Posted on Monday, April 4, 2011
There was once a time when the biggest defenders of Meredith Whitney's over the top, doomsday prediction that 2011 would be the year that municipal bonds defaulted in cataclysmic proportions were to be found at a certain business television network headquartered in New Jersey looking to have her appear on-air in order to goose ratings.
No longer. Whitney's fan base seems to have spread to certain elements of the conservative movement, which appears content to use her increasingly absurd claims of imminent municipal Armageddon to further its agenda of quashing the power of government unions, and the enormous costs they impose on state and local budgets through the bankruptcy courts.
All of which wouldn't be so bad if Whitney's fans on the right had any idea a) that bankruptcy is a costly process for taxpayers, the very people they are allegedly trying to help with their municipal-union busting; and b) how they are playing right into the hands of the left, which is also using Whitney's "analysis" to promote a federal bailout of ailing states and cities that are allegedly heading toward bankruptcy.
Yet, maybe the oddest thing about the conservative infatuation with Whitney's prediction, seen recently in publications like The Daily Caller, and Reason is that it ignores the progress made by conservatives like Governors Scott Walker in Wisconsin, Chris Christie in New Jersey, and the former liberal and turned born-again right wing budget cutter, Andrew Cuomo in New York, who have pushed for budget cuts over union concessions in ways that should make investors in the muni bonds from these states jump for joy.
What all of them have proved is that as bad as things are at the state and city level, Armageddon hasn't yet arrived, and probably wont arrive for some time if state and local governments do the obvious: start cutting their budgets as most are doing now. I never thought I would be saying this, but the lefty-dream of another government stimulus package, with President Obama signing over mega checks to bailout out states so they can bail out cities and their union cronies may well be shattered by son of super liberal Mario Cuomo.
But you wont hear that from certain elements of the right. Instead, people like former House Speaker and possibly Republican Presidential candidate Newt Gingrich are floating stupid ideas like that states should be able to declare bankruptcy in order to squeeze concessions from public-sector unions, particularly on costly guaranteed pension plans and other perks. Gingrich is obviously a smart guy, but he knows almost nothing about the costs associated with a bankruptcy, particularly for municipalities that have gone that route.
After all, who wants to deal with a state, city, corporation or individual willing to declare bankruptcy to renege on obligations? That's why once in bankruptcy, the cost of almost everything goes up, and on the state and local level, the average taxpayer pays this bill.
Amid all of this aspects of the conservative media have found a new poster child to support their agenda -- mainly their screw-the-public-union obsession in Meredith Whitney. I won't bore you with some of the more bizarre writings you can find on the subject these days, but one of Whitney's defenders recently took offense at the fact that after listening and reading exactly what Whitney has said, namely that hundreds of billions of dollars of municipal bond defaults would "be something to worry about within the next twelve months," I came away with the notion that she was making a one-year prediction, which based on default rates so far, seems ridiculous.
This writer, regurgitating Whitney's most recent spin, contends that what she really meant was that doomsday would only begin sometime this year and that all those defaults would occur over time, which seems less ridiculous. Oh and one more thing: I somehow owe Whitney an apology for all of this.
The problem with this argument is that it runs counter to the interpretation of just about everyone else, from analysts to financial journalists like myself who think Whitney is a pretty good banking analyst who simply made a dopey call on munis, to small investors who heard what she said on television (60 Minutes and then CNBC) and began selling munis in a panic.
It also ignored several pertinent facts. First, Whitney stated in September 2010, that things are so bad that there could be a federal bailout of struggling state budgets over the next twelve months, bolstering the one-year time frame interpretation even further. Under the headline, "Whitney Says States May Need Federal Bailout in Next 12 Months," Bloomberg reported the following: "While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable."
And if Whitney wanted to correct a misinterpretation of her research she could have easily done so; she used to appear regularly on FBN, and her husband still does. I called her numerous times not just for interviews on air, but to give her side of the story in my various columns on the subject as it became abundantly clear that her prediction helped spark a panic among small investors, and the most widely held interpretation of her comments, wasn't panning out.
She ignored them all and still does. Instead, she recently chose to explain herself in a puff piece interview with Maria Bartiromo writing in USA Today that her prediction was "an extended, multi-year issue," something that she should have made crystal clear three months ago as the panic set in.
The right-wingers also have all but ignored all the real reporting on Whitney's projections, mainly from the Fox Business Network and Bloomberg News, particularly on exactly what Whitney's controversial "research" report -- the analysis that was supposed to back up her muni-default scenario -- actually said. FBN was first to obtain a copy of the report, and in it there's barely a mention of defaults and certainly no mention as far as anyone can see of 50 to 100 large ones materializing any time soon, whether it is this year or just beginning this year as the spinners on the right would have you believe.
With all of that, reasonable reporters came to the conclusion that while states and cities face enormous budget problems, the default scenario Whitney gave just isn't adding up, and investors need to think twice before they panic. But you wont find that type of caution among Whitney's right-wing defenders who couldn't care less about investors losing money amid a panic particularly one that supports their broader, political agenda.
To be sure, there is ample reason to worry about the budget woes of state and local governments over the next year and the next five years for that matter. The Obama administration's fiscal policy has done little to reverse widespread unemployment, which is the heart of these budget problems. With higher oil prices, a double-dip recession is always a possibility, meaning state and municipal budgets will face even more strain, thus there will a smaller pool of revenues to pay off bondholders. There will be muni defaults, as there always are in difficult economic times -- possibly in larger numbers than when people are working, paying taxes and filling budgets of states, cities and town with ample tax revenues.
But good investors, like reporters, need to ask good questions. Here's one for you: What incentive does the political right have in making Meredith Whitney's prediction look accurate when it appears to be wrong?
THE HUFFINGTON POST, Charles Gasparino, Fox Business Network contributor; Author, 'Bought and Paid For'