Will Meredith Whitney Be Proven Right In The End?

Tyler Durden's picture

We noted, in September, that corporate bond downgrades were outpacing upgrades very notably and today we get the other side of that with Moody's noting that in Q3, Muni downgrades outweighed upgrades by the most since the financial crisis began. At 5.3 to 1, the third quarter of 2011 had the highest downgrade-to-upgrade ratio of any quarter for the U.S. public finance sector since the onset of the financial crisis in 2008. "A rapid deterioration in credit metrics led to a higher-than-average 14 multi-notch downgrades."

While the number of defaults (and size) has hardly been what Ms. Whitney expected, and the overall performance of Muni bonds has been strong - especially relative to corporates - the volumes of downgrades from S&P and Moody's is definitely 'unusual' from a cyclical perspective and we note the rather systemic decompression between General Purpose Revenue bonds vs high-quality G.O.s.

Moody's 'government' upgrade/downgrades over past few years from Bloomberg's RATT screen.

S&P's upgrade/downgrades over the past few years.

And from Moody's:

At 5.3 to 1, the third quarter of 2011 had the highest downgrade-to-upgrade ratio of any quarter for the U.S. public finance sector since the onset of the financial crisis in 2008, says Moody's Investors Service in its quarterly report on rating activity in the sector. The previous high of 4.6 to 1 was registered in the fourth quarter of 2010.


"Downgrades dominated rating revisions across all public finance sectors except for healthcare," said Assistant Vice President-Analyst Dan Steed, author of the report. "A rapid deterioration in credit metrics led to a higher-than-average 14 multi-notch downgrades."


The impact of deficit-cutting measures by the federal and state governments will be a key driver of rating changes across public finance sectors as the strains on core operating expenses and revenue sources of the last three years will likely persist over the next year, according to Moody's.


"This will be mostly due to economic stagnation, high unemployment, declining home values, and low consumer confidence," said Steed. "We expect downgrades to continue exceeding upgrades in upcoming quarters."


--State ratings: Downgrades outpaced upgrades by 10 to 1, as transit and highway revenue bonds accounted for 60% of the downgrades. We expect the trend to continue against a backdrop of federal budget cuts, and lackluster revenue growth exacerbated by increased reliance on personal income taxes.


--Local governments: At 9 to 1, the ratio of downgrades to upgrades significantly exceeded totals (3 to 1)of the prior quarter. Similar to the first half of 2011, school districts were challenged by declining property tax revenues, as well as reduced state funding. A total of 26 local government issuers were downgraded by multiple notches given the sharp deterioration in their financial metrics.


--Not-for-profit hospitals: Upgrades outpaced downgrades for only the second quarter in the last two years. We do not expect this positive trend to continue, especially for smaller-sized hospitals, given continued pressures on major revenue sources such as Medicare.


-- Higher education and other not-for-profits: Ongoing operating pressures and strained liquidity drove the elevated level of downgrades. Unlike the previous two quarters, there were no multi-notch downgrades of higher education or not-for-profit credits. Over the near term, the number of downgrades will likely continue to exceed upgrades due to operating challenges and strained liquidity.


--Infrastructure: The third quarter's single upgrade was significantly overshadowed by 18 downgrades. Downgrade activity might stabilize as operating conditions for infrastructure credits are likely to stabilize over the next year unless economic growth declines precipitously.


--Housing: Continued challenges in the housing and mortgage market led to another quarter in which downgrades exceeded upgrades by a material 3-to-1 margin. The outlook remains negative due to high delinquency and foreclosure rates, low reinvestment rates, and the deterioration of counterparty credit quality.


It is worth bearing in mind that if downgrades continue and Munis underperform then the MtM changes may well be enough to drive significant negative pro-cyclical behavior as the typical investor (in a similar way to Italy bond holders perhaps) is not used to seeing capital depreciation while they earn their modest yield. Perhaps that is the catalyst - further downgrades, fund outflows on price depreciation, and exaggerated liquidity dry ups - as opposed to simple fiscal concerns?

Charts: Bloomberg

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wang's picture
wang (not verified) Nov 3, 2011 1:25 PM

I think she already has, at least in part

Clueless Economist's picture

Does ZH really want to align themselves with these losers and misfits from OWS New York Chapter?

This is what I saw in Zuccotti park


Pladizow's picture

Oh-Sorrry, are they not "1%" enough for you?

whstlblwr's picture

National Review article. More spin, but shows status quo freaking out

November 3, 2011 4:00 A.M.
Ron Paul Fever at Zuccotti Park
Not quite birds of a feather

I hear many names bandied about in Zuccotti Park, and not just at the fringes. Among the most popular are Karl Marx, Hugo Chávez, Michael Moore, Paul Ehrlich, and Dennis Kucinich. But today I heard a less predictable one spoken more widely: Ron Paul.

