The municipal bond market’s recent implosion, which picked up steam after analyst Meredith Whitney's controversial prediction of hundreds of billions of dollars in defaults over the next year, has damaged the portfolios of many individual investors, but large sophisticated investors appear to have made a killing, FOX Business Network has learned.

Wall Street traders and other large investors made a killing off of the recent sharp declines in municipal bond prices by either “shorting” municipal debt or snapping up credit default swaps, or insurance policies on municipal debt, just after Whitney told "60 Minutes" that she had just completed a massive report on the municipal bond market that projected 50 to 100 large municipal bond defaults over the past year that would leave investors holding hundreds of billions of dollars in worthless or near-worthless muni debt.

The December 19th prediction, coupled with a weak environment for municipal bonds stemming from lower tax revenues used to repay debt holders, sent an already-difficult market into crisis mode. According to a research report published Wednesday by Barclays Capital, “over the past two months, muni funds have seen their largest weekly outflows on record.” Prices of municipal debt have fallen dramatically because of the panic selling, hitting the portfolios of individual investors, as opposed to hedge funds and other large traders. Individuals are the largest holders of municipal debt because these bonds are exempt from government taxes.

Many municipal analysts have criticized Whitney’s default prediction in that it would surpass anything seen even during the Great Depression, and called for her to publicly release her report so they can challenge its methodology and halt the panic selling. Whitney has so far refused, saying the report is meant for her clients, who have paid top dollar for her research, though she has repeated her prediction on other business networks following her "60 Minutes" appearance.

But as small investors were getting killed following her report, large players, including possibly Whitney’s own clients, began shorting the municipal bond market, or betting that it will fall. One way to bet against the municipal bond market is by snapping up credit default swaps, which according to data obtained by FOX Business, they did almost immediately after Whitney made her market call on "60 Minutes."

Credit default swaps are among the most popular ways hedge funds and other sophisticated investors can make money off of market distress; investors often snap up the default swaps when bond prices fall. Traders can make money by following the trading activity, and selling the default swap when they think bond prices might begin to recover.

FOX Business reviewed CDS trading in the bonds issued by several states that have been in the news recently as being fiscally distressed: Illinois, New Jersey, California and New York. The CDS on all of the bonds spiked sharply in the days after Whitney’s prediction, before leveling off particularly when municipal bond experts began to criticized the veracity of her prediction.

For example, credit default swaps on Illinois municipal debt that matures in 10 years spiked nearly 11.5% in the two weeks following Whitney’s call. CDSs on New Jersey bonds rose 6% over nearly the same period, while CDSs on California debt rose a little more than 3%.

Lawrence McDonald, a former Lehman Brothers bond trader who now runs his own financial advisory business, says the increase in CDS prices is significant because investors have rarely purchased CDS on municipal debt in the past on the belief that muni bonds were considered a low-risk investment. Historically, states and cities have rarely defaulted on their debt, but according to McDonald, “the little guy is bailing out of the market like never before,” and as small investors flee, some sophisticated investors have stepped in and “made a killing” by shorting municipal-bond market.

Another way they have made a killing is by snapping up municipal debt on the cheap, as panic selling drives down prices and creates incredible bargains. Take the example of the trading of tax-exempt debt issued by Goldman Sachs (NYSE:GS). Major businesses can qualify to issue low-cost municipal debt that is exempt from government taxes if they meet certain criteria; Goldman issued about $1.6 billion of such bonds to build its new headquarters in Manhattan.

But as of this afternoon, the tax exempt bonds Goldman issued were producing returns, or “yields,” at the same level, 5.85%, as a comparable taxable bonds issued by Goldman, reflecting the dramatic selling pressure in the tax exempt, muni market (when yields go up, prices decline).

Tax-exempt yields are almost always lower than taxable yields because of the tax advantages of municipal debt, and as a result some investors have begun buying Goldman’s tax exempt paper on the belief that the market will eventually recover, and when it does, they will make a fortune.

A spokesperson for Whitney did not respond to an email for comment.