Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

2011: The Year 60 Minutes Misled Americans About Municipal Bonds

Interest-Rates / US Bonds Dec 31, 2011 - 04:58 AM GMT

By: Janet_Tavakoli

Interest-Rates

Best Financial Markets Analysis ArticleIn previous posts, I've mentioned serious fiscal problems that need to be addressed at state and local levels. This varies by region and some issues are potentially solvable.

I live in Illinois, which is ground zero for fraud, corruption, underfunded pension funds and general fiscal mismanagement. It's an example of one of the worst fiscal messes in the United States. This year Illinois hiked personal income taxes from 3% to 5%, and increased corporate taxes. We'll be slammed with hidden tax increases in utilities, purchases, and more. When now Mayor Rahm Emanuel left his post as White House Chief of Staff to run his election, the Chicago mayoral race centered partly around steps, including budget cuts, needed to solve Chicago's serious fiscal issues: See "Third Word America: Drowning in Debt and Chocking on Lies," Huffington Post, June 24, 2011, and 'Fast-Tracking to Anarchy;" August 25, 2010.


On December 19, 2010, I was (at first) happy to see 60 Minutes highlight fiscal problems of states and municipalities. It explained how Illinois was late on payments to service suppliers, and it's a huge problem for people doing business with the state. The state's pension fund is underfunded and although 60 Minutes didn't mention it, state pension funds are the prey of Wall Street cronies that stuff them with losses and then propose fee-loaded leveraged financial products that are bets to make up the shortfall. Then 60 Minutes went completely off the rails by suggesting that these problems would lead to widespread defaults on municipal bonds in 2011. You can still view the segment, "State Budgets: Day of Reckoning," on the CBS web site.

A "Performance"

Instead of focusing on the implication of these problems to public services including police protection, fire departments, city maintenance, and city jobs (among other things), 60 Minutes let a pundit claim these problems translate into near-term massive municipal bond defaults. Meredith Whitney, the pundit, had written a report, "Tragedy of the Commons," which supposedly backed her claims.

Contrary to 60 Minutes's assertion, Meredith Whitney, a banking analyst, did not have a great track record. Gullible reporters had given her great PR for an October 31, 2007, call on Citigroup that had been correctly made many months earlier in her presence by my friend Jim Rogers, a legendary investor. They appeared on television together, and at the time she refuted Rogers. I was later bemused to see that either she or her PR flacks apparently took credit for my early warnings about serious problems at AIG. (See: "Reporting v. PR: Meredith Whitney and AIG," TSF, March 23, 2009.)

Whitney was quoted as claiming: "Clients are not pleased with my call and I have had several death threats." A 2008 Fortune cover story reported she had received "one death threat." (Perhaps clients were displeased that her ignoring Rogers had already cost them thirteen points and even then she didn't directly tell people to bail out.) With characteristic humor Rogers quipped: "Gosh, I have never received a death threat ever for saying I was short a stock or that a company would be going bankrupt. What have I been doing wrong?"

Whitney told 60 Minutes: "You could see 50 sizable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults....It'll be something to worry about within the next 12 months."

A Wild Guess

Subsequently, Whitney wouldn't justify her analysis saying "Quantifying is a guesstimate at this point." ("Whitney Municipal-Bond Apocalypse Short on Specifics," by Max Abelson and Michael McDonald, Bloomberg News, Feb 1, 2011.) 60 Minutes admitted it had never reviewed her much-touted report. The report never mentioned sizable defaults, only that there "invariably" would be defaults. Bloomberg also reported that 60 Minutes was wrong about her "untarnished' track record. Since she started her company in 2009, about two-thirds of her stock picks underperformed market indexes. A 2008 Fortune cover story ranked Whitney 1,205th out of 1,919 equity analysts the previous year, based on stock picks.

Whitney told Bloomberg's reporters: "A lot of this is, you know it, but can you prove it? There are fifth-derivative dimensions that I don't think I need to spell out to my clients." As a derivatives expert I can attest that this is gibberish. But I want to hear her explanation of "fifth-derivative dimensions," because I adore a good belly laugh.

Genuine Research via Bloomberg

Bloomberg is also the financial news service that has done great early work on fraud and related municipal bond defaults, because that's a worthy story. Municipal credit issues are granular and the severity of the problem -- or non-problem -- depends on the specific situation.

In September 2005, Bloomberg broke a story about Jefferson County's hair raising problems, "The Banks that Fleeced Alabama," by Martin Z. Braun, Darrell Preston and Liz Willen. According to the article, "taxpayers blame the $160 million in fees JPMorgan Chase and other banks have charged to arrange the county's financing--in deals that were never put out to bid." This year, Jefferson County filed for bankruptcy.

As the year wore on, Meredith Whitney waffled and by May she told a Bloomberg radio host: "In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that." Fortunately, Joe Mysak, a Bloomberg print reporter, exposed that for the nonsense it was. Whitney had indeed given a one-year time frame on 60 Minutes and had called for hundreds of millions of dollars in defaults with 50 to 100 or more sizable defaults. ("Meredith Whitney Trips Over Her Muni Default Tale," May 19, 2011.)

A Stellar Performance

Whitney's prediction of "hundreds of billions" of defaults was way off the mark. Even with Jefferson County's $943 million filing, defaults for 2011 were down from 2010. Bonds that dipped into reserves to make payments totaled only $24.6 billion according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter. Defaults defined as bonds that missed payments are down to only $2.1 billion from $2.8 billion in 2010. In 2011, municipal bonds had stellar performance as an asset class returning more than 10% of potentially tax exempt returns. They beat the S&P, treasuries, corporate bonds and most commodities. ("Whitney's Armageddon Belied by '11 Returns," by Martin Z. Bruan, Bloomberg News, December 16, 2011).

CNBC Schools 60 Minutes

As for the actual analysis in Meredith Whitney's "Tragedy of the Commons" report, it seems that it had serious flaws, at least when it came to Nevada.

Nevada State Treasurer Kate Marshall appeared on CNBC to debunk Whitney's claim that Nevada's municipal bonds were troubled. Marshall challenged Whitney's analytics saying (among other things) that Whitney apparently misinterpreted a PEW report on pension plan liabilities. Nevada only represented 1/16th of the plan, and state employees pick up half the tab. Marshall then explained why Nevada's municipal bond claims paying ability is much better than it would appear to the casual observer. The economy was still tough, but Nevada managed in anticipation of the ongoing crunch. Property tax revenues dropped, but sales tax revenues were up, gambling revenue was up, and business modified tax revenues were up. Her cash position in June 2011 was much better than 2010.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2011 Copyright Janet Tavakoli- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife