Meredith Whitney Shouldn't Pop the Cork Just Yet
Reputed analyst Meredith Whitney of Meredith Whitney Advisory Group went on TV at the end of 2010, and predicted that we could see fifty to one hundred large size municipal defaults, totaling "hundreds of billions of dollars."
So far we have seen nothing like that in this country, with a few defaults from various municipalities and some smaller municipal bond offerings defaulting, like sewers and other smaller offerings. Not even Jefferson County in Alabama filed for bankruptcy, and that has been one of the worst municipality cases in recent memory.
Now we finally have our first major municipality filing of 2011, with Harrisburg, PA. filing for bankruptcy, to protect itself from a state takeover of its finances.
But Mrs. Whitney should not be so fast to proclaim victory, just yet.
In an interview with Bloomberg, Mark D. Schwartz, the Pennsylvania-based lawyer who filed the protection said, “This was a last resort,” regarding filing bankruptcy protection. The town council voted 4-3 in favor to file. “They're at their wits' end,” Schwartz said.
There have been attacks on Harrisburg leadership, as they have been provided with a recovery plan, and town leadership has been called incompetent. Councilwoman Susan Brown-Wilson defended the towns' actions.“We're not incompetent,” Brown-Wilson said in comments captured by Bloomberg. “We're just not going to let you run us over with the train anymore,” she said, referring to state officials.
Jason Hess, the acting city attorney, said the city council members did not follow procedure, and action would not be binding, but the council went ahead with the vote anyway.
Harrisburg has been a poster child for the type of municipal bond defaults that Whitney talked about in her "60 Minutes" interview in December 2010. The town needs $310 million to make bond payments, restructure its debt and repay the county and bond insurer Assured Guaranty Municipal Corp., (NYSE: AGO). When Whitney made the call for the defaults, she received a lot of criticism. She went on CNBC in January of this year to defend herself, saying, “The people that are contesting this are the municipal bond brokers. Across the board, “[states] are spending more than they're bringing in.” She was even requested to go to Washington to talk about her call, but declined to go.
There is still the possibility that the bankruptcy filing gets rejected by the state courts. According to law, municipalities are not allowed to file for bankruptcy to avoid being taken over by the state, in this case, Pennsylvania. Harrisburg was afforded a recovery plan, but chose not to take it.
While this is going to get attention in the press, it does not in anyway come to fulfilling the prediction Whitney had at the end of last year. While there is the chance that the state of Pennsylvania lets Harrisburg file for bankruptcy, there is little chance we see a wave the likes Whitney called for by the end of the year, or even in 2012.
Save that bottle of champagne, Mrs. Whitney. You are not vindicated just yet.
Traders who believe that we never see a municipal bond default crisis the likes Whitney talked about might want to consider the following trades:
- Consider iShares S&P Natl AMTFr Mncpl Bd Fd ETF (NYSE: MUB), which invests in municipal bonds across the country.
- Whitney has long said that California and Florida are two of the worst fiscal states in the country. Consider looking at iShares S&P Cal AMTFr Mncpl Bnd Fd ETF (NYSE: CMF) if you believe she is off in her analysis.
Traders who believe that Whitney will ultimately be vindicated may consider alternate positions:
- It is no secret state, city, and town finances are in trouble, but so far, we have managed to stave off a mass default around the country. If we do see that, it could lead to an inflow into safe havens. Consider PowerShares DB US Dollar Index Bullish (NYSE: UUP) as a long and SPDR S&P 500 ETF (AMEX: SPY) as a short.
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