Whitney stands by U.S. muni bond defaults forecast

By Chip Barnett

NEW YORK (Reuters) – Wall Street bank analyst Meredith Whitney 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 to materialize.

“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 cash.

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 ”terrible” disclosure.

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 managers.

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 crowded theater.”

“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)