Meredith Whitney Muni Call Was 100% Wrong: Bond Pro

High-grade municipal bonds remain a solid investment despite their sometimes-battered public image, according to fixed income expert Alexandra Lebenthal.

Meredith Whitney
Jin Lee | Bloomberg | Getty Images
Meredith Whitney

The reality behind municipal bondsand their low default rate contrasts with the high-profile call from banking analyst Meredith Whitney, whose prediction that munis would suffer a wave of defaults was "entirely" wrong, Lebenthal said in a CNBC interview.

"I have come up with a new measure of risk, which is knowledge risk," said the president and CEO of Lebenthal and Co. "Is the person who is talking about municipal bonds, corporate bonds, equities, what have you, knowledgeable and should people be listening to them?"

"Yes, I have an axe to grind," continued Lebenthal, whose father, James, is one of the more prominent names in the bond business. "I am in the municipal bond business, I'm also in the wealth management business and trying to do the best for clients. But I do know what I'm talking about because I have spent over 20 years in this business and another 20 growing up listening to it."

Whitney issued her call in late 2010 that the muni business was about to suffer an implosion that would result in more than $100 billion worth of defaults.

On the heels of her success in forecasting the credit crisis, muni bonds sold off aggressively on her muni forecast. However, when the rash of defaults failed to materialize, the bonds began picking up again and finished 2011 earning about 10 percent.

Munis peaked in mid-February but have sold off over the past two months, losing about 4 percent during the period even as money continues to flow into the space. Munis have seen net inflows for 18 consecutive weeks, according to Lipper data.

Whitney has stood by her call in subsequent interviews, insisting that even though the rash of technical defaults she predicted haven't taken place, "social contract defaults," such as changes in government services or worker contracts, have proven the weakness in local government finance.

Lebenthal, though, was dismissive of such qualifications.

"So the restructurings did not really take place," she said. "There were refundings — those always go on, just like mortgage refundings always happen. Social default? I still am trying to come to terms with that one."

Whitney did not immediately respond to a request for comment.

In a recent CNBC interview, Whitney cited "backroom political maneuvering" being used to prevent defaults, and advised investors to "stay tuned" as the muni situation continues to unfold.

But Lebenthal insisted the fears are overblown.

"For the vast majority of municipal bonds I'm not looking at credit risk or default risk — 0.5 percent of municipals default. Those are the high-yield junk bonds, the industrial development authority bonds, for projects that probably shouldn't have been financed," she said.

"You need to make sure wherever you're buying your bonds from, you know that the person who is selling them to you knows what they're talking about."