Market Ticker on Moody’s Push to Get Municipalities to Agree to Indemnify & Hold It Harmless for Errors in Assigning Ratings on Municipal Bonds

29 Aug

This is amusing…

WASHINGTON — Moody’s Investors Service is pushing state and local issuers to agree to indemnify and hold it and its officers harmless for any mistakes they might make as a precondition to assigning ratings on municipal bond transactions, market participants said Thursday.

So let me see if I get this right.

Moody’s wants to be able to make mistakes (even “intentional” ones) and yet have the person who is having them do the rating be liable for those mistakes.  That is, it wants the standard for its liability to be willful misconduct or fraud – but not willful blindness or just plain idiocy.

What part of “independent” didn’t Moody’s understand about the alleged value of their ratings?

This shows the mockery that ratings agencies have become in more-stark relief than anything else I can imagine.  It is certainly reasonable for municipal governments to be held responsible for the acts of omission (or commission) that they undertake when presenting data to someone for some purpose, such as a bond rating.

But as soon as you ask someone to indemnify you not for their actions, but for yours you are no longer an independent body – period.

Never mind that many if not most state and local governments would have this clause deemed unenforceable, as such a clause would amount to a budgetary allocation and that has to be passed upon by the various body involved, such as the county commission or state legislature.

Moody’s claimed, incidentally, that this language predated FinReg and was not a “response” to anything in there.  My retort is that it doesn’t matter – the issue isn’t insulation from the government withdrawing their “you can say anything without liability” shield (a shield that nobody else has in any other venue, incidentally), it is that such language destroys any claim of independent status, and thus also destroys the predicate upon which said “ratings” have value in the marketplace.

Incidentally, it also makes those bonds un-marketable among those entities that require an independent rating, and if any of those organizations have purchased said bonds they’ve got themselves a little problem as they did so in violation of their charter!

Here’s my answer to such games:


Tags: , , , ,

Leave a Reply