Multiple Municipal Bond Defaults Predicted

CEO Meredith Whitney anticipates hundreds of billions of dollars in municipal bond defaults in 2011.

Meredith Whitney, CEO of a financial services advisory firm and former managing director and senior financial institutions analyst for Oppenheimer, told “60 Minutes” on the Dec. 19, 2010 broadcast that next to housing, local and state debt is the “single most important issue in the U.S. and certainly the biggest threat to the U.S. economy."

Ms. Whitney projects this $2 trillion debt of U.S. cities and states will cause multiple municipal bond defaults. "There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see 50 to a 100 sizeable defaults. This will amount to hundreds of billions of dollars' worth of defaults."

While at Oppenheimer, Ms. Whitney’s negative report on Citigroup in October 2007 raised skeptical eyebrows, but proved accurate when Citigroup, then the world's largest bank, had to be rescued by the Fed in Nov. 2008.

U.S. states have spent nearly half a trillion dollars more than they have collected in taxes. States are simply spending more money than they have. Illinois outdid its fellow states by spending twice the amount it took in 2010.

Cities and states are forced to make difficult budget decisions:

• Detroit is cutting back on such basics as police, street lighting, road repairs and street cleaning.
  
• California has raised state university tuition a whopping 32 percent.
  
• Arizona sold the state capitol and state supreme court buildings and now leases them.
  
• Louisiana Gov. Bobby Jindal has offered such ideas as selling prisons in two parishes, privatizing a state-run health insurance program and even selling future lottery proceeds to investors to get immediate cash.
  
• Washington state is looking at eliminating a basic health plan subsidy for 66,000 low-income people, suspension of salary increases for K-12 and higher teachers and elimination of state general fund dollars for state parks.