On Meredith Whitney, Munis and Leaks

Bruce Krasting's picture

Warning: Wonkish

When you stick your neck out and make prognostications about the future, sometimes you're going to be wrong. I’m certainly no exception. But when it comes to really big misses, I think Meredith Whitney’s call for a monster blow-out of the Municipal Bond market is on top of the list.



Meredith is a smart lady. That being the case, it’s worth looking into why she was so wrong. A report this weekend from the Bond Buyer provides a partial answer:



A 32% ($138B) YoY decline is a very big relative change. The drop in long-term financing was not offset by increases in short-term debt; that category fell by 7.4% ($5B).

The drop in total borrowings is almost exclusively a result of the 46% ($129B) in the “New Money” category. The drop in New Money debt issuance is a consequence of hundreds of cities and states collectively saying:

We’re in a pinch on revenues. Let’s not spend any money we don’t have to for the time being. We’re going to have put off the construction of the new (Sewer plant, overpass, water treatment facility, school, whatever). The last thing we want to do is go to the Muni market and borrow any more.

As a result of many individual decisions to defer infrastructure projects, the Munis have kicked the can down road. They have eliminated the current and future expenses related to these projects. With that, they have stabilized the trajectory of their debt growth and improved short-term cash liquidity (by having less ST debt). In the process, they have created a shortage of muni bonds (relative to expectations) in the market.

Thus, all may appear well in muni land. A successful re-balancing has taken place, for the time being. If the munis can continue to push off infrastructure projects, they will not suffer the fate that Ms. Whitney feared they might.

I said that the munis had “kicked the can down the road”. In this case, it’s quite a different form of can kicking. When the Federal government raises the debt ceiling, we all say, “They kicked the can”. But the munis are doing (pretty much) the exact opposite, so Can Kicking would appear to be an improper/unfair description of what is happening with Munis. I think it's still valid, deferring infrastructure investments is another form of kicking.

Like most Kicking efforts, it will end badly sooner or later.

I’m looking at a potential example as I write. One of NYC’s reservoirs is about a half mile away. A $60mm NYC/NYS funded construction plan was shelved a month ago. Could this become one of those examples where Kicking goes badly? Consider this daisy-chain.


The Croton Reservoir is part of a chain of reservoirs that provide water for NYC. It’s large (22 miles), but it’s small in comparisons to the big man-made lakes further upstate. Croton is important because it connects directly to those upstate reservoirs via an underground tunnel. That tunnel goes north, and then west. It is 1,000 feet deep where it meets the Hudson River.



A bit of physics. The upstate reservoirs are 1,000 feet above the sea and the tunnel is 1,000 below. The tunnel is (was) large enough to drive a truck through so the water pressure at the lowest part of the tunnel is enormous. What might you expect from a 75 year old tunnel under that much pressure? A leak? Sure.


This is one hell of a leak. As much as 35 million gallons a day was the estimate seven years ago. There is evidence that rate has since accelerated. That comes to  13 billion gallons a year, which is sufficient for 250,000 average Americans. Think Orlando, Madison, Winston-Salem or Reno. Each of these cities uses about as much water as NYC is leaking. In China, this much water would meet the needs of 1.7mm people, In Bangladesh it would be sufficient for 3mm. It's enough to fill 650,000 in-ground swimming pools. That’s a leak.

It gets worse. The leak was first detected in 1988. Therefore something like 15 million swimming pools worth of drinkable water have been pissed into the ocean. It’s so bad that areas on either side of the tunnel have sinkholes. People have been forced to move. Properties have been condemned. And the sinkholes keep getting bigger.



There are already dozens of lawsuits on this. They are after the State and the City who own and maintain the reservoirs. The judges have all sided against the City and State, and there have been promises to fix the damn leak for years. A few years ago, a formal plan was put together.



This is no small engineering matter. A new tunnel will be built that connects the old tunnel before and after the break. Once completed, the old tunnel will be cemented closed. The diversion tunnel will be ½ mile long. Recall that this is 1,000 below sea level, any construction/mining this deep is both difficult and dangerous (the bends). Those normal risks are, however, trumped by risks that the nearby existing tunnel breaches during construction of the diversion tunnel. The water pressure in the tunnel is sufficient to crush a submarine.

