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Whitney Sees ‘Danger Zone’ After Failed Default Forecast

Meredith Whitney, the banking analyst who incorrectly predicted that “hundreds of billions of dollars” of municipal-bond defaults would occur in 2011, said the tax-exempt market is still a “danger zone” for investors.

The reaction to her December 2010 forecast on CBS Corp.’s “60 Minutes” television program was “surprising,” Whitney said today on CNBC’s “Squawk Box.” About $23 billion was withdrawn from tax-exempt-bond funds in the four months after her statement, according to the Investment Company Institute.

“Clearly, this is something people see in their communities and can relate to and see on an anecdotal basis every day,” Whitney said. “If it was just taking my word for it, I don’t think you would have seen a reaction that strong.”

Defaults involving missed payments totaled $2.6 billion in 2011 out of $3.7 trillion of outstanding municipal bonds, according to Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors.

State and local securities earned 14 percent through yesterday since Whitney’s Dec. 20, 2010, “60 Minutes” interview, according to Bank of America Merrill Lynch indexes tracking prices and interest payments. That’s more than the 9.4 percent for Treasuries, 10 percent for company bonds and 9.2 percent for the Standard & Poor’s 500 stock index.

Writing a Book

Whitney plans to write a book about the municipal market titled “Downgraded: Why the Next Economic Crisis Will Be Local,” according to a statement today from Portfolio, a Penguin Group imprint. It is scheduled to be published in November.

The book “will reveal why America’s cities and states are in deeper trouble than is commonly realized, with far-reaching and potentially disastrous consequences,” according to the statement.

Whitney said today that state and local finance “shapes the future of the American economy and shapes the future of migration in this country.”

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net;

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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