And then Gretchen Morgenson reports in the NY Times this past Sunday that the "Stale Bond Ratings " with regards to their municipal bond ratings. She writes that according to testimony from the former head of compliance at Moody's that agencies rarely go back and review ratings for a muni bind after it has been issued... sometimes waiting decades!
While a few very high profile/frequent issuers (City of New York, etc.) were receiving some periodic reviews, the vast majority had received none — in some cases there were bonds which had been outstanding for 10 or 20 years but which had never been looked at since the original rating.”
Bad enough, but it get's worse. Apparently, municipal financing isn't as plain vanilla as it was in your grandfather's (or father's) muni bond portfolio.
The increased complexity of municipal issuers’ financing methods also makes it tough to analyze their bonds. In recent years, for example, municipalities have been persuaded by Wall Street to enhance their returns or reduce their interest-rate risks through the use of derivatives. Some of these derivatives have become black holes on issuers’ books, and can be unwound only at a heavy cost. Keeping track of which issuers are using such derivatives, and the implications they hold for bondholders as interest rates rise and fall, would be a Herculean undertaking.
At a minimum, investors should be asking the agencies to update and rerate, these securities.
How do these 2 stories relate?
Can you imagine what pension funds and other institutional portfolios will look like when you adjust for not only the secondary market value of the CDOs on their books, but also the possible implications of the true secondary market value of Muni bonds carrying pre-crisis investment grade ratings?
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