Jim Chanos Has Been Sounding the Municipal-Bond Alarm for Like Two Years

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Photo: Jed Egan; Photos: Patrick McMullan

Analyst Meredith Whitney is taking a lot of heat for saying that the municipal-bond market will soon see "hundreds of billions of dollars" of defaults. When her report first came out this month, California treasurer Bill Lockyer called her prediction “apocalyptic arm-waving,” muni-bond saleswoman Alexandra Lebenthal practically threatened to cut a bitch, and derision flared up again today after a nonplussed Whitney told Bloomberg, "over a breakfast of scrambled egg whites with a chicken-apple sausage, a side of salsa and peppermint tea at the Four Seasons Hotel," that “I think folks that are saying I’m wrong are making a bigger call than I am. Because they’re saying munis are safe. And that, I think, will prove to be a regrettable tack." But a fur-cap-clad George Soros backed her up on CNBC today, and you know who has been talking about this like forever? Jim Chanos. Way back over the summer, the hedge-fund manager told us all about why he thinks the muni bonds are headed for a crash. "The shape the state and cities are in, it's much worse than everyone thinks," he told us over lunch at Michael's. (We can't remember what he ate, but we had a tomato mozzarella salad.)

"They're having budgetary problems that are very similar to Greece," he explained patiently, as if to a moron or a small child. "For years, the states and cities cut a deal with their employees: 'Look, you may not make as much as the private sector if you're a policeman or fireman or teacher-garbage man, but (a) you'll have job security, and (b) we'll take care of you on the back end in terms of retirement.' Because of the way this stuff is accounted for, state and local municipalities didn't have to put their long-term obligations on the books. If they gave fireman a very small raise but said, 'You can cut your retirement by two years in this contract, and we'll cover your life and full medical, they didn't have to put that as an expense. That bill is now coming due: Baby-boomers are retiring, they're starting to pull down pensions and health care, and it's starting to bankrupt states and cities."

Us, interjecting: "Oh no! But wait—how will this affect New York? Since we are the center of the universe."

J.C.: "The muni-bond business is a huge generator for New York City. Lots of wealthy, retired New Yorkers live on their muni bonds. Look, basically these states are all broke, and they're financing themselves at 2 or 3 percent, because people think that they'll never miss an interest payment. And I'm not sure going forward if that's true. It was true in the past, but if it comes down to firing firemen and policemen or not paying your bond holders, many of whom are rich people, I'm beginning to think that politically there will be a tipping point where screwing the bond holder might not be an imprudent thing to do. It's very interesting when I talk about this what happens: I will get almost angry questions from people about muni debt. They can't believe that their New York bonds or California bonds are going to go in the tank. And I keep saying, 'You're lending to broke entities.' The states are particularly egregious. It's going to hit the federal government, too, but not for ten or twenty years, because the retirement age for the feds is much later. If you calculate the budget deficit as a corporation would —[Ed: Needless to say this never happened.]—by including the present value of all the new liabilities you have, for retired people, the real deficit, is 5 trillion dollars. Somehow, somewhere there's a default coming."

Chanos rightly pointed out today that he's not just jumping on the "Whitney bandwagon," — he's been saying this stuff since 2009. If only he'd been a blonde, maybe you people might have taken him more seriously.