Meredith Whitney is raising the alarm on the fiscal imbalances at the state and municipal level, which is sending muni bond investors into a panic. But the fear of sweeping defaults is far overblown.
By Cyrus Sanati
In the past two months, the $2.8 trillion municipal bond market has gone from being one of the most boring and predictable markets to one of the most volatile and talked about – it even made it onto 60 Minutes this week. But the recent selloff in this normally sleepy but important corner of Wall Street may be a bit overdone, as fears of cascading defaults look remote.
The excitement in munis first started in November, after prices took a steep dive as the government began its second round of quantitative easing. Investors sent prices down even further this month after it became clear that Congress would not be extending the Build America Bonds program.
Now Wall Street analyst Meredith Whitney has managed to add even more fuel to the fire, suggesting on national television this past Sunday that the market was set to experience billions of dollars of crippling defaults within the next 12 months.
Whitney, who gained recognition in the early days of the financial crisis by accurately predicting that Citigroup (C) would have to slash its dividend to conserve capital, believes she is again ahead of the curve in predicting troubles for the muni market.
"There is not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney told veteran 60 Minutes anchor Steve Kroft. "You could see 50 to 100 sizable defaults, maybe more." More
European bankers fret over stress tests.
The financial-reform grass is greener on the other side of the Atlantic.
Start-up rate hits lowest point on record.
The oft-predicted rash of municipl bankruptcies hasn't erupted yet.
Time for Helicopter Ben?Colin Barr - Jul 19, 2010 11:43 AM ET
By Heidi N. Moore, contributor
Uncertainty: The Washington Post says that the death of Sen. Robert Byrd, 92, will further complicate the already byzantine road to financial reform. Related: The American Prospect says nothing, not even Byrd's death, will stop the course of financial reform. Related: At Harvard Business Review, Justin Fox reviews the ideas of financial reform versus its ideals.
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