(Bloomberg News) Time is running out on the credibility of Meredith Whitney, who has yet to acknowledge that her eight-month-old prediction of widespread defaults this year in the market for state and local government debt is proving unfounded.
Defaults fell 60 percent in the first half of 2011 compared with the same period last year, including a $12.5 million Austin, Texas, apartment project that made a late payment in June, according to Distressed Debt Securities Newsletter.
Whitney, the analyst who rose to prominence by predicting Citigroup Inc.'s 2008 dividend cut, predicted "hundreds of billions of dollars" of municipal defaults within 12 months in a Dec. 19 "60 Minutes" broadcast, fueling a wave of selling in the $2.9 trillion market. Instead, the number has fallen as cities slashed spending to balance budgets and state lawmakers stepped in to guard against insolvency and local bankruptcies.
"The data is not helping Meredith," said Matt Fabian, a managing director at Municipal Market Advisors, a financial- research company based in Concord, Massachusetts. "It's always been a possibility there would be a wave of defaults. You can't say that it's zero but it's given no sign of starting."
From January through June, defaults fell to 24 totaling $746 million, according to the newsletter from Miami Lakes, Florida-based Income Securities Advisor. That compares with 60 in the first half of last year, totaling $2.29 billion, and 144 in the first six months of 2009, at $4.89 billion.
The failure of property developments financed with tax-exempt debt led to a record $8.15 billion of municipal defaults in 2008, the middle of the 18-month recession that ended in 2009, and accounts for the slowing pace, according to Jack Colombo, who edits Distressed Debt newsletter. There are simply fewer of the so-called dirt bonds left to falter, he said.
Jefferson County, Alabama, was the last local government to trigger a default, when it couldn't meet payments on about $3 billion of securities tied to a sewer system in 2008 after the complex financing unraveled, he said. The county is home to Birmingham, the state's biggest city.
Communities such as Georgia's DeKalb County have sought to cope with financial stress by raising local taxes, while in municipalities such as Newark, New Jersey's biggest city, mayors have slashed jobs to cut costs. In some cases, such as New York and Pennsylvania, state governments have intervened to prevent fiscal meltdowns at the local level.
Standard & Poor's counted 28 municipal-market defaults totaling $511 million in the first six months of 2011, compared with 53 totaling about $1.55 billion in the first half of last year, according to a report from the New York-based credit- rating company.
'Not Even Close'
"The facts just aren't supporting" Whitney's forecast, said J.R. Rieger, vice president of fixed-income indexes at S&P. "They're not even close."
Whitney, 41, who started New York-based Meredith Whitney Advisory Group LLC in 2009 after leaving Oppenheimer & Co., predicted 50 to 100 "sizable" municipal defaults as states slashed spending, in the interview with CBS Corp.'s "60 Minutes." As for timing, she said it would be "something to worry about within the next 12 months."
"There's absolutely nothing about our thesis that has changed," she said on July 12 in an interview with Tom Keene on Bloomberg Radio's "Bloomberg Surveillance" show in New York. "There are not enough revenues to go around and service all of the debt obligations or debt commitments outstanding."
Whitney also sought to amend her prediction in the radio interview, saying that she said in December "you'd start to see defaults within 12 months." She didn't respond to telephone calls and e-mails seeking additional comment.