All Sorts of Credit Ratings News

All right. I know you all couldn’t get enough of my bond news, so I’m back with a related topic: credit ratings agencies.  We’ve mentioned the crashing of our credit ratings, but some states aren’t taking it lying down.  Of course, California is leading the charge.  The Pew Center on the State’s takes a look:

Four days after one of the agencies, Fitch Ratings, downgraded California’s bond rating to the worst in the country based on the state’s struggling economy, California put together what state officials said was one of the largest long-term general obligation bond sales in U.S. history. The money will be spent on infrastructure projects.

State Treasurer Bill Lockyer said the sale, which exceeded the original goal of $4 billion, proved that the ratings the agencies assign to state bonds are dubious, because as far as the municipal bond buyers were concerned, “investors stepped up and showed their confidence in California.”

Lockyer and other state treasurers say these same agencies gave top ratings to AIG and Lehman Brothers, private companies whose problems helped cause the Wall Street collapse last fall. The state officials say the ratings firms should give states higher credit scores that are more comparable to those assigned to corporations. ( 3/31/09)

This of course is Lockyer’s job.  It is his job to stand up to the ratings agencies and try to prod our rating higher. Even a minor rating change is worth millions, if not billions, to our general fund.  And Lockyer has been making this argument for a while now.  And Lockyer isn’t the only one, with state officials all over looking into the issue, such as Conn. AG Richard Blumenthal. So, best of luck to them.  

That being said, if one were to really crack into the mythical reasonable investor’s mind, would they really be saying that they are showing confidence in California? Or is it that they simply don’t believe the federal government will allow us to fail.

The ratings agencies have the teevee and the intertubes just like we do. They know exactly what is going on.  They see the struggles that we have just in getting the most simple tax increase passed. They see the terrible polling numbers for the special election. They wonder how we are going to pay our bills without Prop 1C’s expected “payday loan.” (Skelton’s words, not my own.)

Now, Lockyer does have a point that if the mortgage backed securities that brought down our economy were given AAA ratings, it makes no sense to give our bonds an “A” rating. But one has to think that given all the scrutiny, the ratings agencies are being extra cautious.

The final point that should be made is that the credit ratings system is most certainly broken. The agencies are paid by the companies issuing the debt, it really is a ludicrous arrangement.

3 thoughts on “All Sorts of Credit Ratings News”

  1. The final point that should be made is that the credit ratings system is most certainly broken. The agencies are paid by the companies issuing the debt, it really is a ludicrous arrangement.

    And yet, California presumably pays for its ratings, and yet, the issue at hand is California wanting better ratings and not getting them. If the system is in fact broken in this respect, is there a way to leverage that?

  2. So while bond investors may be wondering at the short end how the immediate budget deficit ($8-13 billion) gets solved, they also are concerned about getting the principal and interest payments for the term of the bonds, and these bonds stretch 20+ years.  So the fact that 1C looks like it won’t pass is probably a positive (since there’d be no payday loan to be burdened by).

    The bond rating process is totally broken, and I’m glad you point that out.  The issuers of debt just need to threaten to shop around (‘Hey S&P, we’ve always gotten Fitch, Moody’s and S&P on our deals, but we’re thinking of just going to Moody’s and Fitch from now on – we don’t like how you’ve been treating us’), and if it doesn’t intimidate the ratings analysts themselves, it’ll get the attention of the executives/business side of the agencies.  This definitely needs to change.  

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