A year ago this week, analyst Meredith Whitney appeared on CBS TV's “60 Minutes” and predicted that a “spate” of municipalities — 50 to 100 or more, according to her reckoning — would default in 2011.
When asked to comment in the many press reports that followed, the big bond-rating agencies tsk-tsked, saying with a patronizing sneer that there was little to worry about. Given that these models of probity completely missed the disaster in mortgage-backed securities (and actually fueled the financial meltdown by turning MBS dreck into gold with their easy-to-buy seals of approval), the soothing words from S&P, Moody's and Fitch weren't all that reassuring.
Fortunately, time proved Ms. Whitney wrong. Well, let's call that wrong with an asterisk, because she definitely blew the timing but may be right about municipalities' underlying problems.
For now, most of America's cities, states and local governments continue to get by. True, there was one gigantic failure this year — Jefferson County, Ala. — which will go down in the history books as the nation's biggest municipal bankruptcy. But there was no cascade of municipal defaults over the past 12 months.
Analysts I respect at Municipal Market Advisors have noted for some time that the state of municipal financial health is not as dire as Ms. Whitney and press reports would have the public believe. First off, most municipalities are not overburdened by debt, MMA says, and if servicing debt becomes a problem, issuers always can raise taxes, which may not be a great long-term fix, but one that certainly rules out default in the short run.
The bizarre state of the bond markets and interest rates also helped munis this year. With Treasury yields as thin as cellophane and with the Fed working like Santa's elves to manufacture credit, fixed-income investors, including banks, turned to municipal bonds, making them the investment darlings of 2011. If muni investors watching “60 Minutes” last December had the foresight to stay the course (or were so terrified that they were frozen by fear), they probably now find themselves about 10% ahead of where they were this time last year.
Still, I think it's a little too early to break open the champagne for America's cities and towns. Something's rotten in Denmark (South Carolina) — OK, that town's doing fine — but there are lots of problems in St. Louis, Cleveland, Detroit, Milwaukee, Syracuse, N.Y., and dozens of other Rust Belt cities. They seem to have lost their economic reason for being, and no magic formulas are at hand to turn things around. (See a fascinating article on the subject at
City Journal.)
Even America's biggest cities aren't immune. Chicago and Los Angeles are losing their vigor, and if Wall Street continues to shrink or Europeans no longer can afford to visit, New York's luster also will dim.
Like Cassandra, the Greek beauty who foresaw the destruction of Troy, Ms. Whitney is an attractive and intelligent woman who sees municipal trouble looming. Let's hope she is wrong. But let's remember Cassandra and act as if she's onto something.
