Star banking analyst Meredith Whitney has been saying for months that the next phase of the housing meltdown would be a local-government financial crisis. This week she put a number on it, asserting that "hundreds of billions of dollars" of municipal bond debt would end up in default.
Given the pounding that the tax-free muni market has taken since late October, driving bond prices down and yields up, Whitney's comments on CBS' "60 Minutes" were a bond salesman's worst nightmare. Hundreds of billions of dollars in defaults would be a big chunk of the $2.8-trillion muni market.
The analyst, who gained acclaim for accurately predicting three years ago that Citigroup Inc. was heading for serious financial trouble, appeared in a segment Sunday about municipal finances titled "The Day of Reckoning." Without naming names, she told interviewer Steve Kroft that she expected "50 to 100 sizable defaults" by municipal bond issuers — but not by any of the 50 states. (There is no allowance under U.S. law for states to file for bankruptcy.)
There's been no shortage of criticism of Whitney's forecast.
Noting that the one-year record for muni defaults, set in 2008, was $8.2 billion, Bloomberg News muni columnist Joe Mysak wrote Wednesday that the scale of defaults envisioned by Whitney was "in the realm of the fabulous."
What Whitney described sounds like a contagion — a surge in the number of municipalities deciding on the nuclear option of giving up on their current financial plight and trying to start over.
But a municipal bankruptcy under Chapter 9 of the federal bankruptcy code is no simple affair, as Michael Corkery writes in the Wall Street Journal. He noted that 21 states don't even allow their municipalities to use Chapter 9.
And as Mysak noted, just walking away from bond debt wouldn't save many municipalities much money in the scheme of things; their greatest liabilities are pension and healthcare benefits for employees, not debt service.
Still, holders of government bonds everywhere may increasingly feel as if they've got targets on their backs. That is certainly true in Europe: The European Union last month decided that any further bailouts of member countries after 2013 could require bondholders to take haircuts.
But hundreds of billions of dollars in U.S. muni defaults, and soon?
Dick Larkin, a veteran muni analyst at Herbert J. Sims & Co., went on Fox Business Network on Wednesday to call Whitney's prediction "ludicrous" and "irresponsible."
"There will be more defaults. But nothing coming close to hundreds of billions of dollars," Larkin said. "I am putting my career on the line by saying that ain't going to happen. If she's right, she will be a hero — and I will be out of business."