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Was Meredith Whitney Right About Municipal Bonds?

In December 2010, less than two years after our emergence from the worst recession in 70 years, banking analyst Meredith Whitney opined on CBS's 60 Minutes that we were on the precipice of a municipal bond apocalypse. Her prediction entailed that we would see "50 to 100 sizable defaults ... [that would] amount to hundreds of billions of dollars' worth of defaults."

For the most part, this prediction hasn't exactly panned out. There have been notable city bankruptcies, including Vallejo, Calif., and recently Pennsylvania's capital, Harrisburg, but nowhere near the 50 to 100 defaults that Whitney had called for.

So, does this mean Meredith Whitney's predictions were all wet? I don't think so.

I think Whitney's timing didn't work out as well as many of her other calls, but there are some very sizable defaults around the corner if something isn't done soon. Take a look at these eight cities currently running sizable budget deficits through 2012:


Deficit Through 2012

Budget in Fiscal 2012

Annual Budget Shortfall

Detroit $155 million $3.11 billion 5.0%
Honolulu $100 million $1.93 billion 5.1%
New York City $4.58 billion $65.7 billion 7.0%
Chicago $636 million $8.2 billion 7.7%
Cincinnati $60 million $1.2 billion 5.0%
Camden, N.J. $28 million $138 million 20.2%
Los Angeles $457 million $6.9 billion 6.6%

Source: Wealthwire, Reuters, Yahoo! Finance.

This is just a sampling of the budgetary shortfalls currently present. In Chicago, which boasts the highest per capita deficit by far of the above eight cities, building a city-owned casino could be in the cards, as well as eliminating 2,000 currently vacant jobs. For Camden, which is showing a 20% shortfall in its 2012 budget, it's trimming $14 million out of its law enforcement budget -- cutting its police force by half.

Forget Los Angeles by itself; the entire state of California is in dire straits. Gov. Jerry Brown recently stated that without strict austerity measures, California could be unable to pay $3.3 billion in bills by March. The state appears to have run out of money three months ahead of what lawmakers had predicted.

Even though her timing wasn't perfect, it appears that Whitney's calls are coming to fruition now and that austerity measures could be headed to a town near you.

In Harrisburg, a federal judge rejected the town's bankruptcy filing and is planning to put the city into receivership, with the state of Pennsylvania organizing a plan to turn the city around. With a city this size, a precedent is being set to determine whether other municipalities follow the same path as Harrisburg. Does this sound all too familiar?

In the end, municipal bonds offer significantly higher potential after-tax yields than bank CDs or U.S. Treasuries, so the allure of their historical safety is tough to ignore. But trouble in California, New York, and Florida, to name a few states, could be the driving force that cripples some popular diversified muni bonds investments like the iShares S&P National Municipal Bond ETF (AMEX: MUB  ) .

Even more at risk are state-focused municipal bond funds like the iShares S&P California Municipal Bond (AMEX: CMF  ) , BlackRock Florida Insured Municipal (AMEX: BAF  ) , and the iShares S&P New York Municipal Bond (AMEX: NYF  ) . These states all have budget shortfalls that could make even the riskiest income investor cringe with fear.

While I wouldn't go so far as to call for a muni-bond apocalypse, I do feel we have a long way to go to clear ourselves from decades of overspending. The question is, are you ready for austerity measures to hit you in your own backyard?

Share your thoughts in the comments section below and tell your fellow Fools what's being done in your town to curb spending.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He wonders if Apple would buy California if it went to auction. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (11) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2012, at 5:42 PM, constructive wrote:

    Not only were there not 50-100 defaults within a year as she predicted, there won't be 50-100 defaults in the next ten years. Was she right but twenty years early? Nope, she was wrong.

  • Report this Comment On March 01, 2012, at 9:14 PM, EquityBull wrote:

    Whitney was flat out wrong. She got lucky once with the banks and wanted to be the 2007 Garzarelli. She overstepped with this call and completely missed it.

    There have not been any sizable defaults and there won't be. Certainly not 50 let alone 100. Absolutely absurd.

