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Was Meredith Whitney Right About Municipal Bonds?

Sean Williams
March 1, 2012

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 Pennsyl