Trust is key to the bond business, and trust is predicated on credibility. Relatively recent events in the asset backed security (“ABS”) market shocked the financial system and focused attention on the failure of rating agencies to correctly assess risk. Unsophisticated investors lacking the specialized expertise necessary to assess an investment vehicle outsourced their responsibility to investigate and determine risk.
Louise Gantress is a contributor to Muni Market Update. The opinions expressed are her own.
The turmoil and uncertainty that plagues the rating agency landscape provides an opening for alternative models to the traditional credit rating process. MarketTake start-up enterprise, utilizes a web-based survey format to generate market-driven assessments of municipal credit. By aggregating the survey results on featured municipal bonds, the MarketTake Score provides a bottom-up indicator of credit as a counter to the top-down approach of the rating agencies. MarketTake Scores are continuously updated making them dynamic and fast-forward yardsticks of market sentiment.
The Senate Permanent Sub-committee on Investigations, chaired by Carl Levin (D-Mich.) and whose Ranking Member is Tom Coburn (R-Okla.), announced its formal findings of fact with regard to the credit rating agencies and their role in the financial crisis. The findings, the result of an 18- month investigation, were examined Friday, April 23rd at the third in a series of hearings held by the Sub-committee, during which case studies involving the two largest U.S. credit rating agencies, Standard & Poor’s and Moody’s, were examined. The Subcommittee investigation led to the following formal findings of fact with regard to the credit rating agencies...
The Financial Industry Regulatory Authority (FINRA) has informed broker/dealers that the practice of calculating weighted-average ratings by themselves, rather than a nationally recognized statistical rating organization is misleading. FINRA asserts that these internal ratings give investors the impression the funds were rated by an independent third-party, and that there is no consistency across firms.
Nearly ten years ago, the Moody’s credit rating agency announced that it was in the process of revising their credit rating standards in an effort to adopt uniform standards for all types of debt – municipal, corporate, asset-backed, sovereign – based on measures of expected loss and default risk. Previously the rating system for municipal credits was largely independent of the rating systems for the other sectors. Each sector was rated on its own standard...
Glenn Dellinger is a contributor to Muni Market Update. The opinions expressed are his own.