But Corporate Bonds Get Higher Ratings Even Though
Corporations Default 100 Times More Often
And
When Governments Default on "Municipal" Bonds,
Investors Usually Receive Some or All of their Money
Back, Which They do Not Usually Get Back in Corporate
Bankruptcies.
Bond-issuing government bodies, also known as "public borrowers," would generally have the highest AAA credit rating available if only credit raters evaluated them the same way they evaluate bonds issued by corporations (other than the credit rating agencies, which are corporations too, after all). This has caused the Attorney General of Connecticut, for example, to investigate whether credit rating firms are in violation of Antitrust Laws. Julie Creswell & Vikas Bajaj, "States And Cities Start Rebelling on Bond Ratings/Dual Standard is Cited/Billions in Savings Seen if Corporate System is Used Uniformly" p. A1, col. 6 (New York Times Nat'l Ed., Monday, March 3, 2008).
In fact, every single State except Louisiana would have a AAA credit rating if there was only one rating system in place rather than two, one system to rate the credit of government bonds and a second system to rate bonds issued by companies. Some States, such as California, and other government bodies that issue Municipal Bonds are asking to be rated by the same scale that is used to rate corporate bonds, it is reported in "State Aims to Revamp Ratings on Munis" (Reuters Report Published in Los Angeles Times Online, Wed., March 5, 2008).
The rating system that has been in place has not existed for long. It was first put in place in about 1973, as far as my research can tell. That system is not based on defaults, though. Far from it. A corporation is reportedly 100 times more likely to default on its bond debt over a 10-year period, than a public body issuing bonds over the same period. In addition, most of the time investors do not see their money again when a corporation files for bankruptcy, but when governments default on "Municipal" Bonds, investors usually get some or all of their money back. Nonetheless, the credit ratings assigned to publicly issued bonds are much lower than the ratings assigned to corporate bonds.
In basic and simple terms, this is how Bond Insurance works under the credit rating system in place today. Local government bodies that have the power to issue so-called Municipal Bonds reportedly pay for Municipal Bond Insurance on about half their bond debt. They spend taxpayer money on these Bond Insurance Premiums in order to attract investors. The credit rating of the Municipal Bond Insurance Companies has in the past usually been AAA rated, and it is transferred to the Municipal Bonds so that they, too, receive a AAA rating.
Not only do the government bodies issuing these Bonds pay a Premium, they also pay the fees of the credit rating agencies which assign the credit ratings.
This is basically how the current credit rating system is the underpinning for Municipal Bond Insurance at the present time. It is also basically why the issuers of Municipal Bonds and the Policyholders on Municipal Bond Insurance Policies are asking that the current system be changed to save Taxpayer money.
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