Tags: Bond | Whitney | Muni | Disaster

Bond Pro Lebenthal: Whitney 100 Percent Wrong on Muni-Disaster Prediction

Wednesday, 11 April 2012 02:01 PM

Star Wall Street analyst Meredith Whitney made headlines in late 2010 when she told "60 Minutes" that municipal bond defaults could rise to the hundreds of billions of dollars.

She's sticking with her call that the sector is in trouble, and she's 100 percent wrong, says fixed income expert Alexandra Lebenthal, who says municipal bonds are a safe investment choice.

"I have come up with a new measure of risk, which is knowledge risk," Lebenthal tells CNBC.

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"Is the person who is talking about municipal bonds, corporate bonds, equities, what have you, knowledgeable and should people be listening to them?"

"Yes, I have an axe to grind," Lebenthal adds.

"I am in the municipal bond business, I'm also in the wealth management business and trying to do the best for clients. But I do know what I'm talking about because I have spent over 20 years in this business and another 20 growing up listening to it."

Whitney insists municipalities are in trouble, citing political moves that are preventing the day of reckoning, adding that even if many municipalities are technically in default, they're teetering on insolvency.

"You have Stockton that is on the brink of bankruptcy. You have five cities, including Detroit, which is on the brink of insolvency. It's fascinating, because there's been so much back-room political maneuvering to keep these cities from going bust," Whitney told CNBC in March, pointing out how California is trying to pass legislation to prevent municipalities from declaring bankruptcy.

"So there's been every effort on the part of the states to prevent this tidal wave of defaults, which is going to happen sooner or later."

"You're either willing to see it or you'll shut your eyes, and if people want to tell me, 'Oh, I was wrong,' because this hasn't played out, stay tuned."

Municipal defaults rose to 5.5 per year in 2010 and 2011, from 2.7 in the previous 39 years, Moody's Investors Service says in a report.

Most defaults involved healthcare and things like multifamily housing projects, although more failures in the last two years came from smaller cities unable to pay services, pensions and salaries, Moody’s finds.

“While we expect the vast majority of municipal issuers to continue to pay their debts, we also expect a very small but growing number of general government issuers to default on their bonded debts,” says Anne Van Praagh, Moody’s chief credit officer for public finance, according to Bloomberg.

The municipal debt market returned 11.2 percent in 2011, its best performance since 2009, according to Bank of America Merrill Lynch index data, Bloomberg adds.

Lebenthal insists the sector is a good one.

"For the vast majority of municipal bonds I'm not looking at credit risk or default risk — 0.5 percent of municipals default. Those are the high-yield junk bonds, the industrial development authority bonds, for projects that probably shouldn't have been financed," she says.

"You need to make sure wherever you're buying your bonds from, you know that the person who is selling them to you knows what they're talking about."

Editor's Note: Google Banned This Video But You Can Watch it Here

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Wednesday, 11 April 2012 02:01 PM
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