Over the past 18 months, Meredith Whitney's warning about the municipal bond market has stood as probably the worst high-profile call on Wall Street.
So with the shock that has come over some recent well-publicized financial troubles in California, Pennsylvania and elsewhere has come the question of whether the famed banking analyst's prediction might be starting to come true.
Whether it's San Bernardino, Stockton or Scranton, there are clear signs that things are getting worse in municipal finance — though not quite so bad as Whitney supposed.
"There is risk and there are likely to be more bankruptcies and defaults," says Peter Coffin, president of Breckenridge Capital, a Boston-based firm that manages $13 billion in assets and has a dozen analysts devoted solely to the municipal space. "I don't think it's systemic, but it's a greater risk than most municipal investors have been accustomed to in their lifetimes."
Whitney rocked the fixed income world when, during a December 2010 appearance on "60 Minutes" she forecast 50 to 100 muni defaults in 2011 that would cause damage in excess of $100 billion.
Though munis saw only 28 muni defaults in 2011 and about two dozen this year, most of which were comparatively small in dollar value, Whitney told CNBC as recently as March that a "tidal wave" of defaults looms.
"Ultimately, her numbers...are not out of the realm of possibility over the long term," Coffin says.
San Bernardino, Calif., officials this week filed for Chapter 9 bankruptcy after saying the city would be unable to pay its bills otherwise. That follows news out of Stockton, Calif., that it also would need relief from its creditors.
Scranton's mayor, meanwhile, ordered the cash-strapped northeastern Pennsylvania city to pay all its municipal employees minimum wage until it found a way to climb out of a $17 million budget gap.
Down Interstate 81 a ways, the Keystone State's capital of Harrisburg has been teetering on the brink of bankruptcy for more than a year.
So is Whitney finally on to something?
"I don't really think it's the making of a bigger problem," says Alexandra Lebenthal, president and CEO of New York investment firm Lebenthal & Co. "A lot of these issues were already going on prior. They're sort of one-off issues."
Lebenthal has been a vocal Whitney critic, saying the head of the Meredith Whitney Advisory Group was "entirely" wrong in the muni call. In an interview Wednesday, she had softened her tone only marginally.
"Where I'll give Meredith one teeny-weeny ounce of credit is I did yesterday read about debt restructuring for the first time, where an issuer (in Mammoth County, Calif.) did lower the rate and extend the maturity on a debt deal," Lebenthal says.
But she has been especially virulent about Whitney's prediction of "social contract defaults" in which governments would change services or contracts in moves that would amount to defaults even though they might not appear so on paper.
Whitney did not respond to repeated requests for comment.
"We're still seeing relatively positive data in terms of sales tax receipts," Lebenthal says. "So I still look at the local economies as getting stronger and don't think we're heading into what was predicted to be a huge period of massive defaults."
Still, where there's smoke...
"There's never one cockroach," says Marilyn Cohen, president of Envision Capital Management in Los Angeles. "Scranton tells you it wasn't just a California-specific problem. There's probably other Scrantons out there and more Harrisburgs out there. Individual investors need to be very careful and very selective of what municipal bonds they want to own."
Overall, investors in the $3.7 trillion muni bond market seemed not to have cared much about the individual gloomy headlines.
Despite the San Bernardino news, munis actually were trading higher Wednesday as measured through a popular exchange-traded fund, the iShares National AMT-Free Municipal Bond Fund.
The Barclays Municipal Index rose 3.66 percent through the first half of the year, and municipal bond funds saw $317 million in inflows for the most recent reporting week, according to Lipper data.
"In terms of the latest news with the city of San Bernardino, there's really been no impact in the market," says Susan Courtney, municipal desk analyst and lead portfolio manager for Prudential Fixed Income's municipal bond fund. "That's largely due to the fact that technicals are really strong in terms of the amount of investment money coming in, and San Bernardino is a relatively small issuer in the overall market."
So until more systemic problems start to show up, the view in muniland is that the Whitney projection remains largely unfulfilled — for now.
"San Bernardino, Stockton, Harrisburg, Jefferson County (Ala.) — all of them are long, protracted credit events, not events that came out of the blue," Breckenridge's Coffin says. "With good research and careful oversight, investors can navigate through this market and invest reliably and with very little risk when compared to other markets."