Meredith Whitney: 2011- Year of Defaults

[don]

A wave of defaults by state and local governments in the coming months will spark a selloff in the municipal bond market, hurting US economic growth and stocks and causing social unrest as governments are forced to lay off workers and cut back on services, well known financial analyst Meredith Whitney told CNBC Tuesday.

Responding to the uproar over her "60 Minutes" interview broadcast on CBS Sunday night, Whitney defended her prediction that at least 50 to 100 cities and towns could default on their debt as states and the federal government cut back on financial support. Muni experts, including an analyst from Standard & Poor's, dismissed her predictions, saying the numbers don't add up.

"I appreciate that the reaction is so violent," she said in a live interview with CNBC. "I didn't put the debt on these states. We're looking at the numbers. This is how it plays out."

The big problem is that cash-strapped states will no longer be able to provide the financial support to municipalities as they have in the past, said Whitney, who is CEO and founder of Meredith Whitney Advisory Group.

"States clearly have been funding municipal governments—for now up to 40 percent of their total expenditures," she explained. "As the states become more compromised from a fiscal standpoint, that funding is going to end."


The federal government is unlikely to bail out the states either, added Whitney, because the cost—which she put at $1 trillion—would cause a political backlash. "Who in Nebraska's going to want to bail out someone in Florida?" she said.

She also sees parallels with the turmoil in Europe over austerity measures imposed there.

"When you have so many different municipalities default ... you going to have so many issues in terms of layoffs of employees," she said. "This is going to be such a wider-spread issue. It's going to look like Europe in terms of programs are cut, you're going to see a lot of social unrest."

Whitney, who became famous for predicting the financial crisis, also said the bigger coastal states are underperforming economically—mostly because of the real estate decline—while the mid-section of the country is doing somewhat better. But she said that's not enough to even out the national economy and have GDP growth of more than 2 percent in the coming months.

Whitney added that it's way too soon to see muni bonds as a buying opportunity. But she said that can change quickly.

"When you start to see the first major defaults in this area [the states and cities], when you see more defaults and indiscriminate selling—if you do your research now and figure out who's protected where and which revenues are protected, there will be great buying opportunities," Whitney said.

"People are complacent about these defaults. The news about all this isn't out there yet," Whitney went on to say. "And only when it is out there, then there will be a buying opportunity [for munis]."

http://www.cnbc.com/id/40769692/

[sunskyfan]

Re: Meredith Whitney: 2011- Year of Defaults

I love Miss Meredith and the only thing she is saying that doesn't quite wash with me is the idea that the FEDS (Federal Government and the Federal Reserve) won't find a way to bail out the states and municipalities. I would hardly think that bailing out AIG, McDonalds, and the Royal Bank of Scotland was politically okay but it happened. The shouldn't bail out these entities and it won't be close to fair but why would they stop now?

[Stroebel]

Re: Meredith Whitney: 2011- Year of Defaults

The political will for bailouts is fading, and demogogues are characterizing government employees as the "haves" versus the "have-not" taxpayers. Government employees and public unions are going to take a bashing.

Meanwhile, the NY law firm Cravath, Swaine & Moore LLP has agreed to represent Harrisburg, PA's if it files a chapter 9 bankruptcy case on a pro bono basis-- without payment of fees.

Can anyone say "loss leader"? Looks like Cravath is also betting that there will be more chapter 9 cases . . .

[flintlock]

Re: Meredith Whitney: 2011- Year of Defaults

Who says the states and locals won't find a way to bail themselves out? I say we will see a massive shakedown of citizens in the near future. With thousands of new "code compliance officers" roaming the streets, looking for violations like " your grass is too high, your stairs are not up to code, or your house has mold". Property taxes will rise as well. How soon before we must pass an "Energy Audit" in order to continue receiving utilities? And of course, those businesses providing these repairs will require expensive permits and licensing before they are allowed to work. All this gets passed on the the consumer of course. Just wait, it's coming. They won't shut down city hall until they've exhausted all other means of financing it.

Also we can expect more cuts to police and fire. Those are the typical "shock tactics" used to justify to the populace the need for higher taxes and fees. Meanwhile they'll ignore the legions of bureaucrats where cutbacks could be made rather harmlessly.

