The last couple of weeks have provided plenty of entertaining media coverage if you’re a follower of rating agency activities.
First up, the Philadelphia Inquirer ran a story that suggests Collingswood NJ Mayor Jim Maley had failed to persuade Moody’s to adjust the borough’s rating. Apparently, Moody’s had previously acknowledged that in its prior rating action, its analysts had miscalculated the borough’s liability on an $8.5 million loan for a struggling redevelopment project. Reminiscent of S&P downgrading the rating of the United States after it was externally uncovered that they had made a $2 trillion miscalculation, Mayor Maley reportedly called the decision “an outrage” and explained that “[it's] a shell game,” …. “It’s clear they’re not changing this rating because if they do it too quickly, they were wrong.”
Elisabeth Sexton has been covering, in Australian newspapers, the Federal Court proceedings concerning 13 Australian councils’ suit in conjunction with their purchase of CPDO notes. (They’re suing Local Government Financial Services Pty Ltd, the investment bank that created them, ABN AMRO — now part of Royal Bank of Scotland – and Standard & Poor’s.) Sexton’s coverage details concerns about the rating agency’s reliance on its own models. For example S&P’s analyst on the deal expresses surprise to learn that their CPDO ratings had nothing to do with the outcome of their model. A separate S&P analyst was cross-examined about the possibility he gave in to the banker’s demands: an email he wrote to colleagues in May 2006 about a modeling assumption for volatility of credit spreads said that: ”We think it’s acceptable to lower the vol to 30 if it’s absolutely necessary for this trade.” While the rating is well known to be the result of a ratings committee, rather than a model, this goes back to the whole question of ratings transparency, and what it means (see Rating Agencies: Transparent or Not).
Next, Kroll Bond Ratings produced a very interesting report on muni bonds this week. Among other things, this snippet caught our eye, as it speaks to a tangible discrepancy between how each rating agency defines default:
“For example, an S&P study (2000) documents 917 bond issues that went into default during the 1990s, 137 of which were rated and 780 of which held no rating. Similarly, Moody’s (2010) claims that just 54 (Moody’s) rated issuers defaulted on municipal bonds between 1970 and 2009. [1] By contrast, various data sources indicate that 2,842 issuers defaulted over the same period.
[1] Moody’s study ignores technical defaults and defaults by issues that were wrapped by a financial guarantor.”
We feel that rating agency performance should be more comparable, and the definitions should be standardized, so that one can measure relative ratings performance in a way that comapres apples to apples. See our piece on Why It’s a Problem That Only Rating Agencies Evaluate Their Performance
Posted on November 16, 2011
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