Battle of the Bond Girls

When the municipal bond market plunged in 1933, Louis Lebenthal distinguished himself for his lengthy sermons condemning the then popular “tax strike” movement. He castigated “tax slackers” as unpatriotic dolts who threatened to destroy not only the credit ratings of the municipalities whose bonds he sold but the “general community as well.”
As the markets froze again in 1975, his son James Lebenthal campaigned relentlessly to save New York City and flooded the radio waves with commercial spots extolling the virtues of his bond sales staff–whom he dubbed “Lebenthal’s Heroes”–in ensuring the proper operation of the city.

When the markets suffered another downturn in response to changes in the tax code passed in 1986, the younger Mr. Lebenthal cast himself in a series of television commercials in which he navigated sewer systems, commandeered subway trains and heaved trash into incinerators in a bid to convert civic pride into an affection for the bonds that finance public works.

In 2001, James’ daughter, Alexandra Lebenthal, who had been named the brokerage’s president a few years earlier, carried on the tradition of seizing moments of market uncertainty to reinforce the family name’s identification with civic virtues. In a poignant story that ran in the Sept. 19 edition of The Times, she recalled childhood trips with her father to watch the World Trade Center construction site.

“You’ve never seen such a hole of activity,” she wrote. “I would always marvel at what they built on that hole. Seeing that hole again is an unimaginable sight. My dad thought it was very important for us to see what municipal bonds built. Bonds built infrastructure. That’s what municipal bonds do. The World Trade Center was the epitome of what municipal bonds build. It was the shining monument of infrastructure.”

Last month, the prices of such bonds again plunged, this time well below the depths they hit in the panicked days after the 9/11 attacks, with no real catalyst for the sell-off beyond a thinly sourced but heavily watched 60 Minutes segment about the fiscal challenges facing states running budget deficits and underfunding their pension obligations. This time, however, Ms. Lebenthal, who published a chick-lit novel, The Recessionistas, last year and Tweets prolifically about shoes, finance and reality television, decided to pursue a markedly different public-relations strategy for building back confidence in public finance and her family brand. There would be no appeals to the individual investor’s sense of civic pride. Nor would she cite any of the sentimental attachments that moved her to start over again from scratch at age 43 when Merrill Lynch (which had acquired the Lebenthals’ business) announced that it was dropping the Lebenthal family name from its municipal bond marketing materials, a boneheaded upper-management decision David Dinkins at the time likened to “losing the Brooklyn Dodgers.” Instead, in a stroke of strange PR genius, Ms. Lebenthal decided to approach the market panic as a cat fight with the analyst she blamed for bludgeoning her bonds on 60 Minutes, Meredith Whitney.

“I would put any muni analyst in a room with her–on TV, outside in the schoolyard–and see who comes out ahead,” Ms. Lebenthal told Reuters.

“Are We Doing This?” asked the blog Dealbreaker. “Is This Happening? Muni Bond ‘Queen’ Alexandra Lebenthal Has Fighting Words For Meredith Whitney.”

“Alexandra Lebenthal Will Claw Meredith Whitney’s Eyes Out Over Municipal Bonds,” ran the headline on New York’s Daily Intel blog.

With a bonus 14-page photo gallery devoted to Ms. Lebenthal’s “fabulous life,” the Business Insider declared, “Move over Meredith Whitney, meet the real ‘Queen.'”
On CNBC, John Carney was more sober-minded: “Both are lovely ladies–and as tempting as it is to strike the cat-fight note–there is a substantive story here.”

But how much substance is there to this story, really?

Ms. Whitney’s tectonic claim on 60 Minutes, the call that launched more than $20 billion in redemptions from municipal funds in the weeks following her appearance, was that America’s cities, towns, counties and other municipal debt issuers would experience between “fifty to a hundred sizable defaults” on a total of “hundreds of billions of dollars'” worth of bonds, and that the bloodbath would commence within the next 12 months. This prediction, delivered with convincing certitude, was supposedly the product of two years of painstaking research into the finances of American states and municipalities. Ms. Whitney told her hapless interviewer, Steve Kroft, that her foremost grievance about these finances was their “lack of transparency.”

