Wednesday, February 9, 2011

Finally, A Fair and Balanced Column on Meredith Whitney

Alice Schroeder is as tough and thorough as they get. She wrote the exceptionally thorough Warren Buffet biography, Snowball. And she gets the Meredith Whitney situation complete. She includes every piece of information there is out there on Whitney, and believe me there are a lot of people pitching angles on Whitney. Schroder includes them all.  But the points that are most important in the Schroeder story are these:
Many of Whitney’s critics have a vested interest in tearing her down. They include competing municipal bond analysts, fund managers who run muni portfolios, financial advisers who sell the tax-exempt securities, and above all, the borrowers who depend on munis to finance their whopping deficits. To all of them she is a big-mouthed, larger-than-life nightmare.

Is California Treasurer Bill Lockyer objective when he calls Whitney’s forecast “apocalyptic arm-waving”?...It doesn’t help that her big calls have been bearish, which automatically pits her against the established interests of Wall Street...

It’s easier to understand Whitney when you study her provenance. I knew her in the mid-1990s at Oppenheimer & Co. when she was a wide-eyed research assistant to analyst Steve Eisman, now of FrontPoint Partners and one of the main figures in Michael Lewis’s bestseller, “The Big Short.”

Back in those days he was a firebrand who terrorized consumer finance companies. Eisman was the first, if not the only analyst to call them out for trying to outrace a tide of loan-losses through massive growth in lending. His style was to assume the role of town crier, revel in the controversy he created, and take the flak as he waited for the targets of his crusade to crash and burn, as he knew they would do.

Foreseeing Failure

It’s a template that has worked multiple times in the past two decades to predict the fate of business models built on the false notion that high growth can overcome bad economics. (See: Enron, Countrywide, Washington Mutual and AIG.)
Those who were early to grasp the single most important business dynamic of our era -- the Ponzification of America -- turned what is an unfurling disaster for our country into a money-maker for investors. Eisman taught Whitney, and they were both early.

Whitney’s latest call on municipal defaults is the logical extension of this theme. Her point is that, until now, investors were getting paid too little for the risk they were taking by investing in local municipal bonds. She isn’t the first to note troubles in the muni market, just the most aggressive and unequivocal in her point of view. That willingness to be gutsy, along with the work that went into the 600-page report, “Tragedy of the Commons,” is what finally put this issue in the news.

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