Whitney Defends Muni Call, Sees 'Indiscriminate Selling'

Financial analyst Meredith Whitney is sticking by her call that the nation's municipalities face a wave of defaults, despite a wave of criticism over her prediction that hundreds of local governments would not meet their obligations.

cnbc.com Meredith Whitney

In fact, she took the forecast a step further and said when the defaults begin in earnest, it will mark an exodus from the muni bond market.

"When you have the first group of defaults you will see indiscriminate selling that would be a buying opportunity for some," the president of Meredith Whitney Advisory Group said in a CNBC interview. "Because there has been such complacency in the market and muni investors have been talked down to for so long—'There's nothing to worry about, there's nothing to worry about'—they'll just fly."

Whitney is most known for her call, before the financial system collapsed, that Citigroup

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Since then, she has garnered headlines for various dire predictions about the state of the banking industry and its inability to recovery because of pressures from the struggling housing market.

But her foray into the municipal bond area has provoked some of the most intense criticism of her calls. Experts from Pimco's Bill Gross to the leader of the National League of Cities have doubted whether the problem with local and state government debt is as bad as Whitney is predicting.

"We did this analysis in September," Whitney said. "I was scared to death to publish the analysis, understanding that this was a massive deal, probably the biggest call I ever made. We put thousands of man hours into this project. It took over two years to do."

She defended the call's validity, based on the shaky state of local finance and what she referred to as the "daisy chain" of financing from the federal to state to local governments that would not hold up anymore.

Investors can still make money in munis, she said, but need to be very careful in how they proceed.

"You have to know what you own. You have to really do your homework in terms of knowing what supports your bonds," Whitney said. "There are great municipal investments out there, but on a blanket basis you have to be really careful about knowing what cash flows are supporting your investments."