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JPMorgan's Dimon Sees a Hundred Municipal Defaults

Thursday, 31 Mar 2011 09:02 AM

JPMorgan Chase Chief Executive Jamie Dimon predicted Wednesday that a hundred municipalities could default, echoing a warning from bank analyst Meredith Whitney that rocked the tax-exempt bond market.

Although Dimon's off-the-cuff default estimate was surprisingly high, his spokesman stressed that it was a small number, given that are are more than 50,000 municipal issuers.

Dimon, whose bank lends to thousands of municipalities and underwrites billions of dollars of tax-exempt debt every year, said: "You're going to see some municipalities, some of these local things, not make it." He spoke at a U.S. Chamber of Commerce event.

"It's not going to be thousands or 14,000," he said of potential defaults. "It's going to be maybe a hundred. It's going to be a small number. It's not going to stop the United States from starting to grow."

Late last year Whitney spooked individual investors when she predicted 50 to 100 "sizable defaults" by local governments amounting to hundreds of billions of dollars.

Since November of last year, investors have withdrawn about $25 billion from municipal bond funds.

Municipal bond prices did not react to Dimon's comments Wednesday.

"There was no market differentiation." said Gary Pollack of Deutsche Bank.

Dimon also said he did not expect any state to default or need to declare bankruptcy. In recent months, some members of Congress have floated the idea of allowing states to file for bankruptcy protection, something they cannot do currently.

"The states have the wherewithal to fix their problems. They've got to do it," he said. "I would personally be surprised if a state went bankrupt."

Dimon also said the defaults do not threaten the recovery from the economic recession and that "I don't think it's going to shatter America."

According to Fitch Ratings, from 1999 through 2010, there were 11 defaults on debt it had rated, with only one last year. Standard and Poor's Ratings said that of the public finance issues it rated, only three defaulted in 2010, the same number as in 2009.

A bank spokesman said Dimon stressed it was not going to be a big issue.

"His whole point was that this is not a serious issue, financially," the spokesman said.

Whitney recently told Maria Bartiromo for USA Today that threat of defaults will be "an extended multiyear issue."

Earlier this month, Loop Capital Markets said that her predictions that the defaults would equal hundreds of billions of dollars did not add up. In order to reach just $83 billion, the 50 cities with the highest level of debt outstanding would have to default, it said.

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JPMorgan Chase Chief Executive Jamie Dimon predicted Wednesday that a hundred municipalities could default, echoing a warning from bank analyst Meredith Whitney that rocked the tax-exempt bond market. Although Dimon's off-the-cuff default estimate was surprisingly high,...
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