Transparency is not something Ms. Whitney herself is offering. She has barred access to the 600-page report that (presumably) contains some clues as to how she arrived at her conclusions, and about which hundreds of billions’ worth of municipal bonds she deems most likely to fulfill her prophecy, to all but her paying clients, a status for which she charges a minimum of $100,000 a year. (An abridged version of the report obtained by The Observer was underwhelming, and light on specifics.) The irascible Fox Business News reporter Charlie Gasparino finally procured a copy after waging a brief campaign petitioning Ms. Whitney to “show her cards,” going so far as to devote a segment of airtime to the question of whether the report existed at all. But shortly after getting the report, Mr. Gasparino reported on Twitter that it made no mention of the “massive defaults” she predicted. Pressed further by two Bloomberg reporters, Ms. Whitney at least yielded an amusing new variation on no comment: “There are fifth-derivative dimensions that I don’t think I need to spell out to my clients.”

Aside from Ms. Whitney, 60 Minutes seemed to have sourced the doomsday depiction only to New Jersey Governor Chris Christie, who furnished one of his familiar sound bites of budgetary tough talk for the introduction. “The day of reckoning has arrived. That’s it. And it’s going to arrive everywhere. And the timing may vary a little bit depending upon which state you’re in, but it’s coming.”
Two weeks later, Mr. Christie would find himself cutting in half a long-planned education bond issuance on account of the mass paranoia sown by the Day of Reckoning segment. Some major investors ridiculed Mr. Christie for sabotaging his own state’s finances by declaring at a town hall meeting on the day of the offering that the demands of the state’s unionized workforce were “bankrupting” New Jersey and thus stoking fears that drove up New Jersey’s borrowing costs. “It doesn’t help to try and sell a billion-dollar deal on the same day the governor is talking about the state going bankrupt,” one fund manager griped to Bloomberg.

It also didn’t help that all year various G.O.P. luminaries had been promoting as-yet-unwritten legislation that would offer states the option–unanimously undesired by states and almost certainly unconstitutional–to declare bankruptcy in times of severe fiscal distress. Nor was it a boon that in the aftermath of the Day of Reckoning, this hypothetical legislation would assume greater perceived urgency in the view of the media and (given all they have just been through) the municipal bond markets.

But no one had taken any of this seriously, really, until Ms. Whitney put her presumed hard numbers to the project.

Ms. Whitney is one of the most respected women on Wall Street, although that isn’t saying much. She owes her stature largely to a single (but extraordinarily well-timed) report she wrote in October 2007 about the imminent solvency crisis of a single (but very big) bank. And since the list of where-are-they-now erstwhile market Midases is long enough to occupy a full deck of Trivial Pursuit cards, it is probably safe to say that a sizable faction–a silent majority, even–of the small population that keeps tabs on financial analyst microfame has been waiting for Ms. Whitney to prove to be a sort of Wall Street Mira Sorvino.

Yet sell-side analysts like Ms. Whitney make so little money by Wall Street standards that their status within the hierarchy is probably more commensurate with that of recognizable character actors. Their paltry compensation is partly a function of their ability to share their opinions with television audiences and thereby sate what Adam Smith observed to be one of “one of the strongest of all natural desires … the desire of being believed, or the desire of persuading.” Sooner or later, though, an analyst succeeds not only in persuading others of the rightness of her opinions but in imagining a string of zeroes trailing from those others’ net worths. Then it is time to try one’s hand at a less humiliating arrangement.

By the end of 2008, Ms. Whitney had left her old firm, Oppenheimer, to found Meredith Whitney LLC. Despite her recent induction into the Time 100 list, her $100,000 client fee may have been a tough sell for many reasons. Not least of these is that Ms. Whitney’s expertise was in analyzing banking stocks, and those have been rendered by a sustained assault of federally guaranteed earnings schemes relatively impervious to the coldly rational fundamental analysis with which she made her name.

“I don’t know what’s going on in the market right now because it makes no sense to me,” she told a reporter at the beginning of 2010. Around that time, Ms. Whitney decided to turn her analytical powers away from the great foolishness that so often seems to govern the stock market–her record as a stock picker is mediocre, anyway–and toward the more straightforward, theoretically substance-based bond market and found her own credit-rating agency. This was such an ambitious undertaking that it seemed a bit desperate, but the credit-rating agencies had failed so comprehensively over the past five years that it also seemed doubtful Ms. Whitney would not find a way of twisting the knife.