There are three key reasons for this, I think. The first is a good old marriage of convenience, the same sort of unholy alliance as arose in the early 20th century when Baptists and bootleggers came together to argue for the prohibition of alcohol in America. You see, Ron Paul is angry, too, and he wants to “restore” America to its old ways. The majority of Paul’s policy positions may be radically different, but much of his rhetoric is in line with Occupy Wall Street’s, particularly his anti-Hamiltonian conviction that the banks have callously denatured the United States. For many, this alone is enough to make him an ally.

s2man's picture

-1  You already said that

-1  Replying to the first comment to get your shit at the top, instead posting a new comment.

-1 OT

yabyum's picture

Yes, I dont know any bankers, must be cool to be you.

whstlblwr's picture

He's upset about new article in National Journal that Ron Paul supporters taking over OWS. Too bad for you clueless.

Clueless Economist's picture

Now that is good news if true.  I saw 1 Ron Paul sign at OWS...and I believe it was sarc "Ron Paul/Barney Frand 2012"

I am a Ron Paul Libertarian and I loathe the GOVT

whstlblwr's picture

Well be happy then, lazy running by OWS to take their water, mother fucker.

john39's picture

posting this on every blog entry today? 

luna_man's picture

"Clueless Economist"... HUSH YOUR MOUTH!


HOW DARE YOU QUESTION "ZH"...Now go stand in the corner!...

Now face the wall and keep that (DUNCE) hat on!! 

fuu's picture

I don't know if you are an economist but you are certainly fucking clueless.

Clampit's picture

Stumbled on this this gem from an earlier post of his:

"I predict it will peter out when it becomes colder rather than devolve into violence." - Clueless Economist Sun, 10/23/2011 - 12:25

I just smile when I see people attacking OWS for being stoners, derelicts, or esentially uncouth, this only shows a shortage of effectual ammunition.

Clueless Economist's picture

Have you spoken to these people like I have?

You are a Soros controlled idiot.

Eally Ucked's picture

So really what did you expect, Rolls-Royces parked at side streets, men in business suits and waitreses and bus boys runing around serving drinks and cleaning? And what ZH has to do with it?

reader2010's picture

Why don't you ask your governments to roll them over? Your big piece of shit motherfucka.

centerline's picture

OWS seems to be starting with the fringe for sure.  No argument there.  But, the heart is the right place - and the lack of clear leadership makes it difficult to co-opt.  Infiltration is another story though - potentially serving to shape public opinion towards the movement (negatively of course).

My real fear actually is that OWS morphs into the exact weapon of our destruction.  That is, there are more people beholden to the system via paycheck, pension, medical care, welfare, etc. than not in our current society.  But, I am also a skeptic here because I don't believe that there is any viable solution that will make good on all the promises... let alone allow us to continue with parabolic population growth in face of peak oil, water shortages, etc.

DormRoom's picture

she was right, but her timing was off, and she underestimated the amount of printing.  Supercomittee cuts will be a huge drag on state & local government.  States will rebalance by making further cuts to muni.  US growth is from financialization, and not real economy, its only a matter of time, before it collapse.


How can economist talk about  growth (non-real) when there's 40M+ Americans on food stamps.  That indicates there's something seriously wrong with the real economy.  The phantom economy can mask the problems in the real economy, for only a lil while

boiling frog syndrome

Abitdodgie's picture


Is this the same  Meredith Whitney that was in" Last Action Hero"
fourchan's picture

munis will go as property values go...down.

Manthong's picture

At the rate things are going, she will be right..

right after the printing presses disslove into a puddle of molten metal and ink.

And it seem to me that the presses are probably running at warp speed right now.

Where is all the money that is propping up this market coming from anyway? 

Anybody you know?

Deadpool's picture

gold should so be at $2100 right now...and silver at $84.

TheSilverJournal's picture

Right now: the dollar should be worthless, gold should be $10,000 in real terms, silver should be $1,000, and housing should be down 70%-80%

Deadpool's picture

not possible YET with the world of money scurrying into the dollar for safety (perceived)...that time will come, but not now. $2100 on the way to $10,000....but good luck spending it on things that matter (food).

TheSilverJournal's picture

I said in real terms. I'll likely be able to buy thousands of loaves of bread with one oz. of gold and I'll likely be able to buy hundreds of loaves of bread with one oz. of silver and I'll likely be able to sell my house for 70%-80% less of loaves of bread than I'm able to now. Is that better?

bonderøven-farm ass's picture

This farmer will accept nothing less than PM's for my produce when things get ugly....gl finding a farm that'll take paper.

Deadpool's picture

since most people don't own PMs what will you do when the mob comes for your crops? take paper or lead?

TheSilverJournal's picture

Exactly, PMs and an escape plan is what's in order.

Smiley's picture

Yeah and the next Mega Millions drawing SHOULD come up with all my numbers...

Chief KnocAHoma's picture


Last night this conversation between Obama, Geitner and Bernanke was recorded in the Oval Office:


Obama: What seems to be the problem gentlemen? And it had better be important because Sports Center is about to give my pre-season basketball picks.


Geitner: Mr. President the global credit markets are seizing up again. All liquidity is being drained from the system because those greedy European peasants are demanding what was promised to them.


Obama: No problem Timmy. I'll give a speech in the morning with soothing words and caring faces. I'll put just the right emphasis on selected words and phrases. The press will fall all over themselves thanking me, and the markets will heal.