The only option is to stop the flow of water in the tunnel from the source, and then pump out what is left. The supply of water would be cut for about a year while the diversion tunnel is completed. This takes us back to the Croton Reservoir and the cancelled construction at this location. The plan was to raise the spillway by four feet. This change would have added a permanent storage to the NYC system of 11B gallons (11 days of consumption). It was intended that this expansion of storage would be completed before the leaking water tunnel is closed. It would have provided an additional level of comfort on available water for the City. Not any longer.

NYC’s has numerous sources of water. The Croton reservoir system could be eliminated for a period of time without a real shortage. However, that would not be true if the tunnel was closed for an extended period, particularly if there was a drought in the northeast.

I wouldn’t be surprised if the cut off in supply were much longer than the one-year projection. The North East has been blessed/cursed with above average rainfall for years due to the long running La Nina, but rainfall is impossible to predict. Could we be in a full-blown El Nino (dry in the NE) when the construction starts? Maybe. If so, NYC will regret not having upgraded the storage capacity at the Croton system.

I don’t want to leave the impression that NYC is headed for trouble. The possibility of a hard landing is small. But there are risks, and those risks are increased as a result of the cancellation of the Croton project. Caswell Hollowy, the NYC commissioner on the tunnel repair project said in 2010:

“You want to know how long the water is going to be off so you know where the supplemental water is going to come from. It’s absolutely critical to get it right.” 


When Hollowy said this, the plan to upgrade the Croton system was still on.  Now it is has been shelved (Budget concerns were the reasons cited). It's now more "critical" to get that timing right. I'm laying 4 to 1 they don't.


The Bond Buyer reported a drop of $129B in New Money bonds. If you consider the $60mm Croton project as being representative, about 2,200 projects got cancelled last year. With that big a number, it is just a matter of time before something falls through the cracks (literally) and economic consequences follow.

Will NYC or some other city have water supply problems?


Will some municipality have a breakdown in its water treatment capacity that results in huge sewage leaks?

Will a bridge collapse that restricts important commerce?


Will there be a blow-out of the electrical grid due to underinvestment?

The answers to these questions (and more) is that infrastructure breakdowns will occur. If we don’t invest, the  resulting “leaks” will come back and bite us in the ass.

So far, the munis have reacted to their changed financial circumstances and have avoided the fate that Whitney saw coming. If they (collectively) continue doing what they did in 2011, they will probably avoid a financial crisis. But that doesn’t preclude problems sometime soon. Some big “things” are going to break. When they do, large communities will be affected. In the end, Whitney might be right that some munis will run into trouble. If that trouble is the consequence of a significant infrastructure failure, Meredith Whitney will be right, for the wrong reasons.




*I’m sorry this went on and on. I just love big construction projects.

*Why did the tunnel under the Hudson fail? It went through a section of limestone. The water from the reservoir is filled with acid rain. The acidic water dissolves limestone. The original tunnel designers had no clue what acid rain was, so the limestone section was not sealed during construction.

*The 138B drop in New Money is equal to 0.9% of total GDP. This lack of borrowing was a drag on total output. Another good example of Debt = Growth.


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malek's picture

They have eliminated the current and future expenses related to these projects.

And that leads to a 32% drop?
In other words you are implying "discretionary" projects make up that much or more of the long-term muni issuance?

Sorry but that guess is as good as any else.
How about one-time accounting tricks were used?

Orly's picture

I don't understand why there hasn't been a technological fix to all of this many years ago.  I understand the problems with pressure but there are chemical companies in your neck of the woods who could develop a tube that could be unwound down there to fit the surrounding tunnel as it already exists.  If nothing else, it would at least slow the leak to a trickle.

Sure, it would take brilliant engineering and great expense but it would save billions of dollars.  It seems to me that it is at least a plausible idea.


P.S.  If the Japanese were to interevene in the currency markets, now would be a good time.  Their new-found recession was confirmed earlier this evening.  It's not looking at all good for their economy.

Stoploss's picture

Whitney wil be proven right in the end. The mistake on her part was and is to continue to talk about it. As well as the rest of the right minded thinkers.


Silence is golden. Stop exposing weakness, and it will be ignored.


Maybe if Whitney knew the muni complex was going to collapse, would have been better served by quietly betting against it, and let it implode on it's own, rather than drawing attention to it, so tptb could make an attempt at stalling the process, which is what happened in this case.


We are our own worst enemy right now, because we are giving free advice on which fires to put out first, and exactly how to do it.

curbyourrisk's picture

If not for constant bailouts of everything at every level, Merideth would hav ebeen right.  I am not saying that in the long she still won;t be!!!!


