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Subject:  Meredith Whitney again Date:  6/8/2011  2:14 PM
Author:  jackcrow Number:  32920 of 36785

I was watching cNBC's "Squawk Box" this morning and Ms. Whitney was the guest host.

When it comes to her call on munis as near as I can tell she is lumping some things together that many of the standard players in the game are not including. She adds GO and Revenue bonds and the many project specific backed by the state/muni bonds that often are not directly visible in State and municipal budgets but the biggest kicker is unfunded liabilities to employees like retirement and medical benefits. It is common practice in govt accounting to create underfund employee benefits creating or adding to their liabilities and future costs estimates.

Her argument is not unlike the GM and Chrysler bond bears who watched these unfunded legacy costs grow at a pace faster than revenue or income. A large portion of her argument is that the States and other municipalities are less likely to be able to stay ahead of this curve. It is also a large part of her argument that she did not make a time specific call only that this is a highly likely future outcome based on the condition of muni balance sheets.

Later in the day on "Squawk on the Street" a muni fund manager disagreed. What I found fascinating is that she was visibly agitated by Ms. Whitney continuing to stand by her argument and the math that she is using. It is also important to note that this interviewee does not actively track the total servicing costs of everything Ms. Whitney is including in her calculations.

I don't know who is right the old pros in the space or an outsider with little history but I do know there is often an emotional not an intellectual response from many that disagree with Ms. Whitney's findings.

As near as I can tell much of the industry that follows muni debt is likely underestimating current muni risks by ignoring the growing unfunded liabilities. It is also quite plausible that Ms. Whitney is overestimating the risks in the space.


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