Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Whitney: Right on Goldman, Right on Munis, Too?

More proof that Meredith Whitney may be right with her prediction of municipal bond Armageddon: She was right about Goldman Sachs.

Meredith Whitney
Jin Lee | Bloomberg | Getty Images

On April 26, 2010, Whitney said during a CNBC appearance that “the momentum clearly has been taken away” from Goldman, predicting that the stock price would slide and smaller competitors would gain market share. 

In fact, she said the Wall Street giant would trade all the way down to book value , or near $120 a share then. At that time, the stock was trading around $156, meaning Goldman would have to be in for a pretty good drop ahead to meet the projection.

OK, so things didn’t go exactly as the head of the Meredith Whitney Advisory Group and godmother of the financial crisis predicted.

Goldman’s stock sloshed around a while, actually heading north for a while and momentarily breaching $175 a share.

Ah, but nothing goes up forever, specifically when it is in the Meredith Whitney death grip.

Goldman’s stock sailed hither and yon, surviving for a while the hysteria over the Dodd-Frank financial reform bill.

But lately it has been sinking, and on Thursday finally had its Meredith Moment: The stock fell more than 3 percent while the rest of the market was taking a ferocious beating, finally breaking below book value in morning trading.

Was Whitney a tad early? Um, yeah. But ultimately she was right.

The importance of this event goes past whether you’re holding Goldman stock.

No, the bigger issue here is Whitney’s credibility, which has been under severe attack since predicting early this year that muni bond land was at the doorstep of a major crisis, with perhaps more than a hundred defaults ahead that would cause more than $100 billion in damages.

Whitney has been vilified for the prediction, particularly because it caused an immediate bond selloff, not to mention that the class has performed splendidly this year as local and state governments have scrambled to get their houses in order.

So was Whitney not wrong but rather early on her muni call? We shall see.

However, it bears reminding that a NetNet post under this byline appeared on Feb. 11, a few weeks after the infamous prediction, that assumed the analyst would be right in “that Meredith Whitney kind of way.”

The point was that since her most famous call—a warning about toxic debt at Citigroup ahead of the unfurling of the financial crisis—Whitney has made a number of out-on-a-limb calls.

Many of those forecasts have been sort of right—rising unemployment, though not the 13 percent she forecast; that home prices would fall 25 percent from their late-2009 levels—though perhaps not in degree.

Directionally, though, she has been right more than she’s been wrong.

So while it’s pretty clear that she was early on her muni call, the jury is far from in on what the future holds for local government debt.

Bank of America Merrill Lynch, for one, asserted in a research note Thursday that the US was “only one shock away from falling into recession.” Among the consequences of recession, the firm said, would be possible danger to the bonds of governments that have practiced substantial belt-tightening and can scarcely stand an economic slowdown to compound their woes.

So while 2011 may not end with the muni cataclysm Whitney envisioned, there’s always next year.

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