Boy, that was one of the fastest capitulations on record. Less than thirty-six hours after Barney Frank threatened to intervene and end the disparity between corporate and municipal bond ratings, Moody’s fell into line. That pretty much guarantees the other rating agencies will follow suit.
As we noted earlier, the ratings disparity gave the monline insurers a free lunch, since in many cases they were paid fees to insure muni bond issuers who properly should have been AAA or at least AA. Now that this rigged game is over, the bond insurers will have to assume real risk when they write guarantees. Their record in structured finance suggests they are not up to the task.
Moody’s Investors Service said Wednesday that it will start rating municipalities on the same scale as corporations and countries, a move that may reduce demand for bond insurance.
The move could also provide some relief to money market funds and other investors that have to hold top-rated securities.
Laura Levenstein, senior managing director at Moody’s, said the agency recently decided to assign ratings from its corporate and sovereign system to municipal issuers upon request…….
If a lot of municipalities take up Moody’s on its offer and get upgraded to AA or AAA, that may reduce demand for bond insurance…..
Shares of Ambac Financial, one of the largest bond insurers, fell 11% to $6.86 on Wednesday. Rival MBIA Inc. dropped 4.9% to $11.55.