Leave Meredith Alone! All Really is Not Well in Muniland

Meredith Whitney
Meredith Whitney

It’s still not easy being Meredith Whitney.

The vaunted analyst, who just six months ago was the reigning queen of Wall Street and whose every utterance stopped traffic dead, is continuing to take hits over her December doomsaying over the municipal bond market.

The latest market maven to take a whack at Whitney is Byron Wien of the Blackstone Group, who said Tuesday on CNBC that Whitney is far too bearish on the state of local and state government debt.

“All the figures I looked at indicated that the states are fairly well-disciplined,” Wien said. “I wish the federal government were as well-disciplined as the states.”

Wien, of course, isn’t the only one to take on Whitney lately.

Those who disagree with her include Pimco’s Bill Gross, David Kotok of Cumberland Advisors and a cast of others that included another CNBC guest Tuesday, Thomas Doe of Municipal Market Advisors.

Her critics all have a point: the state of municipal finance looks different than it did when Whitney first made the call back in December, and even she admitted in her most recent CNBC appearance that the timing of her prediction could be a little off.

Municipal bonds, in fact, just broke a 29-week outflows streak, pulling in $246 million in inflows last week, according to Lipper.

But Wien’s statement that the state governments are “well disciplined”?


The collective state governments are looking at a combined budget deficit of $112 billion this year, amounting to a staggering 17.6 percent of their total budgets, according to figures from the Center on Budget and Policy Priorities. By comparison, the spendthrift federal government is running a deficit at about 11 percent of total expenditures.

So the contention from Wien that the states are doing better than the feds is hard to stomach.

(Worth mentioning: Wien makes predictions each year. For 2010, his included GDP above 5 percent, a 10-year Treasury above 5.5 percent and an S&P 500 at 1000, compared to its end-year value of 1257. Oops.)

The fact is, we’ll get a much clearer picture of muniland once budgets get approved this month. Local governments have been paring costs by necessity, and even woeful Harrisburg, Pa., has managed to stave off disaster with the help of state supervision.

Unfortunately, the debt debate is beginning to devolve into semantics—over what constitutes an actual default versus a restructuring. From this chair, a default, in which bondholders have to take a haircut on principal or accept a reduced rate, amounts to a default.

Not all agree.

“The only default that matters to a muni bond investor is not getting paid principal or interest when due,” Kotok wrote in his latest analysis on the Whitney call.

Whitney has become known for exaggerating a bit in her predictions. That’s probably true this time, at least for the moment as localities scramble to balance their budgets and the worst of the debt crisis is still overseas.

But just as her calls for 100 muni defaults may be off the mark, so is the notion that all is well in the state of government debt.


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