Boomerang_ Travels in the New Third World - Michael D. Lewis [70]
But that’s not at all what she had said: her words were being misrepresented so that her message might be more easily attacked. “She was referring to the complacency of the ratings agencies and investment advisers who say there is nothing to worry about,” said a person at 60 Minutes who reviewed the transcripts of the interview for me, to make sure I had heard what I thought I had heard. “She says there is something to worry about, and it will be apparent to everyone in the next twelve months.”
Whatever else she had done, Meredith Whitney had found the pressure point in American finance: the fear that American cities would not pay back the money they had borrowed. The market for municipal bonds, unlike the market for U.S. government bonds, spooked easily. American cities and states were susceptible to the same cycle of doom that had forced Greece to seek help from the International Monetary Fund. All it took to create doubt, and raise borrowing costs for states and cities, was for a woman with no standing in the municipal bond market to utter a few sentences on television. That was the amazing thing: she had offered nothing to back up her statement. She’d written a massive, detailed report on state and local finances, but no one except a handful of her clients had any idea what was in it. “If I was a real nasty hedge fund guy,” one hedge fund manager put it to me, “I’d sit back and say, ‘This is a herd of cattle that can be stampeded.’”
What Meredith Whitney was trying to say was more interesting than what she was accused of saying. She didn’t actually care all that much about the municipal bond market, or how many cities were likely to go bankrupt. The municipal bond market was a dreary backwater. As she put it, “Who cares about the stinking muni bond market?” The only reason she had stumbled into that market was that she had come to view the U.S. national economy as a collection of regional economies. To understand the regional economies, she had to understand how state and local governments were likely to behave; and to understand this she needed to understand their finances. Thus she had spent two unlikely years researching state and local finance. “I didn’t have a plan to do this,” she said. “Not one of my clients asked for it. I only looked at this because I needed to understand it myself. How it started was with a question: how can GDP [gross domestic product] estimates be so high when the states that outperformed the U.S. economy during the boom were now underperforming the U.S. economy—and they were twenty-two percent of that economy?” It was a good question.
From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever-riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it all off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could only be dealt with in one of two ways—massive cutbacks on public services or a default—or