[vinoveri]

Re: Meredith Whitney: 2011- Year of Defaults

I love Miss Meredith and the only thing she is saying that doesn't quite wash with me is the idea that the FEDS (Federal Government and the Federal Reserve) won't find a way to bail out the states and municipalities. I would hardly think that bailing out AIG, McDonalds, and the Royal Bank of Scotland was politically okay but it happened. The shouldn't bail out these entities and it won't be close to fair but why would they stop now?

Exactly. There are no fiscal contraints of printing/borrowing unless and until Treasury bonds go up in earnest. Remember, Volcker didn't crush inflation until bonds were yielding 12+%. We've a long way to go. The "people" will not stop the out of control ponzi scheme, thieving, rule-of-law suspending government; only the markets can do that now.

[don]

Re: Meredith Whitney: 2011- Year of Defaults

Who says the states and locals won't find a way to bail themselves out? I say we will see a massive shakedown of citizens in the near future. With thousands of new "code compliance officers" roaming the streets, looking for violations like " your grass is too high, your stairs are not up to code, or your house has mold". Property taxes will rise as well. How soon before we must pass an "Energy Audit" in order to continue receiving utilities? And of course, those businesses providing these repairs will require expensive permits and licensing before they are allowed to work. All this gets passed on the the consumer of course. Just wait, it's coming. They won't shut down city hall until they've exhausted all other means of financing it.

Also we can expect more cuts to police and fire. Those are the typical "shock tactics" used to justify to the populace the need for higher taxes and fees. Meanwhile they'll ignore the legions of bureaucrats where cutbacks could be made rather harmlessly.

You may have stumbled across the answer to the poisoned drywall conundrum. Homeowner compliance fines! (The one thing I'd add to your well-put "shock doctrine" is park closures. Gets them every time.)

[jk]

Re: Meredith Whitney: 2011- Year of Defaults

the congress won't vote to bail out california or illinois or [your state here], but nothing prevents the fed from buying munis along with treasuries. i think, though, that there will be plenty of defaults before that gets in gear.

[Stroebel]

Re: Meredith Whitney: 2011- Year of Defaults

Exactly. There are no fiscal contraints of printing/borrowing unless and until Treasury bonds go up in earnest. Remember, Volcker didn't crush inflation until bonds were yielding 12+%. We've a long way to go. The "people" will not stop the out of control ponzi scheme, thieving, rule-of-law suspending government; only the markets can do that now.

I must respectfully disagree and side with M. Whitney on this one. For state and local governments, the bill has come due.

In the coming months, I expect that we will see the loss of local government power, layoffs, strikes and concessions by local and state government unions, and other belt-tightening measures.

Harrisburg presents an excellent example:

http://www.muninetguide.com/articles...-recovery-399/

[CanuckinTX]

Re: Meredith Whitney: 2011- Year of Defaults

Who says the states and locals won't find a way to bail themselves out? I say we will see a massive shakedown of citizens in the near future. With thousands of new "code compliance officers" roaming the streets, looking for violations like " your grass is too high, your stairs are not up to code, or your house has mold". Property taxes will rise as well. How soon before we must pass an "Energy Audit" in order to continue receiving utilities? And of course, those businesses providing these repairs will require expensive permits and licensing before they are allowed to work. All this gets passed on the the consumer of course. Just wait, it's coming. They won't shut down city hall until they've exhausted all other means of financing it.

Also we can expect more cuts to police and fire. Those are the typical "shock tactics" used to justify to the populace the need for higher taxes and fees. Meanwhile they'll ignore the legions of bureaucrats where cutbacks could be made rather harmlessly.

I don't doubt that this could be the reaction of many municipalities but the unintended consequences of this kind of tax grab will be to further reduce revenues.

You take money out of the pockets of your citizens and businesses and guess what, they have less to spend! That means more businesses end up closing, reducing your tax revenue further, or people just up and move to somewhere cheaper reducing the tax rate on homes and it becomes a domino effect. As someone else stated, the bill is due and you can't just tax your way out of the mess. At some point austerity is going to be forced on the municipalities because there will be no alternative.

[slippery]

Re: Meredith Whitney: 2011- Year of Defaults

Municipalities are already making changes. There will be increased fees. A common one is a fee for emergency services, especially emergency medical services that accompany fire calls. But there will also be layoffs, early retirements, cost cutting, and pension reform.

