With credit-rating agencies under fire for their role in the global financial meltdown, can investors trust their ratings of municipal bonds?
We've been asked that question many times lately, and for good reason. Investors have relied on municipal bond ratings since S&P began assigning them in 1916. In fact, the widespread use of ratings has fueled the growth and popularity of municipal bonds. Ratings have allowed investors in one city to better relate to the credit quality of bonds issued in others. Historically, markets for municipal bonds tended to be regional. Bond ratings, as trusted opinions from an independent source, allowed municipal bonds to be traded nationally. This is important because unlike stocks, municipals don’t trade on a central exchange.
Recently, as a result of Senate hearings on their role in rating debt backed by sub-prime real estate, the spotlight is on the rating agencies themselves, leading investors to question whether municipal bond ratings should also be called into question. Not long ago, Moody’s and Fitch announced “recalibrations” of their muni ratings to bring them in line with their corporate counterparts. This action was widely seen as recognition that municipal bonds, with their extremely low default rates, were rated too low in comparison with much riskier – but higher rated - corporate bonds.
The sub-prime crisis
Public perception placed at least part of the blame for the sub-prime crisis on competition among rating agencies for market share, and the resulting pressure to deliver the ratings the investment banks wanted.
For muni investors, it's important to know whether practices by the agencies could cause a similar catastrophe in the municipal bond market, and if their ratings can be trusted.
How the rating process differs
The bonds at the center of the sub-prime meltdown were “structured” products. Unlike a traditional municipal bond, structured bonds have no issuing “entity,” such as a local government, hospital or other responsible party seeking to raise capital from the sale of bonds for traditional purposes. Rather, structured bonds represent slices of large pools of underlying financial assets. Each slice contains hundreds or thousands of mortgages whose mortgage payments are used to make principal and interest payments on the bonds.
Municipal bonds, on the other hand, are issued to fund capital needs such as buildings, or water and sewer projects for either governmental entities or qualifying non-profits. There is usually a security interest in the project pledged to bondholders.
This difference is key. Structured ratings try to statistically predict the likelihood of default, based on historical loan performance data. Municipal ratings are indicators of relative credit quality, rather than default predictors. Few municipal bonds ever default, and those that do, are typically unrated.
Municipal bond ratings provide a guidepost to investors as to which bonds are likely to be more economically sensitive, have greater revenue or expenditure challenges or have stronger or weaker security pledges in case a default does occur. All bonds rated "BBB-/Baa3" and above are considered “investment grade,” meaning they are expected to meet their debt service obligations in full and on-time. Average ratings for state and local governments respectively, are in the "AA/Aa" and "A" categories.
The rating process
Contrary to public perception, rating agencies do attempt to maintain independence and neutrality in the rating process. Ratings are done on request by the issuer, who then cooperates in providing required financial information and other data needed in the rating process. S&P assigns two analysts to each rating, a primary and “backup” analyst. The primary analyst is expected to develop a formal rating presentation and rating recommendation that is presented to a rating committee composed of senior analysts. After discussion and voting, a rating is assigned and communicated to the issuer. The issuer can appeal the rating, but only by presenting new information not available at the time of the initial rating decision.
Shielding the rating process from outside influence at S&P is accomplished by committee decision procedures. It would be close to impossible for a compromised analyst to overcome the committee process since the assignment of a rating is ultimately out of the analyst’s hands. A rating recommendation substantially at variance with other similar credits would raise eyebrows.
Although rating agencies are paid fees by issuers for ratings, fee setting is separated from the analytical process and is determined by a separate staff. Analyst compensation is not based on the volume of ratings done or new business originated.
Like any business, senior management within the rating agency is expected to generate earnings that please its public owners (Moody’s) or corporate parent (S&P). While analysts often participate in the rating of new products, their compensation is not tied to product development and they are not compensated on business production, but rather on quality of analysis, committee participation, and other rating quality related evaluations.