The most laborious prerequisite to getting an S.E.C. credit-rating-agency license is the publication of a comprehensive historical survey of a certain class of bond prices. And it was Ms. Whitney’s attempt to fulfill this requirement–her 600-page survey of the finances of the biggest American states, titled “The Tragedy of the Commons,” which she released to clients in September–that led to the current controversy. (Through an assistant, Ms. Whitney declined to comment for this story.)

Ms. Whitney’s choice to make the public finances of states and cities the focus of her study is roughly analogous to that of a college student changing his major from electrical engineering to 16th-century Japanese art in the middle of the second semester of senior year (if such a decision could be somehow worth tens of millions of dollars). In interviews, Ms. Whitney has repeatedly attributed fateful life decisions–majoring in German history, working on Wall Street, surely most aspects of her workout regimen–to an abiding desire to involve herself in what she believes to be the most “competitive” fields. Which makes this shift in focus all the more puzzling, since judging the credit risk of the Mendocino sewer system vs. the state of Oregon vs. the legion Montgomery counties has historically proven time and again a relatively lonely (and thankless) way to spend one’s working hours. After all, virtually none of the 89,000 or so separate issuers of American state or municipal bonds has ever exhibited an even remote danger of defaulting.

The most conspicuous exception to this rule in recent memory is Jefferson County, Ala., which filed for bankruptcy protection in 2008 after overdosing on a beyond-lethal dose of toxic interest-rate swap contracts Wall Street banks regularly pawned off on the more corrupt and/or negligent states and municipalities with whom they did business over the past decade. But even in Jefferson County, small-time municipal bond investors not under investigation for participating in a criminal conspiracy to defraud the county are still receiving sporadic interest payments thanks to the $300-plus monthly sewer service bills residents have been stuck paying. And while Wall Street financiers tried over the past decade to sell municipal treasurers on overpriced and explosive derivatives contracts, the municipal bond market was never (unlike the housing market) the focal point of any major cons. “The crass truth is that there was never that much money in munis for Wall Street,” Ms. Lebenthal told The Observer. “It was nothing like housing.”
By last week, the reckoning rhetoric had been mostly replaced by excited CNBC chatter about some of the bargains that could still be found in municipal bonds. Squawk Box anchor Joe Kernen sheepishly copped to overdoing it with clips of Governor Christie warning the town hall meeting that unions were bankrupting the state: “We get a sound bite like that, we’re gonna run it every half-hour; it’s incumbent upon us to do it!” Maria Bartiromo invited the Lebenthals on her evening show for a full half-hour to rebut Ms. Whitney’s predictions. Ms. Lebenthal was typically restrained, her father typically colorful. “To talk about massive defaults is the equivalent of talking about meteors, the downfall of Rome and the end of Western civilization!” he declared.

Over the weekend, Newt Gingrich recruited a new co-conspirator to his cockamamie scheme to let states declare bankruptcy in former Florida governor Jeb Bush, who co-authored an op-ed in the L.A. Times promoting the idea, but House Majority Leader Eric Cantor and the Association of Governors backed away from the idea. “I don’t know why anyone in the market would listen to Newt Gingrich,” veteran bond manager David Kotok said. “He’s the one who wanted the United States to default back in 1995.” On Monday, freshman Senator Pat Toomey of Pennsylvania introduced a bill with that very outcome in mind, calling for the federal government to award the Chinese senior creditor status over Social Security recipients in the event of a default.

The most common cat fights these days pit men shamelessly cheering on the wreck of civil society against the phantom parasites and pensioners freeloading off their tax dollars. It’s a tiresome feud, and it’s near impossible to avoid in any televised discussion of words like “deficit” and “debt” and “default.” In stoking her friendly fight with Ms. Whitney, Ms. Lebenthal gave us something else to watch: blonde vs. brunette, suburban-born transplant vs fourth-generation Manhattanite, new money vs. old, disappointingly superficial analyst vs. unexpectedly rigorous socialite-saleswoman. Battle of the Bond Girls