Fix It Again Timmy's picture

Why spend money on infrastructure when you can spend billions of dollars on military bases that you later abandon?  Abandoned military bases has such a nice ring to it.  Infrastructure sounds like something you go to the hospital for...

Tapeworm's picture

Thanks Bruce, the master of useable information.

Joebloinvestor's picture

Yeah go ahead and fix it.

There has to be another construction trough (like the BIG DIG) for cronies and crooks to stick their snout in.

Make sure they use waterproof glue to hold the concrete in place.

Eireann go Brach's picture

Seriously, nobody thinks any more of you fucking idiots that preach about not watching TV! You obviously hang out in your basement and your wife does not shave and smells like a sewer! Go watch some sports you fucking weirdos!

ekm's picture


Meredith is brilliant.

However, everybody falls for the "prophet" urge.

Crude realistic understanding of reality - Check Ms. Whitny

Timing - Check the "graves" of everybody.

spinone's picture

Infrastructure problems are huge.  Expensive and huge.  Built duing the WPA programs of the 30's and the post war boom of the 50's and 60's with federal money.  Now federal funds have decreased, while the infrastructure rots in the ground.  The older pipes last longer (90 years) because they were cast and are thicker.  The newer pipes are thinner cause they are spun and last 60 years.  So the stuff installed in the 30's lasts 90 years (2020's) and the stuff installed in the 50's and 60's last 60 years (2020's). Its going to be a disaster in the next 20 years.  Too bad the election cycle is 4 years.

Gashole's picture

Meredith was right.  State governments are defaulting.  Not on their obligations to bondholders.  Just on their obligations to their citizens.

Eric L. Prentis's picture

I love Meredith Whitney, who is right on the what, just a tad off on the when.

The Alarmist's picture

Yeah, it's Whitney's fault, and that is why TPTB had her eliminated.  Uh, Meredith Whitney? Haven't heard from her almost as long as from Whitney Houston ... never mind.

On a more serious note, leaks can lead to catastrophic failures ... fixing this thing now is certainly more cost effective than having to replace the entire tunnel, which I would give even money on as the most likely outcome if they continue to defer this needed maintenance.

But hey, TPTB can fix this little inconvenience by issuing the water equivalent of SNAP cards to the residents of NYC. It's a bitch to shower with bottled water, but I did it for a few days when my building's water tank failed.

Heroic Couplet's picture

Poetic justice. The bailout went to the banks in NYC, and now there's infrastructure and water problems that will affect the banks--CEOs and employees--who got the bailouts. BWAHAHAHA.

Sorta like what if you owned a Manhattan penthouse but you couldn't sleep because of nonstop drumming from Occupy Wall Street. Sleep and water deprivation sounds about right.

pashley1411's picture

The problem is not debt, or infrastructure.

Its that the country has been conquered through legal ruling and administrative fiat by the educated proletariat and the bankers that support them.

Every dollar going to "infrastructure", "schools", even "national defense", gets siphoned off to locusts, who will come back hungrier and more voracious the next time.

In your heart of hearst, you know every dime spent on taxes, for whatever reason, goes to the occupying army.

slackrabbit's picture

given that  councils are meant to maintain roads, sewer etc as part of their job, this is a default by any other name. Yes you can pay your bond holders but you are defaulting on your customers, in the same way a bank shuts its doors ATMS and websites, but keeps the bondholders happy......for how long? this is a perfect example of the difference between accounting and finance. 

how long till a customer took said company to court from breach of contract or for that matter bankruptsy.


GMadScientist's picture

How long until the "customer" is willing to pay (as in taxes) for the "product" so that the councils don't have to go to shylocks?


Reese Bobby's picture

U.S. Governments, (including States) don't focus spending on real assets anymore; the first priority is handing out free money to the class of people whose opportunities they have destroyed.


As far as the muni market goes, investors are so complacent that it makes me suspect it will prove to be a disaster, (help ZH).


The  Croton Reservoir reminds me of my youth: ill-advised leaps from the trestle bridge; 40" from the track level and at least 60" from the top.  Been there Bruce?  Cheers.

Bruce Krasting's picture

The bridge you speak of over Rt129 was replaced years ago. I never jumped off the old one. But I know a bunch of foolish kids, including my own, who did.

But when it really got to being foolish, you went to Dickies to jump. Been there? They are still jumping...