Getting it right
Clearly, while ratings are assigned appropriately most of the time, there are instances where the rating process, no matter how rigorous, can end with an errant conclusion. Either the rating criteria were wrong or misapplied, important but unknown information was not supplied to the analyst, or judgment of the analysts and committee were just inaccurate. A healthy, properly staffed surveillance process will usually catch these problems. Fortunately, in the municipal bond sector, the glaring mis-calls have been few, and the market has remained confident in the vast majority of rating decisions.
...you are a product of your environment, your environment is a product of your priorities, your priorities are a product of you......
The replacement of morality and conscience with law produces a deadly paradox.
STOP BEING GOOD DEMOCRATS---STOP BEING GOOD REPUBLICANS--START BEING GOOD AMERICANS
The DOT building is locked into a long term lease -- not likely to happen, therefore. plus they got a good deal going there in terms of paying taxes, thanks to the former rulers of Schenectady.. why give it up...
Good deal on the taxes?
Wow. Assessment just over $10 MILLION, Exemption LESS THAN $1 MILLION. Uh, that means, SB, that taxes ARE PAID on roughly $9 million of the $10 million assessment. AND, the former rulers set the tax exemption as TEMPORARY and it ends in 2012.\
Now, SB, would YOU care to provide documentation to disprove the FACTS?????? By the way, provide us the proof of SMALL and VERY SHORT TERM tax exemptions of the stuff downtown under the socialists. Can you do that?
Oh yeah, SB, as usual, when I state something countering what you said, I ALWAYS back up my statements with OFFICIAL PROOF.
The OFFICIAL PROOF is found in the following. First, here is the FINAL assessment roll from the City of Schenectady itself. You can see 328 State Street, this is page 588. Notice where it says the full assessment value is $10,105,400. Notice the property tax exemption amount of $920,540. Can you read those words, SB? Or did you fail reading in school? Can you READ the words TAXABLE AMOUNT is $9,184,860????? Can you see that?????? THAT is what the former rulers did. Taxes ARE PAID on $9 million. Do you know how to do math?
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
The DOT building is locked into a long term lease -- not likely to happen, therefore. plus they got a good deal going there in terms of paying taxes, thanks to the former rulers of Schenectady.. why give it up...
By the way, SB, the state does not pay property taxes. The owners collect rent out of which the owners pay property taxes. The state COULD get out of the lease, heck, it could sublet to some private sector and then the state would not be paying. All things are possible.
So, SB, show us a copy of the lease, can you do that? I don't mean what a mere newspaper worker wrote, but the lease itself, show us what the terms of the lease are....YOU claim it's long term, show us the proof from official sites, NOT from a mere newspaper worker.
And by the way, SB, the property tax exemption to the owners, which was only partial, started in 2003 and it ends next year. YES, SB, once again, as usual, I provide proof of what I write.
Here is a copy of the tax info from the county website. I trust you can read the words "end" and "2012" Can you ??????
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
thanks for keeping us all informed to the 'truth'!!
Good job!
When the INSANE are running the ASYLUM In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. -- Friedrich Nietzsche
“How fortunate for those in power that people never think.” Adolph Hitler
I find it interesting that people are starting to look into the whole ratings agency scam, because if you recall, BS's claim to fame was that he saved Schenectady by improving our Standard and Poor bond rating when he raised taxes nearly 25%. Me, I just looked at it from the point of view of someone who has lived here a long time. Schenectady had problems, but since that tax increase BS was so proud of, I could see the city start to get worse BY THE DAY. I think that so much of this financial stuff is so hard to understand, people just assume that someone like BS who appears to know more about it than they do must be doing the right thing. Ron Paul was on PBS talking about the worldwide financial crisis recently. He sounds very reasonable and informed when you see him speak for himself instead of reading what the press says about him. I think people have to wake up to the fact that the "experts" aren't always telling you the truth, and that "leaders" (like BS) don't always know what they are doing even when they won't admit it, and sometimes (a lot of the time) they are acting only in the narrow self interest of themselves and their cronies.
we can move to the left because the ratings agencies say its AAA then we get moved to the right because the ratings agencies say left is now B- and right is now AAA......move along move along nothing to see here....damn you, get back on that hampster wheel......go go go before we rate you to the grave
...you are a product of your environment, your environment is a product of your priorities, your priorities are a product of you......
