Banking analyst Meredith Whitney’s much-maligned call on municipal bonds is not so far off the mark, suggests Jim Chanos, chief of Kynikos Associates, a fund that focuses on short-selling.
Whitney, the former Oppenheimer & Co. analyst who called the financial crisis early and rode the wave of that call to form her own firm, now says to expect hundreds of billions in municipal defaults. She has since taken it on the chin from other bond experts for muni call, notably from chief investment officer of Pimco, Bill Gross.
Kynikos compared municipals to rotten mortgage bonds that investors believed would never fail them.
“You think people are reading the financials of that water plant? I doubt it. They're depending on ratings agencies just like they did in the good old days of mortgage financing,” Chanos told CNBC.
The central concern for municipal bond investors, if Whitney is right, is how much if any backstop to expect from an overstretched federal government. A dicey vote on raising the federal debt ceiling is still ahead, and Treasury Secretary Tim Geithner has delivered to the politicians a plan to get the government out of backstopping the mortgage market.
"Even Warren Buffett said to be long the muni-bond industry in effect you have to bet on a federal bailout, and I'm not so sure that with the politics in Washington now that that's the smartest bet in the world, given you'll only be earning 3 or 4 percent," Chanos said.
Whitney was called to testify on municipal bond risk before Congress but demurred, citing scheduling conflicts.
Rep. Patrick McHenry (R-NC) said he will examine Whitney’s argument with her or without her.
“This isn’t a gotcha thing, but she’s going to be part of the hearing, whether or not she participates,” McHenry told The New York Times. “If she doesn’t want to come forward in a venue like this, that makes a statement.”
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