    Any states and townships that have shortfalls will cut where they need to and get within budget. They won't default. Even if they do the bondholders won't lose the principal.

    What we see in the media are the black swan predictors. You throw them out there and hope one comes true. If it ever does you look like the great all knowing oracle. Problem is that usually works once then everyone listens to your next big call and it fails always (Garzarelli, Roubini, Schiff, etc). Now they are just the boy who cried wolf. Listen to any of them at your own peril and your portfolio's

  • Report this Comment On March 01, 2012, at 11:16 PM, aptosjoe wrote:

    I understand that Stockton Ca is seriously considering filing within the next few weeks.

  • Report this Comment On March 01, 2012, at 11:40 PM, CaptainWidget wrote:

    Cincinnati's annual budget is over a billion dollars......seriously?

    I'm from Cincinnati. You jog across the town in an hour. To pay for that budget, they'd need to collect $3000 a year from every man, woman, child, and disabled person living in the city limits....and that's just for CITY tax.

    They could pay each member of the police force $550,000K dollars a year, and still have half a billion dollars left over with that, way to mismanage your revenue Cincinnati.

  • Report this Comment On March 01, 2012, at 11:55 PM, funspirit wrote:

    Sean, Here's the thing, I live in Los Ang, and the streets here SUCK. They really do. A parking ticket here, $68 for nothing.

    And if there is a default, what do you do lay off police? Do no road work, ala LA. Where is the money coming from?

    Economic recovery? Full steam ahead. Only for innovators like Apple or Google!

  • Report this Comment On March 01, 2012, at 11:59 PM, TMFUltraLong wrote:


    Don't have to tell me twice. I lived in LA for 18 years. There's a reason I no longer live there...

  • Report this Comment On March 02, 2012, at 1:41 AM, valari25 wrote:

    Whitney was right once, and rode that call from Oppenhiemer to hanging out her own shingle with Whitney Advisory Group. It is no coinicidence that the initials line up with Wild Ass Guess.

    If you took her advice, you are bankrupt. She has to make extreme calls to get herself invited to CNBC so she can be on TV. My 4 year old is right more often then Whitney when it comes to investing.

    You know she knows how wrong she has been, she's aged 20 years in the last two.

  • Report this Comment On March 02, 2012, at 6:51 AM, jimwalker99 wrote:

    The painful truth is that as debt increases, so do the risks it will be politically, economically and financially worthwhile for borrowers to walk away from paying back their loans to bondholders. This is what most small defaulted towns /cities are trying to do.

    There have been about 300+ municipal bond defaults but mostly small. To see a whole portfolio of defaulted muni bonds and what they are worth go to Bondview.

    Good Luck To All

    Jim Walker

  • Report this Comment On March 02, 2012, at 5:08 PM, uclalien wrote:

    I'm surprised that no one pointed to the obvious flaw in the article. It highlights Vallejo, CA as a notable bankruptcy, implying that Whitney was at least a little correct. Yet Vallejo filed for bankruptcy in May 2008, a full two and a half years before Whitney made her prediction.

  • Report this Comment On March 02, 2012, at 8:47 PM, SecurityChief wrote:

    From my recollection, Meredith Whitney was about 9 months early in her call on Citi, BoA & so on. Her work was based upon the quarterly disclosures and also the non-disclosures declared by the financial institutions. She nailed it!

    The work performed on the muni/bond default prediction was based upon the accounting at that time. During and since that time our Fed Gov’t has pumped over a trillion dollars into the States and municipalities. That of course would delay the timing of her call, but does not make it incorrect.

    As long as these States and municipalities are pumped up with fed funding then the inevitable will be delayed further.

  • Report this Comment On March 12, 2012, at 12:59 PM, Kabir14 wrote:

    Please calling names and this and that to any one.

    Look at the figures. go to individual cities. state statemen if you can.

    Meredith has looked into most of them. Any one any one making a comment must first apraise themself of the figures. Other wise all comments and Punidtary is fiasco and unhealthy. I for one like to see the figures and statement as collected by Meredith unfortunately I cannot afford her fees.

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