The replacement of morality and conscience with law produces a deadly paradox.
STOP BEING GOOD DEMOCRATS---STOP BEING GOOD REPUBLICANS--START BEING GOOD AMERICANS
Yep, as expected, SB can't provide one shred of proof of what he writes. Can't provide one teeny shred of proof to disprove what I wrote.
SB avoids this thread now
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
Yep, as expected, SB can't provide one shred of proof of what he writes. Can't provide one teeny shred of proof to disprove what I wrote.
SB avoids this thread now
Looks like you poured SB a big tall glass of Shut the F$%# Up.
Life is tough, but it's tougher when you're stupid - John Wayne
TIP TO NEW VISITORS TO THIS FORUM - To improve your blogging pleasure it is recommended to ignore (Through editing your prefere) the posts of the following bloggers - DemocraticVoiceofReason, Scotsgod08 and Smoking Bananas. They continually go off topic, do not provide facts and make irrational remarks. If you do not believe me, this can be proven by their reputation scores or by a sampling of their posts.
SB takes marching orders and gathers info from 'the handlers'!
When the INSANE are running the ASYLUM In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. -- Friedrich Nietzsche
“How fortunate for those in power that people never think.” Adolph Hitler
Looks like you poured SB a big tall glass of Shut the F$%# Up.
ROFL. And take a bow again. Thank you, thank you.
But just watch, when he makes an appearance, he'll side step to avoid commenting directly on the proof of how I proved him wrong yet again.
And just like DV, the more SB writes that I prove wrong with direct links to official sites, and he doesn't come up with one teen shred of proof (from other than heresay), the less credibility he'll show
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
The DOT building is locked into a long term lease -- not likely to happen, therefore. plus they got a good deal going there in terms of paying taxes, thanks to the former rulers of Schenectady.. why give it up...
Ah hem.
DOT budget cuts their regional offices according to the head of the department. Obviously you were wrong again, SB, just like usual
And this is what one DOT employee points to the proof
Quoted Text
DOT employees can go to the “P” network drive to find files with names related to the “restructuring”. It is in P:\Administrative Services\Facilities Mangement. Look for the files named, “REGION ONE move to 50 Wolf Road” (dated 12/20/11) and “REGION ONE consolidation” (dated 3/14/11).
So SB, have you found the place ON the GCAR website where the property values in Schenectady are going up? Have you found the place ON the GCAR website where it says the value in Schdy county is that $185,000 (+/- a few) the you claimed GCAR said....but you were ONLY doing a copy and paste job from a mere newpaper worker....a worker who actually did not proofread what he wrote.
Well?????? ROFLMAO
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
DOT budget cuts their regional offices according to the head of the department. Obviously you were wrong again, SB, just like usual
And this is what one DOT employee points to the proof
So SB, have you found the place ON the GCAR website where the property values in Schenectady are going up? Have you found the place ON the GCAR website where it says the value in Schdy county is that $185,000 (+/- a few) the you claimed GCAR said....but you were ONLY doing a copy and paste job from a mere newpaper worker....a worker who actually did not proofread what he wrote.
Well?????? ROFLMAO
BRAVO MC1...........again!!! Looks like you should be working for the gazetto where you can show them what real 'investigative reporting' is!!! HURRAY for citizen journalists like MC1!! Take a bow!!
When the INSANE are running the ASYLUM In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. -- Friedrich Nietzsche
“How fortunate for those in power that people never think.” Adolph Hitler
Optimists close their eyes and pretend problems are non existent. Better to have open eyes, see the truths, acknowledge the negatives, and speak up for the people rather than the politicos and their rich cronies.
Logged
