Meredith Whitney’s Critics Are Conmen
by Mark R. Crovelli
Imagine for a second that you are a financial analyst, financial advisor, institutional investor, or trader who specializes in municipal bonds. Your goal, presumably, is to determine which municipalities in the United States are creditworthy enough to justify lending money to them.
Ideally, you hope to be able to pick up bonds that are dirt cheap, have a high rate of return, and that have very low chance of defaulting. This goal is usually difficult to achieve, because bonds with the lowest risk of default usually have the lowest rate of return, and vice versa for those with the highest rate of default.
Under certain circumstances, however, it is sometimes possible to pick up low-risk bonds at bargain-basement prices. If, for example, thousands of banks are forced to sell off their bond portfolios to cover losses they are suffering on other toxic assets on their balance sheets (mortgage backed securities, for instance), bond traders like yourself can take good bonds off their hands for a pittance.
As another example, if people become unreasonably bearish about the creditworthiness of municipal governments and start liquidating their bond portfolios, (because, say, a financial analyst that people trust makes a completely idiotic call), you can pick up the bonds they are stupidly selling at ridiculously low prices.
As a professional investor, you love it when these rare events present themselves. Since you know the market, and you have an insider’s view into the creditworthiness of municipal governments, you want nothing more than to be able to buy up good, dirt-cheap bonds and make a veritable killing off the interest. Early retirements are secured in such ways.