Municipal Bonds Ratings Don’t Reflect Real Bond Pricing
Can you really trust your AAA municipal bonds? Oddly enough, investors are still showing that they put a lot of stock into the AAAs assigned by the major rating agencies, Moody’s, Standard & Poor’s, and Fitch -- even after their dubious, self-serving actions largely contributed to the global financial crisis of recent times. Sure, the ratings seemingly make assessing bond pricing and risk easier, and these agencies have been around for a century, but when the SEC officially ordained them, “The Recognized Statistical Rating Organizations,” they could not have foreseen the egregious misuse and abuse of trust that the ratings agencies would go on to commit in the following decades. How do we know true bond values?
Dubious Municipal Bonds Ratings
In the period leading up to the housing market crash, which would eventually snowball into a global financial crisis, the agencies worked with large banks to pool together dubious subprime mortgages into mortgage backed securities, assigning them AAA ratings while restricting key buyers to purchasing only those municipal bonds with the highest bond pricing and ratings.
In turn, the major ratings agencies banked big while the rest of the world suffered with plummeting credit and home prices, and skyrocketing foreclosure rates
While there are relatively few AAA companies in the world, Moody’s, S& P, and Fitch could still reconcile assigning AAA rating to thousands of municipal bonds, passing them out as though they were sunflower seeds to the same companies that were lining their pockets.
Goldman Sachs & Moody’s
When Goldman Sachs allegedly swindled its clients by selling them junk municipal bonds while having other cohorts bet against them, depreciating the bond pricing and ensuring failure while in turn cashing in on their bets, Moody’s was there. The agency complicity passed out AAA ratings to municipal bonds that were engineered to crash and burn.
How can a once venerable agency allow corruption to run their reputation into the ground to be dragged through the mud? Weak internal oversight, general complacency and a lack of touch with reality is what many within Moody’s have said of its top executives. Unsurprisingly, of the three major ratings agencies, Moody’s had been the least forthcoming in ongoing SEC investigations, and for this reason, they’ve finally been subpoenaed.
Smart Investing
As the rating agency model has hardly changed since it helped fuel the economic crisis, investors must show some common sense and remain wary of the major agencies – if for no other reason than their poor track records. Conducting personal research and bond analysis to ascertain bond pricing and yields is the smart ticket to investing in municipal bonds.