Bloomberg News lands some real blows on analyst Meredith Whitney in a terrific story this morning.
Whitney, famously—or infamously—went on 60 Minutes in December and predicted that fifty to a hundred “sizable” cities and counties would go bust, defaulting on hundreds of billions of dollars of municipal bonds.
Since then, the risk-averse muni-bond market has tanked amidst controversy over whether Whitney’s call makes any sense.
She sparked a mini-panic with the help of a news program and then refused to release her report to show everyone why they were panicking (worse, 60 Minutes never asked her to back up her apocalyptic assertions). As Charlie Gasparino wrote in an excellent column a couple of weeks ago:
And yet, as the municipal market is crashing on her prediction, with deals being pulled and slashed in size, with prices falling and taxpayers having to pay extra so cities and states can sell debt, Whitney is refusing to release the actual report that would tell us how she came to such a brash, and unprecedented prediction, on the grounds that her research is proprietary and for the use of the clients of her research firm only.
It’s about time Whitney came clean and released her report to the public so we can determine if it should be given so much credence; and if it shouldn’t, traders and investors can stop a possibly misguided prediction from causing further damage.
Whitney didn’t release her report. But Bloomberg’s Max Abelson and Michael McDonald force her hand. They got hold of it and report that Whitney doesn’t have any numbers to back up her assertions—she pulled the numbers out of thin air.
Whitney gives them an embarrassing interview that includes these gems of gibberish (emphasis mine):
“Quantifying is a guesstimate at this point,” she said. “I was giving an approximation of a magnitude that will bear out to be correct“…
“A lot of this is, You know it, but can you prove it?” Whitney said Jan. 30 over a breakfast of scrambled egg whites with a chicken-apple sausage, a side of salsa and peppermint tea at the Four Seasons Hotel in Midtown Manhattan. “There are fifth-derivative dimensions that I don’t think I need to spell out to my clients,” she said.
Uh huh. Some analysis.
(A technical aside: I love that Bloomberg puts these nonsensical quotes in here. A lot of reporters would have passed them over for something that makes sense to the reader. I know I’ve done it. In that sense, we present a false picture of sources, making them look smarter and better than they really are. The smart thing to do here was to show how the source can’t talk straight.)
Whitney is the analyst who got famous calling Citigroup a dog back in 2007, and Bloomberg is good to point out that she was not the first to do so. She, a former Fox News talking head, married to a former WWE wrestler who at various points went by the ring names Bad Santa, Death Mask, and Vampiro Americano, was the most media savvy.
Whitney sent her report to her customers back in September, but the mini-panic gained steam six weeks ago with the 60 Minutes report in which reporter Steve Kroft asserted flatly at the top that “there is another financial crisis looming involving state and local governments.” Bloomberg notes that Whitney used the words “panic” and “social unrest” in other interviews.
The problem with using this kind of language is that the muni-bond market is disproportionately comprised of widows and orphans investors. It’s not a place where, say, Lloyd Blankfein is likely to put his money. Cyrus Sanati wrote in Fortune a couple of days after the broadcast that “investors in munis are normally quite risk averse – for them, Whitney’s view on the market was akin to yelling ‘fire” in a crowded theater.”
The impact of Whitney’s prediction was compounded by the fact that the 60 Minutes report came amidst fundamental factors that weakened muni bonds temporarily:
“The professionals on the Street kept saying, ‘These default numbers make no sense,’ and investors are saying, ‘All right, if you are correct, why is my portfolio down?’” (Citigroup bond analyst George) Friedlander said by telephone on Jan. 21. “The belief in this thesis of imminent mass default was dramatically increased by the fact that munis were falling”…
“She’s trying to shock the market into a panic mode,” said Thomas G. Doe, chief executive officer of Municipal Market Advisors, a research company in Concord, Massachusetts, said in a Jan. 20 telephone interview. “Nothing makes sense.”
Toward the end, Whitney made her prediction that up to a hundred big municipalities would default. Bloomberg puts that number in context:
Municipalities rarely fail to make their principal and interest payments to investors, according to Moody’s, which counted 54 bond defaults over a 39-year period in a report last year on securities it rates. More than three-quarters, 42, were standalone housing and health-care projects, while just three involved general-obligation debt, Moody’s said.
And as other have pointed out, the state and local budget problems, while enormous, can be overstated. The liberal Center on Budget and Policy Priorities points out that the debt service on muni debt is less than 5 percent of state and local budgets on average, far less than it was in the 1980’s (fun fact: Those pensions people are going crazy about? Some of them are indeed crazy, but they make up less than 4 percent of state and local spending).
Bloomberg further examines Whitney’s credibility as an analyst. This is fun:
Asked Jan. 30 what improved credibility she could bring to ratings, she said she has “an untarnished track record.”
Bloomberg News reported in October that about two-thirds of her stock picks since starting her company in 2009 had fared worse than market indexes. Visa Inc. fell 14 percent after she called it her “single best buy,” and Capital One Financial Corp. tripled after she urged clients to sell…
A 2008 Fortune cover story ranked Whitney 1,205th out of 1,919 equity analysts the previous year, based on stock picking.
And it does a little media reporting, too, finding that 60 Minutes didn’t bother to ask Whitney to back up her assertions:
Whitney’s prominence on Wall Street and the context in which she appeared were cited by Kevin Tedesco, a “60 Minutes” spokesman, when asked whether the program had asked for research to back up her assertions.
That’s just irresponsible. 60 Minutes shouldn’t have broadcast Whitney’s self-promotional apocalypse call without asking her to back it up.
Fantastic work by Bloomberg News here.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.