Opinions are like ass holes everyone has one; so here is my opinion/ass hole. Bond Ratings are opinions nothing more and nothing less. Therefore one must infer that Bond ratings are like ass holes. The bad news is all ass holes smell to some varying degree. These ass holes stink.
If you are having some doubt on the issue I invite you to read the June 2009 Moody’s Investment Document Titled “Moody’s Rating Symbols & Definitions”, which is slick 54 page document full of horse shit which appears to have been written by their marketing department. You can find it at their web site, I would put the URL here, but it does not seem work correctly.
In particular one should be directed to a little section on page 8 titled “Long-Term Corporate Obligation Ratings” where the various rating levels for long-term corporate obligations are categorized. There are 9 major Levels. Appending a numerical value of 1 to 3 is used to further delineate six of these Levels. Three of these Levels are not further delineated by a numeric value. This allows for 21 levels of Moody’s Bond rating hell, three times as many as Dante provide in “The Inferno”. The rating for 19 levels of Moody’s Bond rating hell use one of the following four words in their description “judged, considered, subject”. The lowest levels of hell use the words “likely in default” or “in default”.
The words “judged, considered, subject and likely” are words that connote opinion not fact. You can be sued and lose for knowingly or for that matter unknowing misstating fact; knowingly misstating opinion is much harder to prove in a court of law. Additionally words and phrases like “minimal, very low, low, moderate, substantial, high, very high” are used throughout the definitions. Again these are words that connote opinioned size or probability, and again only in the most abstract of manner. No opinion or guidance is provided in this document as to what is the difference say between “very low” and “low”. It is left up to the reader to infer at their own peril as to what the committee was inferring when they came up with their rating, which is nothing more than a inference.
There appears to be just too much snake oil, too much smoke and mirrors, or just too much crap in the system and the process to make it seem credible much less usable to anyone. The system appears to have been designed to create and foster confusion.
The use credit rating agency rating of an obligations is at best a lazy man way of performing due diligence on his investment, and at worse malfeasance. The use of a credit rating which is reality nothing more than an opinion, that is bought by the selling agent should not relieve any fiduciary entity from performing their own due diligence on the issues that they are purchasing. The use of credit agency rating is fraught with pit falls most notable being the implicit assumption that the rating agency did their due diligence. At the end of the day it is the investor who stands the loss, not the fiduciary agent acting for the investor, and certainly not the credit rating agency.
The rating for long-term United States obligations as opinioned by one the three major credit rating agency fell from the first level of a possible 21 levels in their rating hell to the second level of a possible 21 levels in their rating hell. And now we all are supposed to grab the hand of the persons standing next to us and calmly walk off the cliff. “CRAP”
Credit rating agencies are filled with humans, and as such they are subject to all the failures of humans. They have acted in the recent past in a manner that has shown that they are not independent, unbiased, or disinterested third parties. They have been shown not to be independent, they know who provides their bread, and who butters it, and they have been shown to be loyal to their masters. They answer to no one outside of the system. Their actions are for the most part legal, but not moral.
In several recent books on the financial implosion it was state and believed by various individuals that the people who ended up in the various credit rating company arrived at that position because they were not the sharpest tools in the shed, in that they could not cut it at organization further up the food chain. I do not know if this is true, but recent actions by at least one of the parties would indicate to me that there might be at least some truth to story.
Credit rating agencies have been shown not to have performed due diligence in their rating, additionally it has been shown that the mechanism that they say exist internal to their organization to detect and control an malfeasance are at best ineffective, and at worse non existent.
In all probability they were corrupt from day one, it is just that given the stakes that were involved then it did not really matter, unfortunately it is different today.