Mr. Gasparino — I think you owe Meredith Whitney an apology.
On December 19, 2010, financial analyst Meredith Whitney was interviewed by 60 Minutes reporter Steve Croft for a gripping segment entitled The Day of Reckoning. The segment told the story of the precarious financial condition of state and local governments that would inevitably lead to the next financial crisis. With a nation still shell-shocked from the 2008 stock market crash, the report’s warning was ominous and all too familiar.
Based largely on a proprietary report entitled Tragedy of the Commons that Whitney distributed to clients in September 2010, the main argument of the 60 Minutes story was that state and municipal debt was putting enormous pressure on local governments. All of the segment’s interviews were compelling, but it was Whitney’s comments that would ignite a media firestorm.
When asked how this new financial crisis could manifest, Whitney offered, “There is not a doubt in my mind that you will see a spate of municipal bond defaults. You can see 50 sizable defaults. Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars worth of defaults.” And to add a time horizon to its initiation, she offered, “It’ll be something to worry about within the next twelve months.”
I’ve chronicled the media firestorm that followed her interview in a short story soon to be published entitled The Muni Syndicate. The attacks on Whitney were fast and furious and came from all angles by various groups with interest in the stability of government borrowing. But Gasparino’s aggressive reporting on the Whitney drama falls into an entirely different category — and I believe a retraction is imminent.
Many have attacked Meredith Whitney on the accuracy of her call, Gasparino being one of the lead detractors. Since the publication of her report, much has occurred at the state and municipal level that has validated her thesis. Indiana began discussions on a bill that would allow municipalities to claim bankruptcy for the first time. Prichard, a town in Alabama, did the unthinkable and stopped sending monthly pension checks to retired public employees — breaking state law in the process. Detroit’s mayor started discussing plans to eliminate vital services to 20% of the city, including garbage pickup, police patrols, road repairs, and street lights. Another Michigan town, Hamtramck, has been pleading for bankruptcy. California’s comptroller warned the state would need to issue IOUs if spending cuts weren’t enacted.
And even some on Wall Street have aligned with Whitney’s thesis. Billionaire investor George Soros claimed state and local finance would be “the drama of the year,” comparing the situation to the European debt crisis. He later flatly stated that, regarding state and municipal bonds, “there will be defaults.” JPMorgan’s CEO warned, “If you are an investor in municipals, you should be very, very careful.” Jim Chanos, an investor with an early bearish position on munis, called Whitney’s prediction an important call. “I think her general sense was correct,” he told CNBC. The “King of Bonds,” Jeffrey Gundlach, has admitted to seeing a collapse in the municipal bond market when stating to Barron’s that, “There will be a panic at the margin, and muni bonds from the highest-rated on down will plummet.” Nouriel Roubini, who along with Meredith Whitney was a seer of the banking crisis before most, predicted that as much as $100 billion of municipal bonds could default over the next five years. Even Bill Gates, not someone that typically weighs in on public finance, said that state and local government accounting was so bad that even “Enron would blush.”
But none of these developments are why Gasparino should issue an apology to Meredith Whitney. His impending retraction resides in a much more fundamental element — his facts.