Moody’s vs. S&P Rating of Chicago
On May 12, Moody’s downgraded Chicago’s GO bonds to Junk.
I commented on that downgrade in Moody’s Cuts Chicago Bond Rating to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.
On May 14, S&P Downgraded Chicago General Obligation Bonds from A+ to A-. That rating is three levels above junk.
Two Questions
Rate Shopping Whores
The answer to both questions is rate shopping.
Mark Glennon at WirePoints explains S&P, slated to rate upcoming Chicago bond sale, goes comparatively easy on downgrade. Hmmm.
“Chicago plans to price offerings of $201 million and $182 million on May 19, as reported yesterday by Bloomberg. And guess who is one of the two agencies slated to rate the new offering, hired by the city? You take it from here. What a system.”
Origin of Rate Shopping
It did not use to work like this. And I have been harping about the underlying problem for years. A good starting point is my September 28, 2007 post Time To Break Up The Credit Rating Cartel.
Here is a recap.
The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.
Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.
Establishment of the NRSRO did three things (all bad):
