How to Invest if a Wave of Municipal Bankruptcies Breaks Out?

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Meredith_Whitney_1I suppose the simple answer would be to avoid buying munis or other municipal revenue bonds. But what would be the fallout? Meredith Whitney, famous for accurately analyzing and predicitng in 2007 the troubles that would befall Citigroup, now runs her own shop, Meredith Whitney Advisory Group LLC, with which she intends to compete against the big rating agencies. Anyway, she has calculated, according to today's Lex Column in the FT, that a wave of municipal bankruptcies is in the offing.

The Lex column quotes her as saying there is $6 trillion --- that's trillion --- of total outstanding debt (including underfunded pension plans) in U.S. cities and states. That equals 2.5 times their tax base, Lex quotes her report. Put another way, that's equal to about 40% of of the nation's GDP. If she is right --- that a wave of government defaults is on the way --- how do you position your clients' portfolios? Especially those clients in high tax brackets who rely on munis for income?

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