Not if McHenry is defending the bankers and bond dealers when an analyst stands up and calls bullcrap on the muni market.

Meredith Whitney no doubt hit the banksters in the wallet by predicting massive defaults in the municipal sector. Money has run for the exits in recent months. And? So? This merits a Congressional investigation? Only if McHenry is a wholly-owned subsidiary of Big Money.

Municipal debt ratings have long been inflated by and benefited from the assumption that governmental entities had rock-solid revenue streams. Well, the last two years have proven that many governments (ahem) have relied on positively fantastic revenue assumptions. And the ratings agencies and deal placers went right along with those assumptions. It was fraud on a massive scale. Now, someone comes along to point out that the New Normal might not throw off enough revenue to pay the massive debt bills — off with her head!

Check the supposed “solution” the banksters tout to prove Whitney is wrong and defaults cannot happen. State-imposed financial control boards that would seize tax dollars as they come in to pay down debt, essentially jumping the bond holders to the front of the line, ahead of local taxpayers and citizens. This is an admission that in many cases AAA ratings were a joke, that the political risk of non-payment of the debt was not properly priced into the offering. This gets us to the heart of the matter, if Rep. McHenry cares to pay attention.

Muni debt sky-rocketed pre-crash because of a happy convergence of goals. Governments wanted to spend money without raising taxes and bond traders wanted commissions on bond placements. It was in no one’s interest to point out potential problems in servicing the debt. The higher the rating, the bigger the placement, the more money for everyone. The political risk of ever-larger debt service eating into operating budgets was massaged away with rosy revenue and tax-base growth assumptions — we’ve certainly seen that in Mecklenburg County. Dedicated revenue streams were double and triple promised to multiple issues will little attention paid to the overall debt burden. The emphasis was making the deal “work” not on the long-term financial health of the government unit.

As a result, in 2011, we actually have the chairman of a subcommittee of the House of Representatives suggesting, in deed if not word, that the first job of local government is to pay bond traders and mega-banks instead of cops, firemen, and school teachers.

Update: Charlie Gasparino needs to stick to leaks from CEOs, he does not know a damn thing about politics.

Update II: Response from McHenry’s office to this post, along with my reply:

Jeff,

Sure wish you would have reached out to me before writing your blog post today. Congressman McHenry is holding this hearing on the looming state and municipal debt crisis tomorrow because he believes that fiscal imprudence has been rampant in the states and municipalities. He believes that over-spending, not under-taxing, has been the driver of the debt crisis. The hearing will examine the causes and severity of the debt crisis and take in to consideration ways to provide states the tools they need to dig themselves out from their debt.

The hearing has academic scholars who have written in depth on state fiscal issues, particularly on unfunded or underfunded liabilities in pension funds. That issue is an extremely troubling one that Congressman McHenry is interested in hearing more about.

The one thing that is known for sure going in to these hearings is that there will be no bailouts and no additional stimulus money available.

Hope this helps clear up where the Congressman stands a little. If I can ever be of assistance or answer any questions for you please let me know.

Best,
Ryan

Ryan Minto
Rep. Patrick McHenry (NC-10)


Thanks for the input, Ryan. Did the NYT misquote the Congressman:

…But the subcommittee’s chairman, Representative Patrick T. McHenry, Republican of North Carolina, said that would not dissuade him from investigating her record.

“This isn’t a gotcha thing, but she’s going to be part of the hearing, whether or not she participates,” he said. “If she doesn’t want to come forward in a venue like this, that makes a statement.”…

If not, I spent 13 years in DC, I know a subcommittee lynch mob when I see one. Whitney is a not a fruitful subject for investigation, nor is the bankruptcy canard. (Although I would like to see Eileen Norcross’ testimony which is not posted yet.)

Get Chris Whalen up there (his new book is required reading) to explain what happened and how to fix it. The banks and bond traders helped drive the over-spending. Call Brian Moynihan to testify to get to the root of the looming crisis.

Later.
—
Jeff A. Taylor

I think it was an accurate quote, but how it is perceived is important. “This isn’t a gotcha thing” was him explaining to the reporter that this isn’t an investigation of Meredith Whitney. I think what he was trying to explain was that she did make a splash with her 60 Minutes segment and because it ties so closely to what we are looking at it could be brought up. We are very excited about having Ms. Norcross. We’ve been reading her work for some time now. I’d be glad to send you her testimony if you would like.

Ryan Minto