Reese Bobby's picture

No...never heard of Dickies.  I've been out of that area for a long time.

lotsoffun's picture

i had a lot of fun at that trestle.  it's a long time ago.

only did the bridge, not the top.



Reese Bobby's picture

Same here.  It wasn't usually a fully sober event.

Bruce Krasting's picture

Has anyone ever done it sober?

iamtheeggman whooooooooooooo's picture

Thanks Bruce. I very much enjoy your writing.

Bluntly Put's picture

I think it was Denniger who suggested that most municiple projects in the past 20-30 years financed through bonds haven't even touched the original principle on the bonds, they just roll the debt.

There are all kinds of infrastructure problems in this country I used to follow the ASCE's ratings on infrastructure as it was related to my career. I think the last estimate I read from ASCE was that we would have to spend roughly $2 trillion a year for 5 years running to bring the nation's infrastructure from a level of servicability D to C. That's $10 trillion but really far more since once an ambitious program is started you can bet the cost of labor and materials not to mention environmental mitigation costs will skyrocket.

But our government seems more concerned with bailing out banks and keeping the government cheese flowing to overpaid bureaucrats and special interest groups. The western half of the country is in better shape than the older, eastern infrastructure except surface water impoundment.

Obviously, an aggressive rebuilding campaign could only be financed by debt and there must be some marginal utility for the expense. Say, peak utility where the macro economic benefit from the improved utilities must overcome the debt expense to contribute positively to our nation's GDP. Overall, we spent the past 30 years enjoying a fat lifestyle with lots of promises to all kinds of people based on debt while our nations infrastructure that was built primarily in the 60-70's has reached it's design life.

Urban Roman's picture

2 words: Shovel Ready

bugs_'s picture

I think Meredith is right about the muni's she just misunderestimated the ability of Criminology Supreme Clientele's ability to jimmy things and keep it going

masterinchancery's picture

Yes Bruce, I would wager a lot of money that many municipalities will default in the next 15 years, absent a deus ex machina rescue from the money printers in Washington DC.  Nor did she pin herself down to a particular timeline for default, contrary to the implication of your article.

RichardENixon's picture

We are children who squandered an inheritance left to us by a parent who worked to build something great.When it falls down around our heads we will be on our own.

4horse's picture

who's We, kimo sabe . . .

in A New York City story?


The bailout went to the banks in NYC . . .

the country has been conquered through legal ruling and administrative fiat by the educated proletariat and the bankers . . . Every dollar going to "infrastructure", "schools", even "national defense", gets siphoned off to locusts, who . . . In your heart of hearst, you know every dime spent on taxes, for whatever reason, goes to the occupying army

U.S. Governments, (including States) don't focus spending on real assets anymore; the first priority is handing out free money to the class of people whose
                                  __who. Who? organized crime. still dare not speak it's name. here 

z nyc dc





as if even ZeroHedging the obvious can only result, Bluntly Put __Overall, we spent the past 30 years enjoying a fat lifestyle with lots of promises to all kinds of people . . .


          • the banks in NYC
          • the educated proletariat and the bankers
          • locusts
          • the occupying army
          • the class of people
          • all kinds of people                        

           • APB
           • APB
           • APB
                  on Johns DoH!
                                   me me me, to the tune of trillions

WARRANTS: on Bullet Points
WANTED:  real bullets

Dead: real people. millions

Alive: rubin
         et cetera 
         _ _ _ _ _
         et cetera
         _ _ _ _ _ 
         _ _ _ _ _ 
         _ _ _ _ _ 
         _ _ _ _ _ and A Bank TBA  later
                              "        TBN  never

kaiserhoff's picture

This is my area, and government accounting is nothing but a set of lies agreed upon. (A Micky Mouse, cash basis pile of shit and guesses, which in the private sector, would be accurately described as fraud).

Meredith was early, but Cali and the rest are still broke, dying a slow death from unfunded liabilities, which Bruce, on his better days, reports on in some depth.

The second part of the piece was right on target.  Delaying road and bridge repair, failing to maintain dams and pipelines is a well known Soviet Socialist approach to routine maintenance.  Gawdhelpus.

Dermasolarapaterraphatrima's picture

Must be very green above that pipeline....where the leaks are.

