Meredith Whitney Should Show Her Cards

It's about time Meredith Whitney came clean and released her municipal bonds report to the public so we can determine if it should be given so much credence.
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Meredith Whitney should finally come clean.

The banking analyst who made a name for herself properly warning investors about the dire condition of the big banks a full year before the 2008 financial collapse has been making waves of late issuing similar warnings about states and cities that issue municipal debt. Whitney is saying that over the next year, dozens of large issues (between 50 and 100 to be exact) are about to default on their bonds, meaning that, at least in her view, investors will be left holding "hundreds of billions" of worthless bonds -- something not even seen during the dark days of the Great Depression.

And yet, as the municipal market is crashing on her prediction, with deals being pulled and slashed in size, with prices falling and taxpayers having to pay extra so cities and states can sell debt, Whitney is refusing to release the actual report that would tell us how she came to such a brash, and unprecedented prediction, on the grounds that her research is proprietary and for the use of the clients of her research firm only.

It's about time Whitney came clean and released her report to the public so we can determine if it should be given so much credence; and if it shouldn't, traders and investors can stop a possibly misguided prediction from causing further damage.

Aside from anything Whitney is saying, there are, of course, lots of reasons to have legitimate worries about municipal bonds, which are issued by cities and states to build infrastructure projects such as roads and bridges, and also to plug deficits when times are tough, as they are now.

The money used to repay bond holders comes from tax revenues, which are being squeezed because of a weak economy and runaway big government. For every governor like Chris Christie looking to slash spending and keep taxes low in New Jersey, many more city and state government officials still refuse to deal with the downside of the modern welfare state: The very real fact that for years they've been living beyond their means, taxing businesses out of their states while they hand out lavish and unaffordable benefits to public employees.

With that, investors have been hedging their bets on municipal bonds, demanding lower prices (and higher "yields) where the fiscal distress is highest. But with Whitney's prediction of massive defaults -- astutely marketed during a 60 Minutes segment several weeks ago and repeated on selective business networks ever since -- the market has gone from worried to crisis mode.

All we really know about the report is its overheated title -- "State Budgets: The Day of Reckoning," and what Whitney will disclose about her research, and methodology, which so far ain't much. No one I know in the municipal bond market has even a bootlegged copy.

There's nothing wrong with Whitney keeping the report private for only her clients to see; research firms do that all the time. But I have never seen an instance where a proprietary research firm markets its "proprietary" predictions on national television, and Whitney did one better: She's allowing the fallout from her prediction to fester now for nearly a month while she offers almost no insight into the methodology of her research the few subsequent times she has agreed to publicly comment (neither her or her spokesman returned email requests for comment).

Seeing the actual report might give us some idea why she thinks defaults might surpass levels over the past year not seen since the Great Depression -- a pretty outlandish claim when you think of it -- considering the general improvement of the economy. Seeing the report will also give the investing public some indication about Whitney's own motives in making such claims.

Has Whitney or her firm invested in municipal bonds or are they shorting the market (betting it would fall)? Regulators expect market positions to be disclosed in research -- even the proprietary kind that's not released to the general public. On its face, there's nothing wrong with Whitney taking a market position, but if she or her firm is short the market, it gives us some more insight into her call and why it's so aggressive.

Meredith Whitney is a great banking analyst and someone I believe did investors a great service during the early days of the banking crisis, when at a small brokerage firm, Oppenheimer & Co., she stood up to the large and powerful banks, namely Citigroup, and told everyone the truth about the dire state of the banking industry.

Yet those calls -- and her research -- were released publicly; we all got to see why she believed Citigroup was destined to fail over the next year as it nearly did before the federal government stepped in with a bailout.

That's not the case with her municipal research so it's impossible to know whether it should be taken as seriously as her prior research.

In the meantime, the municipal bond market continues to suffer as do taxpayers.

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