Because the anti-government buzz is building, I am seeing a lot of proactive action by counties and locals to establish a 2-tier pension plan. New hires will get either a smaller multiplier for their pension benefit and/or a 401k type plan. Whether this is enough to bring expenses in line with revenues and placate the public will be one of the unfolding stories of 2011.

I think Meredith may be overestimating the number of defaults. So far, most of the major problems have been due to bad financing deals, like Jefferson County, AL, or bad projects like the incinerator in Harrisburg. Or, maybe she is right. She did do the work and I can only speak from inside knowledge of a couple of local municipalities.

[jk]

Re: Meredith Whitney: 2011- Year of Defaults

Alabama Town’s Failed Pension Is a Warning

PRICHARD, Ala. — This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.

Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”

etc

So the declining, little-known city of Prichard is now attracting the attention of bankruptcy lawyers, labor leaders, municipal credit analysts and local officials from across the county. They want to see if the situation in Prichard, like the continuing bankruptcy of Vallejo, Calif., ultimately creates a legal precedent on whether distressed cities can legally cut or reduce their pensions, and if so, how.

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”

etc

http://www.nytimes.com/2010/12/23/bu...ichard.html?hp

[Stroebel]

Re: Meredith Whitney: 2011- Year of Defaults

. . . it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

That's ugly. Don't they call that "Trickle down economics"? You know, with everything rolling dowhill and all . . .

I don't know about pension plans, but I do know there's a strain of chapter 9 law that supposedly allows the rejection and breach) of union contracts.

[jneal3]

Re: Meredith Whitney: 2011- Year of Defaults

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Whitney added that it's way too soon to see muni bonds as a buying opportunity. But she said that can change quickly.

"When you start to see the first major defaults in this area [the states and cities], when you see more defaults and indiscriminate selling—if you do your research now and figure out who's protected where and which revenues are protected, there will be great buying opportunities," Whitney said.

If government entities can just decide not to obey the law, who can say which revenues "are protected"?

[WildspitzE]

Re: Meredith Whitney: 2011- Year of Defaults

the congress won't vote to bail out california or illinois or [your state here], but nothing prevents the fed from buying munis along with treasuries. i think, though, that there will be plenty of defaults before that gets in gear.

i actually thought that this would be part of QE2 as a way of nipping the muni issue in the bud, before it got out of hand (from the fed's perspective), even if they wouldn't actually act on it with purchases.

however, one thing that has kept inflation at bay given the amount of AMB expansion is that the banks have been keeping this money as excess reserves (while they slowly repair their BS) - and thus the Bernank from the real hot seat. if they were to affect muni purchases directly, whoa! turn the fire on bc we know that the states will spend like a drunken sailor (and not only based on actual purchases, but on expectations that the fed will buy their junk no matter what). perhaps this is what makes the fed apprehensive to buy muni debt?

[flintlock]

Re: Meredith Whitney: 2011- Year of Defaults

I don't doubt that this could be the reaction of many municipalities but the unintended consequences of this kind of tax grab will be to further reduce revenues.

You take money out of the pockets of your citizens and businesses and guess what, they have less to spend! That means more businesses end up closing, reducing your tax revenue further, or people just up and move to somewhere cheaper reducing the tax rate on homes and it becomes a domino effect. As someone else stated, the bill is due and you can't just tax your way out of the mess. At some point austerity is going to be forced on the municipalities because there will be no alternative.

I agree completely, but that won't stop short sighted bureaucrats from trying to save their own jobs. I am hearing from customers about work they had done 7 or 8 years ago being questioned about permits. I'm talking minor stuff like a water heater being replaced. Some local jurisdictions are particularly aggressive. I was talking to a friend the other day outside a restaurant. Some stranger walks up and wants to know if we are working there! "No, just having lunch", I said. There was an awkward moment as he just stood there glaring at us. Eventually the idiot realized there was a restaurant right behind us. He was an inspector who thought he'd made his big bust for the day. What a jerk. Eventually he'll be gone like others I know who lost their job when city hall realized the irate calls to their councilmen aren't worth the paltry amount of money they take in. One guy I used to work with became an inspector and used to brag about what an ass he was to people. Now he is a janitor at my kids school. They laid off the entire staff except one inspector, who I hear is now very polite and fair.