Shostack + Friends Blog Archive


Credit Ratings for Governments?

Last week, I talked about consumer credit in “The real problem in ID theft.”

Yesterday, the New York Times had a story, “States and Cities Start Rebelling on Bond Ratings:”

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.

At every rating, municipal bonds default less often than similarly rated corporate bonds, according to Moody’s… Colleen Woodell, chief quality officer for public finance, acknowledged that municipal debt had defaulted at lower rates than corporate issues, but she noted that the data covered a relatively benign 20-year period…Ms. Woodell said the disparity was “within a tolerable band” and would diminish over time.

Tolerable to whom, Ms. Woodell?

The article goes on to explain that the financiers are taking enormous sums of money from taxpayers on what is really very safe debt.

Since most government bonds are repaid, there would be a very large chunk of identically rated bonds.

If you rate 95 percent of the issues the same, the ratings cease to be useful, and investors need and utilize these ratings to differentiate credits,” said John Miller, chief investment officer at Nuveen Asset Management in Chicago, which manages about $65 billion in mostly tax-exempt bonds.

Really? If the bonds are safe, and 95% of them would get a AAA rating, maybe we could save a lot of money by removing a low-value information source.

It makes sense to look at the organizations who control credit data, and ask the age-old question: who benefits? These organizations aren’t in it for their health.