phil Villaluz, head of municipal strategies for the brokerage firm Sterne Agee, says his company has received a number of concerned calls from clients since Whitney’s interview aired. The analyst's prognostication could create “a panic for retail investors,” Villaluz says.
The warnings come at a time when investor confidence in the safe-haven security is shaky. The most recently available data from the Investment Company Institute shows that investors withdrew over $1 billion from municipal bond mutual funds for the week of December 8—a trend that has persisted for over a month.
Nonetheless, some investors and money managers are quick to point out though that the odds of a large or systemic default by a major municipality or state remain very low.
States are not legally permitted to file for Chapter 9, the section of the bankruptcy code reserved for municipalities. And despite a renewed push for fiscal austerity, industry experts say states like California and Illinois would be loath to let their major cities pursue municipal bankruptcy filings unless every other avenue had been explored.
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