Who Has the Big Knife Out for Meredith Whitney?

There's something very odd about the trashing Meredith Whitney is getting over her warnings on the municipal debt market. First, there's been the unending attack by Charlie Gasparino at FOX on her warning. Now word comes, via Gasparino, that a Congressional subcommittee, headed by Congressman Patrick McHenry, wants to look into the condition of the municipal bond market . Although Gasparino is painting the story as though it is somehow an investigation of Whitney.

Writes Gasparino:

As part of this inquiry, the subcommittee is looking into the validity of Whitney’s call made on national television that predicted between 50 and 100 major municipal bond defaults over the coming year, which would cost investors hundreds of billions of dollars in losses. The call sparked massive panic among small investors -- the largest purchasers of muni bonds -- because of the tax advantages.


Many small investors unloaded their bonds, and redeemed shares of municipal bond mutual funds, at a loss.

Not the first time in America that an analyst statement has caused buying or selling in the markets. In fact, Gasparino in an interview disclosed that he has moved  markets himself:

It's great when the market moves when you say this stuff...you know you are going to have an immediate impact. It's scary.

One wonders how Gasparino would react, if he were requested to appear before a Congressional subcommittee to explain just how he obtained his information. And one wonders, if small investors ever unloaded their positions based on a Gasparino story.
In fairness to Gasparino, he is a reporter and someone is feeding him this story and he is running with it. On the Congressional request for Whitney to appear Gasparino writes:

Whitney has so far rebuffed the committee's attempts to have her appear at the hearings scheduled for February 9, and there is talk on the committee about subpoenaing her to appear, as well as subpoenaing her to produce her controversial report on municipal bonds.

But, who is behind this attempt to get Whitney to testify? It's somebody a lot more powerful than Gasparino. As I said, Gasparino is just running with the story, there's someone else moving the pieces on the chessboard. Gasparino did not instigate the Congressional hearing.

Whitney has truly upset a major player somewhere. She is doing the correct thing for her own career not to appear before the hearing. If Gasparino is correct, this investigation is to a large degree about getting Whitney, more than it is an examination of the muni market. If they subpoena her, she should take the Fifth. Remember, Martha Stewart, Meredith.

For the record, people that I talk to who are a lot more influential than Whitney, hold the same beliefs about the municipal markets. They aren't talking publicly because they no the heat that would come down from such a warning--the kind of heat Whitney is now experiencing. But their fears about the muni market are just as strong, though perhaps their view on the timing of the developments is a little different. Further, in a very under-reported speech, Fed chairman Bernanke on October of last year came as close as a Fed chairman is ever going to come in warning about a potential municipal bond crisis (My emphasis):

....in the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it--meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Courageously, Whitney has put out a clear warning that may save many who have, because of her warning, sold their muni bonds. However, somebody else appears just as determined to move the chess pieces to crush Whitney for her warning, and silence her. Welcome to 21st century America.