(Recasts lead, adds comments from Reuters Summit, research
By Chip Barnett
NEW YORK, June 8 Wall Street bank analyst
Meredith Whitney on Wednesday continued to stand by her call
last year that hundreds of billions of dollars of U.S.
municipal bond will default, even as her dire outlook has yet
"Sadly, that's the size we'll be looking at," Whitney told
CNBC's Squawk Box in an interview. But she added that seeking a
strict timeline "misses the point" and said defaults are only
part of a larger issue about state and local finances.
Last year, Whitney unnerved investors in the $2.9 trillion
municipal bond market when she said on CBS Television's "60
Minutes" that there could be 50 to 100 defaults by local
governments amounting to hundreds of billions of dollars.
Whitney made her reputation by correctly predicting in 2007
that Citigroup would need a massive capital infusion.
On CNBC, she pointed to the precarious state of government
budgets, saying unfunded liabilities threaten their finances
and could force many to sell or privatize assets to raise
Whitney cited off-balance sheet debt expenses and unfunded
pension liabilities as problems states must address.
"State governors agree with me," she told CNBC. "It's the
muni bond market that doesn't."
She added that recent research done by her firm, Meredith
Whitney Advisory Group, is validating her claims, even though
researching munis is like jumping into "a dark pool" with
Whitney released a report this week that paints a grim
picture of municipal finances, according to Fortune Magazine.
Her forecast, however, has been challenged by many top fund
Richard Bernstein, chief executive of Richard Bernstein
Advisors LLC, discounted Whitney's alarms at the Reuters 2011
Investment Outlook Summit on Wednesday in New York. He did say,
however, that the handsome yields of munis these days make them
the "junk bonds of this cycle."
And DWS Investments, in a report released on Wednesday,
said Whitney's forecasts are akin to "'yelling 'Fire!' in a
"There will certainly be some additional defaults as the
year progresses," the report by DWS, which is part of the
Deutsche Bank Group, said. "The muni market has defaults every
year, even during boom years, particularly in bonds rated below
investment grade and those that come from small issuers."
The report added that defaults are trending downward, not
upward. It projected a total of 39 defaults for all of 2011;
through May 11 there have been 14 defaults totaling $605
million this year.
"The investment public now seems to be recognizing that
fundamentals in the muni market are improving," DWS said.
In May, Whitney wrote in an op-ed column in The Wall Street
Journal that the condition of state and local finances
threatens the U.S. economic recovery and must be addressed.
In an interview on Bloomberg radio in May, she also stuck
by her default prediction, but added a qualification: "I never
gave precise estimates or a specific period of time."
(Reporting by Chip Barnett; additional reporting by Jed
Horowitz; Editing by Leslie Adler)