Boy, that was one of the fastest capitulations on record. Less than thirty-six hours after Barney Frank threatened to intervene and end the disparity between corporate and municipal bond ratings, Moody’s fell into line. That pretty much guarantees the other rating agencies will follow suit.
As we noted earlier, the ratings disparity gave the monline insurers a free lunch, since in many cases they were paid fees to insure muni bond issuers who properly should have been AAA or at least AA. Now that this rigged game is over, the bond insurers will have to assume real risk when they write guarantees. Their record in structured finance suggests they are not up to the task.
From MarketWatch:
Moody’s Investors Service said Wednesday that it will start rating municipalities on the same scale as corporations and countries, a move that may reduce demand for bond insurance.
The move could also provide some relief to money market funds and other investors that have to hold top-rated securities.
Laura Levenstein, senior managing director at Moody’s, said the agency recently decided to assign ratings from its corporate and sovereign system to municipal issuers upon request…….If a lot of municipalities take up Moody’s on its offer and get upgraded to AA or AAA, that may reduce demand for bond insurance…..
Shares of Ambac Financial, one of the largest bond insurers, fell 11% to $6.86 on Wednesday. Rival MBIA Inc. dropped 4.9% to $11.55.
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Hmmmm… are different government figures all on the same page when it comes to the bond insurers? First, the rating agencies got their arms twisted to avoid downgrading the bond insurers, but now they got pressured to do something which hurts the bond insurers. Did the sudden resignation of Spitzer give Barney Frank a free hand?
Hadn’t connected those dots, although Spitzer hadn’t yet resigned when Frank gave his threat.
Now that a lot of cities and states have been damaged despite the efforts to save the bond insurers, I think it’s open season on them.
Let me see if I understand this.
If the monolines were downgraded, this would force all the muni (and other) bonds they rated to the same rating they were moved to, resulting in losses for everyone holding those bonds, the End of The World As We Know It, etc.
But if only munis weren’t being rated on a “special” scale that artificially lowered their ratings compared to corporates, they could have had higher ratings anyway. So *poof*! instead of artificially rating the monolines high, the agencies just had to stop rating the munis artificially low.
Does anyone else think it’s ridiculous that huge chunks of the financial system rest on such artificiality?
cb,
You’ve discovered the dirty secret. Most of the practice of finance is preying on fear, ignorance, or CYA.
For instance, pension funds and endowments hire money managers, even though there is ample evidence money managers add not value (a paper by Vishny, Lakonishok and Schleiffer over 20 years ago wondered how the industry could survive). And then these entities hire fund consultants (who of course charge fees) to help these saps pick the right fund manager.
Buffett has repeatedly written about how the Helpers, as he calls them, reduce the returns of those who have capital.
It’s funny that haven’t Ambac and MBIA gotten into the CDO mess, nobody would even notice their muni “insurance” scam.