'Waterfall' of muni downgrades will trigger rapid sell-off: Whitney

I know this seems like old news, but this report is from Wednesday May 18. Queenbee

Insurers in line to get soaked, controversial analyst predicts; buying opp after carriers unload


There will be a “waterfall” of credit-rating cuts in the $2.93 trillion municipal debt market as rating companies scrutinize state and local off-balance sheet liabilities, said Meredith Whitney, the banking analyst.

The downgrades will force investors such as insurance companies to sell the securities, presenting an opportunity for other bond buyers, Whitney said on a radio interview today on “Bloomberg Surveillance” with Tom Keene. The analyst fueled a sell-off of tax-exempt debt when she said on CBS Corp.'s “60 Minutes” in December that there could be 50 to 100 “sizable” municipal-bond defaults in 2011 amounting to “hundreds of billions of dollars.”
“Once these municipal bonds get downgraded, there will be forced selling by the insurance companies,” said Whitney, who founded New York-based Meredith Whitney Advisory Group LLC in 2009 after leaving Oppenheimer & Co. “Then you'll see an opportunity to go in and buy quality issues because there'll be indiscriminate selling.”
Investors have withdrawn about $47 billion from U.S. municipal-bond mutual funds since Nov. 10, according to Lipper US Fund Flows, a Denver-based research company. Tax-exempt bonds had their worst quarterly performance in 16 years in the final three months of last year, losing 4.5 percent, according to the Bank of America Merrill Lynch Municipal Master index, which accounts for price changes and interest income.
The withdrawals have slowed in recent weeks after the pace of municipal bond sales fell and state tax revenue began to improve. Rates on top-rated tax-exempt bonds due in 10 years reached 2.6 percent on May 18, the lowest since Nov. 12, while the index for insuring against the default of $10 million of municipal bonds for five years was $124,725 yesterday, down from $235,940 on Jan. 7.
Whitney, who correctly predicted Citigroup Inc.'s 2008 dividend cut, said she wouldn't personally buy municipal bonds yet. She declined to say when it would be a good time to purchase the securities.
“Despite the fact that there have been retail withdrawals from the municipal market, there really hasn't been that much,” she said. “It's just that nothing has gone on in the municipal market for so long. A little activity seems like a big deal.”
The analyst stood by her forecast for municipal bond defaults, even as the latest data has yet to back her up.
There were nine municipal defaults totaling $254 million in the first three months of this year, down from 22 totaling $1 billion in the same period last year, according to a newsletter published by Income Securities Advisor in Miami Lakes, Florida. Defaults peaked in 2008 at $8.2 billion, including rated and unrated debt, the company said.
“In the cycle of this municipal downturn, I stand by it,” she said.
Also let's see what Shaza sent me about Moody's downgrade of the Aussie banks. QB

Downgrade shines light on China's role

  • THE expected Moody's downgrade of the big four banks is in itself so marginal as to be almost meaningless.
    At worst, in terms of any direct impact, it could end up adding maybe five points to your home loan interest rate at some indeterminate date well into the future.
    The potential significance is more subtle and opaque. It could prove a straw in a turbulent wind. For it goes to one of the two core foundations of our prosperity - bank home lending. The other, bigger, one is China.
    Now Moody's, as the rating agencies do, had previously put Australia's big banks on notice of a possible downgrading from a sector credit review. In practical terms the downgrading effectively happened then.
    The bottom line is that the Moody's Aa2 rating (and the equivalent S&P AA) is only two notches down from the absolute top Triple-A. Only 14 banks in the world carry this rating or higher including of course all four of our big banks.
    So all up, the effect in global financial markets on their ability to raise money and the cost at which they do will be pretty close to zero.
    What it could do is turn the spotlight on a series of dynamics that while working just fine now, add up to the Achilles heel not just of the banks but the economy more broadly.
    One is the banks' reliance on overseas money. According to Moody's, about 40 per cent of their liabilities (the money they raise) came in the wholesale funding market, either directly overseas or through the local wholesale market.
    Further, the banks' reliance on overseas funding is also the broader economy's reliance. Because it is the banks borrowing overseas that provides the capital inflow to cover our continuous current account deficit.
    If the banks stopped borrowing, "someone else" would have to borrow instead. It'll be the companies investing in all those resource developments. Which are, dependent on ... China.
    Banks lend the money they borrow overseas to homebuyers. They also lend to business, but in the last decade almost all the growth in lending has been to homebuyers. That is probably topping out.
    If banks can borrow less overseas, they must chase deposits at home what they have been doing lately, but it costs.
    All this pivots on China and the huge sums it is pumping into the economy. If China slowed, this whole series of linkages would implode. I'm not suggesting that, but the downgrade shines a light on the importance of these linkages and signs of some fraying at their edges.
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