Whitney Says U.S. States May Need Federal Bailout

The U.S. government will face pressure to bail out struggling states in the next 12 months, said Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008.

While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

“People will think the federal government will bail these states out,” Whitney, 40, the founder of Meredith Whitney Advisory Group Inc., said in an interview on Bloomberg Television’s “In the Loop.” “It’s going to be an incredibly divisive issue.”

Whitney’s comments coincide with her release of a report rating the financial health of the 15 largest U.S. states measured by gross domestic product, according to Fortune magazine. The report, which Whitney said took two years to complete and hasn’t been released publicly, ranks California’s finances the worst, with New Jersey, Illinois and Ohio tied for second-worst.

The longest recession since the Great Depression has left states facing budget gaps of $72 billion next fiscal year, according to a July report by the National Conference on State Legislatures. State pension funds face deficits of more than $1 trillion, according to the Pew Center on the States. The amount of municipal debt outstanding has increased about 90 percent in the last decade, according to Federal Reserve data.

Buffett and Bailouts

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