Idea of the Week: A Recalibrating Muni Ratings and Rating Muni Raters
Mar 26, 2010
On March, 16, 2010 Moody’s Investors Service announced that it would recalibrate all of its ratings of U.S. municipal bond issues to its global rating scale, beginning in mid-April, abandoning the separate municipal scale that it has used since 1918. Approximately 70,000 municipal ratings will be recalibrated in this process over a period of several weeks, on an industry by industry basis. Following the recalibration, all new municipal securities will be rated on the global scale.
Moody’s executives stress that the recalibration will not signify a change in fundamental credit assessment. According to Moody's Municipal Group Managing Director Gail Sussman, "the recalibration of the ratings represents a move from their expression on one scale to another and does not represent a change in our opinion of the credit quality of the affected issuers."
This is a change that has been sought by Members for Congress for some time. Last year, Senior House Financial Services Committee Members Reps. Michael Capuano (D-MA) and Emanuel Cleaver (D-MO) introduced legislation that would require Moody’s and the other National Recognized Statistical Rating Organizations (NRSROs) to rate municipal securities on the same scale as corporate borrowers, believing that the separate municipal scale was driving up borrowing costs to municipal borrowers. This bill was incorporated in the Wall Street Reform and Consumer Protection Act that was passed in the House of Representatives on December 11, 2009. Senate Banking Committee Chairman Chris Dodd’s (D-CT) comprehensive financial regulatory reform bill, the Restoring American Stability Act of 2010, which was marked up on Monday, March 22, 2010, would also mandate that NRSROs rate municipal securities on a global scale.
Both the Dodd bill and the House passed bill would also significantly augment SEC oversight of credit rating agencies. Both bills would establish an Office of Credit Rating Agencies at the Securities and Exchange Commission reporting directly to the Chairman, which would be tasked with examining the NRSROs annually and making exam reports public. Senator Dodd’s bill broadly follows the House passed bill, requiring the SEC to conduct annual reviews to address ratings, policies and methodologies. But unlike the House passed bill, it allows the SEC to deregister rating agencies with inadequate ratings. Senator Dodd’s bill confers upon investors a private right of action against rating agencies for a “knowing or reckless failure” to conduct a reasonable rating investigation. The Wall Street Reform and Consumer Protection Act permits private rights of action under a gross negligence standard.