Meredith Whitney Muni Bond Defaults Fails to Materialize

Remember Meredith Whitney?

Right about now, she’s probably hoping you forgot. Whitney is the analyst who said,

“There’s not a doubt in my mind that you will see a spate of municipal bond defaults…”

She went on to say that there could be 50 to 100 sizable defaults or more and that those defaults would amount to hundreds billions of dollars worth of defaults.

Municipal bond markets reacted by bidding up the yield for muni bonds.

Meredith Whitney Muni Bond Defaults Fails to Materialize 1Most experts didn’t buy Whitney’s prediction. Even I wrote a 2011 article about how safe are muni bonds when people kept asking me about it. Of course, none of those stories was a big, inflammatory prediction of doom from a “name-brand” financial analyst.

Analyst Predicts Muni Bond Defaults

Wall Street and the financial markets are a very weird place. Preeminent analysts are created by making market calls or predictions that come to pass, especially when they make calls that no one else saw coming. Ironically, those same analysts aren’t necessarily held accountable when they make bad calls.

Goldman Sachs’ Abbey Joseph Cohen made a name for herself by making ever higher market calls during the technology fueled stock market bubble of the late nineties. When other analysts concluded that there was no rational basis for the stock market to go any higher and predicted a downturn, Cohen was always there with an even higher market prediction, and she was right (for a while).

Unfortunately for the people that listened to Cohen, she was most decidedly not right about when the market would finally turn. Indeed, when the market first began heading down, Cohen predicted a rebound. Listening to her would have cost you much more money that it would have made. In fact, Cohen predicted an UP year for the stock market in EVERY SINGLE YEAR during and after the internet bubble popped, which means she has NEVER thought the stock market would go down.

It’s a sad fact that there is little or no real accountability in the investing world. The bond rating agencies Moody’s, Standard and Poors and Fitch have suffered no negative effects from rating toxic mortgage securities as AAA until long after it was obvious to EVERYONE that there were problems. Many securities went straight from AAA to Junk status, an admission that the AAA rating was either gross incompetence or outright fraud. Either way, all three companies continue to prosper.

Meredith Whitney’s Muni Bond Default Prediction Defaults

Financial analyst Meredith Whitney rose to fame by making a call warning about bank stocks in 2007, before everyone else realized the ship was sinking. Later, she predicted the dividend cut by Citigroup, further cementing her reputation as someone who saw things others could not see.

In mid-December of 2010, Whitney made another call no one was making, that muni bonds were headed for big waves of failures. The reality is that despite a very tough 2011, the end of stimulus dollars flowing from Washington and state and local tax collections below predictions, there have actually been FEWER muni bond defaults in 2011 than in previous years.

The closest thing to Whitney’s prediction were two defaults late in the year when Harrisburg, Pennsylvania and Jefferson County, Alabama defaulted. That $3 billion is a far cry from the hundreds of billions Whitney predicted. A closer looks shows a flawed project and not a tidal wave of financial problems sweeping up an entire county’s finances. Remember, the giant (and very real) financial issues of California led to not one single dollar of California muni bond defaults.

In the real world, Whitney’s credibility should be destroyed. In the world of finance, however, Whitney will lie low for a while before putting a better spin on her remarks. There will be caveats, and things that she said elsewhere in much lower profile that seem to make her bold prediction less of a failure.

The terminally stupid will by into this spin, and use it to defend her. But, the fact remains that when the press was swirling around and her name was in big BOLD headlines, she did not make one remark, give one interview, or say one single thing that suggested she was in any way uncomfortable with how her prediction was being represented. Only now, after she has been proven wrong and it looks bad for her will she suddenly point out the subtle nuances that meant it was all just a big misunderstanding.

For 2012, make your investing resolution to be, “To stop listening to analysts who make their living by making a lot of noise with big predictions.” After all, sooner or later you’ll be listening to Abbey Joseph Cohen call an up year for the markets in 2008, or Meredith Whitney telling you to get out of bonds before all those non-existent defaults in 2011.

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