Pimco: Whitney Analysis 'Not Worth Paper It's Written On'

In public, money-management powerhouse Pimco has waged a toned-down battle to rebut the doomsday predictions of analyst Meredith Whitney, mostly through the measured commentary of its co-founder, bond guru Bill Gross. Whitney, of course, is warning of hundreds of billions of dollars of defaults in the municipal-bond market.

In private meetings with brokers who sell munis to investors and other major players, however, Pimco has launched an all-out war to discredit Whitney’s research in an attempt to restore confidence in the $3 trillion municipal-bond market. In the wake of Whitney’s prediction, made on the television show 60 Minutes in December and in selective follow-up appearances, investors have sold their muni holdings in droves.

Pimco, which specializes in selling bond-related mutual funds and other investments, has been hit particularly hard; the redemptions from municipal-bond funds have hit historic proportions, according to a report by Barclays Capital, totaling tens of billions of dollars, though there are some signs that the run on the market has abated.

But it hasn’t abated enough for Pimco. While Gross quietly jabs at Whitney in his television commentaries, his people on the ground in charge of selling bond funds to brokers are playing offense. According to one person with direct knowledge of the matter, a Pimco representative said that they money management firm has even obtained a copy of Whitney’s report, and it “wasn’t worth the paper it was written on.”

The Pimco representative said, according to this person, that the money management firm paid $10,000 to obtain the report and considered having Whitney herself address analysts at the money management firm, but decided not to because officials there believed her analysis to be superficial.

Mark Porterfied, a spokesman for Pimco, declined to comment publicly about the matter; Whitney didn’t return repeated telephone calls for comment.

FOX Business was the first media outlet to obtain the report, written back in September of 2010, titled “Tragedy of the Common; Launching Ratings on the Top 15 States.” As first reported on FOX Business, Whitney’s analysis contained none of the doomsday predictions she made on television, namely that there will be 50 to 100 major municipal-bond defaults costing investors hundreds of billions in losses over the next year.

It focused on state municipal issues, and stated that her analysts showed that no state would likely default. It made just a passing reference to the wider municipal bond market, namely cities and private entities that can issue tax exempt debt , stating “we believe there will invariably be defaults on the local level,” without giving specifics.

Whitney’s claims of hundreds of billions of defaults come amid considerable strain on budgets of states and cities across the country due to falling tax revenues as unemployment remains high and business conditions weak. And yet, the amount of defaults she predicted would surpass anything since at least the Great Depression, while many economists are projecting an improving economy in 2011.

That said, her statements have roiled the municipal bond markets, and caused small investors to flee, even attracting the attention of the Securities and Exchange Commission. Small investors who sold their holdings may be forced to jump back into the market (small investors are the largest holders of muni debt because of their tax advantages) at higher prices if her predictions turn out to be wrong.