Dollar Dominatrix who saw the credit crunch coming

You have to believe Meredith Whitney when she says scheduling conflicts have kept her from agreeing to appear at today's House of Representatives hearing into state and local government finances. The woman they call the Dollar Dominatrix does not normally turn down an opportunity to espouse her apocalyptic views.

Her critics may caricature her bearish outlook, dismiss her as a self-publicist and sneer that it is her good looks that get her on TV, but she has earned her platform. People have been taking notice ever since October 2007, when she predicted that Citigroup, the most significant bank in the US, would run out of money to pay its dividend. She was pilloried for that call, but it turned out to be right – and then some.

Then, she was banking sector analyst at Oppenheimer & Co, a middling investment bank, where she had learnt her craft at the knee of Steve Eisman. He wasn't famous before the crisis either, but he is one of the heroes of the Michael Lewis book The Big Short, about the Wall Street misfits who saw the credit crisis coming and made a fortune betting against the banks.

Ms Whitney struck out on her own in 2009, creating the Meredith Whitney Advisory Group, and her ambitions have only grown since then. Her report on state and local government finances, The Tragedy of the Commons, is the first step in the firm's campaign to establish itself as a major rating agency of bonds and to dislodge the hold on that business by the tarnished trio of Standard & Poor's, Moody's and Fitch.

Profilers of Ms Whitney never fail to mention her husband. These days John Layfield is a Fox News commentator, but he is better known as a champion wrestler. These days, it's hard to say which of the pair is the tougher cookie.

Gambling on municipal bonds

The US federal government's $13trillion debt has been the No 1 political issue since November's midterm elections, but it is the $2.8trillion of debt raised at the other levels of government that has the financial markets and their close observers really concerned right now.

The 50 states are divided into counties, with towns, townships and individual cities below those, and – together with school districts, redevelopment agencies, public utilities, airport authorities and other agencies – all have been able to tap the municipal bond market for cheap funds. Municipal bonds, pr "munis", enjoy favoured status in the financial markets. Because they might be used to fund infrastructure or development projects, they are viewed as worthy of public support, so the income investors get from them is often exempt from tax. That is not something that can be said of corporate bonds, so investors tend not to demand high interest payments from munis.

As well as the tax breaks, munis have found favour because of their perceived safety. Most of the authorities that issue them have tax-raising powers, and could therefore tap citizens if necessary to avoid defaults. Other munis are secured on revenues from things like road tolls or airport fees. Investors took comfort from the likelihood that, should a city or county get into trouble, the state was likely to step in and help out, rather than risk a default that could raise interest rates for all state muni bonds.

That isn't to say that munis don't default. Last year saw one of the largest defaults ever, when the Las Vegas Monorail Co filed for bankruptcy. The four-mile train line, which links hotels on the Las Vegas Strip, never came close to the revenues projected in 2000.

The city of Las Vegas's own bonds were downgraded last month by Fitch, which cited the ongoing recession affecting the area. And it is a picture that is common across many of the worst hit parts of the US. The question is how severe the crisis becomes.

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