I’m certainly no financial whiz, but I never knew-until-today that municipal bonds, corporate bonds, and other financial instruments are rated on scales relative to their type rather than one all-encompassing scale.   e.g. “An A rated muni has the same chance of default as AA/AA- rated corporate and a AA+ rated CDO.” (quote from David Einhorn’s 10-19-2007 prepared remaks.)

I suppose it’s not that surprising that these things are rated on different scales given their different underlying variables (default, recovery rates, etc).  I just didn’t realize it happened.  I thought an A was an A.

Einhorn makes this difference especially noteworthy when he writes: “Moody’s noted the 10-year cumulative default rate for all investment grade Moody’s-rated municipal bonds, including bonds one notch above junk, is about half the rate for Aaa rated corporate bonds.”  Next time I look at Munis, I’ll give them a little more credit. (pun intended)

Regarding the rest of Einhorn’s paper: I agree with Einhorn’s criticisms of the ratings-hegemony held by the major agencies because of their exclusion from Reg FD (they get privileged information from the investments they’re being paid to rate without having to disclose it like everyone else).  Doesn’t seem like the current system is built to produce the most accurate ratings.

Sometimes (and lately more often), I look at America and think: “If this were happening in another country, we’d be outraged.”

(p.s. thanks to JCHP for passing along the paper.)

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