Excellent report. I was wondering abut those muni issues. I did not believe the problem just vaporized.

max2205's picture

Debt=water=finds lowest level

GMadScientist's picture



Heads is acting wild, sippin pour, puffin dank
Competin with the next man for higher playin rank
See I ain't got time to try to be Big Hank,
Fuck a bank; I need a twenty-year water tank

Mr Lennon Hendrix's picture

No wonder the price of Munis went up so much, the supply was short.  Munis are very easy for traders to sell.  Tax free yield, they're tax tree, and did I mention they're tax free?  Still, they are just as dangerous as any investment.  If Municipalities did come out and flood the market it could cause the prices to fall, or if ZIRP ends it would scare the pants off of new buyers. 

There really isn't an investment out there that is not carrying huge counter party risk....except gold.

I am Jobe's picture

I used to  live in NJ and commuted to NY. No desire to live in the E Coast . Cess pool of crap and crap is all one can say.

Argos's picture

What about those 100 year old steam pipes under New York City streets?  Those must be holding up pretty well too.

kaiserhoff's picture

The stench will tell you that they are not interacting with the sewer system or the fifty pound rats..., oh wait.

I am Jobe's picture

With Duct Tapes and millions of dollars later, still an issue. Great job there. Dispatch the DHS and let them solve the issues. Yeah no Civil engineers needed anymore in the USSA

IQ 101's picture

The upstate reservoirs are 1,000 feet above the sea and the tunnel is 1,000 below. 

Whats wrong with this picture?


The Aquaduct.

Sean7k's picture

Bruce, would it be possible that Whitney was predicting based on current trends and the historical actions of the central bank, not anticipating the methods Bernanke has resorted to in order to reflate the market?

I have been reading doomsday scenarios for years, most culminated in 2012, some 2013. These dates keep getting pushed out as the criminal use of money expansion and perversion of bond markets by the FED have changed the game.

The reality must consider that this debt has not been retired, nor paid, merely transferred to future dates or other areas. Your example here is just one of thousands. The problem of infrastructure is always looming and like the failure to maintain capital in any business- can have disasterous results.

Most of the dire predictions of 2009 have fallen by the wayside, but they have not disappeared, just morphed into larger and more shadowy monsters lurking and preparing to strike. The Greek debacle is the poster child of "kicking the can". Black swans of 2009 might become black dragons and dragons are not a disaster easily slayed.

Great piece by the way. I enjoy reading about these type of projects as well.

Bruce Krasting's picture

Yes, the deferral of the infrastructure investments was just a part of the story. Uncle Ben and ZIRP,QE etc helped a great deal.

I live near the big spillway in Croton. That was where the extra 4' of elevation was going to made. It would have been a hell of a project to watch. Now I get nothing.

A few pics and a weird story of mine re: the dam:



MrPalladium's picture


With DHS now talking about its "global infrastructure defense initiative" it is only a matter of time before the infrastructure failures are blamed on terrorist attacks.

Downtoolong's picture

As the saying goes, “It ain’t over til it’s over.” Sometimes you are right on the outcome, but, just wrong on the timing. Besides, I see little difference whether a municipality defaults on its financial debts or its obligation to provide the safe, functional environment for its residents as promised when all the money was first spent. Failure, just like  debt, risk, and money itself can easily be shoved off on someone else by those with the power to do so. 

Stuck on Zero's picture

BTW.  What fools designed an aqueduct that couldn't be entered for repairs?  The Romans knew better than this 2000 years ago and their aqueducts are mostly still working. New York is paying for a bad design of a tunnel less than 70 years old.

GMadScientist's picture

Mmmmm...that's some tasty lead.

slackrabbit's picture

Yes indeed it..........errr what were we talking about and why aren't you wearing any clothes and have a teapot on your head?

GMadScientist's picture

I was talking about aqueducts, the claim of Roman ingenuity, and the hazards of heavy metal poisoning (from which you seem to possibly suffer).


Zero Govt's picture

What fools designed an aqueduct that couldn't be entered for repairs? 

New York is paying for a bad design of a tunnel less than 70 years old?

New York is the answer to both questions

I am Jobe's picture

The new infrastructure spending, dig the hole and then cover it up. Dig the hole and cove it up. Yes We can, Yes we can, Yes we can create more defaults and borrow more money and print more. Ah the stupidity of the nation and the so called leaders. Who the F elected these BOZO's, none other than the very same people who think these guys are gonna solve the issues, what a crock of shit. Must be the inbreeding that is causing some critical thinking skills to somewhat suppressed or non existent. Welcome to the NWO, inbreeding and stupidly in the USA>