Bernanke: (Looking at Geitner with dumbfounded glare) Mr. President I think we may need to do more than that. I think we need to inject a significant amount of capital into the markets immediately. We can call it The American Re-Investment Act Phase 9. I'll print the living shit out of money, and create a lot electronically, then the system will free up. (A devilish grin appears.) Of course we will have to tax some one for the additional debt.


Obama: Is there any way we can exempt minorities, Muslims, single mothers and White Sox fans from the tax?


Geitner: I think that is called Obamacare.


Obama: Hmm... (scratching his chin) This is another hardship on the American people, and more importantly, it will hurt my poll numbers. Do you think we could blame Bush?


Bernanke: (Trying to keep a straight face.) Mr. President you will be viewed as a hero to thousands on Wall Street, which means big campaign dollars, and we can even blame it on the banks. They don't care...


Geitner: (Laughing out loud) Yeah... like they have souls anyway.


earleflorida's picture

obama: hey timmy, before you leave put some air in by basketball

timmah: yes sir

Obama: ,... and you there ben, hang around, your going to be going one-on-one with me doing some lay-ups

benny: how high do i have to jump

obama: the skies the limit

ps. just couldn't resist myself, Chief  KnocAHoma  

made my day :-)) tx

HardlyZero's picture


I think at last tally there have been over 60 munipal bankrupt/wiped-out since she made the big announcement.

Its all going down slowly in the night with a whisper of a gurgle....

Got God.

Got Silver.

(not questions...only answers)

chunkylover42's picture

Not really.  Whitney claimed there would be "hundreds of billions (presumably she meant millions with an 'm') of dollars in municipal defaults".  These aren't even defaults, they are downgrades, so she's not even remotely close.

lolmao500's picture

So when will the municipal markets man up and destroy all the bankrupt cities out there?

Like Compton...


Compton finds itself in full financial meltdown

The city is in such disarray that it amassed $369,000 in late fees because it could not pay its policing contract with the Sheriff's Department. It has already laid off about 15% of its workforce. Most disconcerting is its looming deficit of $39 million.

But most disconcerting is the city's looming deficit of $39 million, a sum that represents about 80% of its annual general fund budget.

Messianic's picture

Yet the sheeple and plantation workhands still vote for those corrupt malcontents in charge...or refuse to vote, or refuse to vote with their feet...

JW n FL's picture





NEW REPORT: 280 Most Profitable U.S. Corporations Shelter Half Their Profits from Taxes.

“These 280 corporations received a total of nearly $224 billion in tax subsidies,” said Robert McIntyre, Director at Citizens for Tax Justice and the report’s lead author. “This is wasted money that could have gone to protect Medicare, create jobs and cut the deficit.”

·        30 Companies average less than zero tax bill in the last three Years, 78 had at least one no-tax year.

·        Financial services received the largest share of all federal tax subsidies over the last three years. More than half the tax subsidies for companies in the study went to four industries: financial services, utilities, telecommunications, and oil, gas & pipelines.

·        U.S. corporations with significant foreign profits paid tax rates to foreign countries that were almost a third higher than they paid to the IRS on their domestic profits.



Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association










MFL8240's picture

And Brown is giving illegals free tuition. lol!!  

Smiddywesson's picture

Reciting from memory:

Average costs to house a prisoner in USA:  $22k per year

Average cost in Fed pens:  $28k per year

Average costs in California per prisoner: $58k per year.

No wonder they are busted

Incubus's picture

Prison is good money for the ones running the show. 

A little clockwork orange wouldn't hurt--but there's no money in 'fixing' peoples, is there? 

Deadpool's picture

I read (must be true) that in Japan seniors are committing violent crimes to get put in jail to be provided for in old age...now that's a penal pension system to die for.

Schmuck Raker's picture

Compare that to tuitions and Brown almost looks like a genius.

earleflorida's picture

California says : do the crime - do no time 

centerline's picture

Who knows.  But I will speculate it will hit like a tidal wave.  Why?  Because it is all about cash flow, not cash.  It is amazing how operations can be run, even in the most brutal of times, as long as there is cash flow.  But, when the cash flow stops (is suddenly insufficient to a great enough degree) it is game over in a hurry.  Same as we witness with the likes of MF Global.

fourchan's picture

the local news today is that detroit will be bankrupt by febuary,

the mayor is already calling in a financial manager to swing the wrecking ball.

this news has not hit the major press yet.

earleflorida's picture

curious,... could it be the guy that just left fannie?

centerline's picture

Meredith will be proven correct... in time. Just early to the party.

derek_vineyard's picture

Early calls often cause financial catastrophy.......the naz bubble crushed many short sellers, the muni market has been rallying all year-----but yes she is right, just not rich anymore (if she invested in her call).

MisterMousePotato's picture

It is said that being early is the same as being wrong.

Carlyle Groupie's picture

It depends how quickly they can raise property, sales, and other taxes.

You know it's coming.

Meredith was right at that point in time but if THEY change her input variables over time then she will only be partially correct.