Connecticut Vs. The Ratings Agencies
A woman once sued McDonald's (MCD) because she spilled the company's hot coffee on her lap while driving and a man sued Anheuser-Busch (BUD) because he guzzled its beer, but a gaggle of bikini-clad babes didn't show up and invite him to play volleyball.
These high points in American jurisprudence have merit compared with the state of Connecticut's decision to sue the nation's top credit rating firms.
The alleged sin: Giving low credit ratings to cities and towns that may have cost the taxpayers big bucks in higher interest payments on bonds.
Connecticut Attorney General Richard Blumenthal and Consumer Protection Commissioner Jerry Farrell Jr. charge that Moody's (MCO), McGraw Hill (MHP) and others established a dual ratings system that results in lower credit ratings for bonds issued to states, cities and other public agencies.
The lower ratings result in higher costs, but in Hartford none dare call it risk assessment.
Here's more on how the alleged conspiracy works: Publicly traded, money-making companies aren't the same as, say, the town of Waterbury and therefore aren't rated by the same criteria.
Perhaps the good civil servants in the Nutmeg State haven't noticed that boys and girls are different, too.
For starters, the real estate downturn has eroded valuations and cut tax receipts in many jurisdictions. Cities don't sell stock for all the obvious reasons. Topnotch companies such as General Electric (GE) and Intel (INTC) produce innovative products and compete in global markets. But what do cities and states produce except budget deficits and silly lawsuits?
Anthony Mirenda, a spokesman for Moody's, told The Associated Press: "Based on our understanding of the allegations as it relates to Moody's, it is entirely without merit and we expect it will be dismissed expeditiously."
Let us hope.
But the lawsuit raises a basic question: Has the split between the public and private sectors become so deep that Connecticut's top shyster doesn't understand the difference between the 2, or the need for objective assessments of a city's financial status? In government, extra money is as close as a tax increase or fee hike, but the attorney general apparently has no idea how Wall Street raises and allocates capital - or why.
Clearly, this calls for a vast public effort: Economics 101 for Governmental Dummies. (Please, no quips about that being redundant.) This will take buckets of money and here's betting it won't be raised through an IPO.
Adam Smith, do something!
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Yes, certain public sector entities are hurting and could find it difficult to increase the overall tax burden, but economic down-drafts are sure to hit many leveraged corporate entities just as hard if not harder.
I think the CT AG is way smarter than you suggest.
You do realize these are the ratings agencies who NEVER downgrade until a week or two after companies declare bankruptcy?
Rating agencies keep two scales solely to create an artificial market for bond insurers. Guarantors in turn then get to charge premiums and give kick-backs to the rating agencies. (There MIGHT be an excuse for guarantors if they were like title insurance - confirming the docs, not really insuring.)
Lack of volume and rating agency greed let the guarantors stray into corporates, especially structured finance.
Now the entire business model is bust, and the agencies can no longer keep up the deception.
