CHICAGO — Comments made by banking analyst Meredith Whitney in 2010 about looming municipal defaults caused more damage to the municipal bond market than market participants charged with fraud in recent years, a former top muni regulator said Friday.
Paul S. Maco, a bond attorney and former head of the Securities and Exchange Commission’s municipal securities office, told a bond lawyers’ group that Whitney’s prediction for “hundreds of billions of dollars” in looming municipal defaults, and the subsequent attention the comments received in the market, eroded investors’ faith in municipal securities and led them to dump muni bonds.
“Meredith Whitney probably harmed more individual investors in this market than any collection of deliberate fraudsters the SEC could ever assemble,” said Maco, who works in Washington, D.C., for law firm Bracewell & Giuliana LLP. “The number of people who sold their bonds on her statements … is really a tragedy.”
Maco, who in the mid-1990s was the first director of the SEC’s muni office, made his comments during a regulatory session at the National Association of Bond Lawyers’ Bond Attorney’s Workshop in Chicago.
Whitney’s predictions were particularly damaging because scant availability of accurate, timely financial disclosures meant investors were largely unable to check the veracity of her comments, Maco said.
“Investors couldn’t go to robust, reliable disclosure reporting system to check out” the prediction, he said.
On the CBS program “60 Minutes” in December 2010, Whitney called municipalities’ financial problems “the largest threat to the U.S. economy” and predicted 50 to 100 “sizeable defaults” worth hundreds of billions of dollars. Whitney said the “lack of transparency with the state disclosure is the worst I’ve ever seen.”
Despite those predictions, muni default rates spiked in 2009 and have since returned to historical levels, according to the SEC’s July 31 muni market report. Actual market data varies because of differing definitions of “default.” Distressed Debt Securities newsletter said muni defaults hit $25.36 billion in 2011, while Standard & Poor’s pegged the number at $1.06 billion.
Maco said comparing financial data of different government jurisdictions is difficult because disclosure requirements are not standardized and many issuers’ disclosures are outdated or incomplete.
He said disclosure improvements are needed, and called attention to disclosure differences between the corporate and muni bond market. Maco noted that corporate bond issuers must disclose material events by filing forms like 8-Ks on the SEC’s EDGAR reporting system. By comparison, the SEC regulates muni issuers’ disclosures indirectly through dealers, a system that Maco described as “porous.”
The SEC has requested legislative authority to set the content and timing of issuers’ disclosures, but Maco said a state-led regulatory approach, like one proposed by the State Budget Crisis Task Force, could be more effective.
The task force, which was headed by former Federal Reserve Chairman Paul Volcker and former New York Lt. Governor Richard Ravitch, released a report in July highlighted state and local government financial problems. It recommended states develop programs to monitor local government finances and create financial reporting standards that would apply to both the state and its local governments.
Maco said states could work together to make sure standards are similar across state lines.
“A state approach … may achieve greater success in the long run because of national legislative problems,” Maco said. “States could beat the SEC to the punch.”