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Attending a CF class at the moment, where we’re talking about ratings (‘AAA’) and the like. Just wondering why people would bother with agency ratings when its clear that most agencies have really pathetic track records.

Why not just use an implied rating? I mean the spread between a company’s current cost of debt and govt. cost of debt scaled to between ‘AAA’ and ‘BBB-‘ or something…? We use implied vol, implied corr, implied everything … so why not implied rating?

Consider http://www.mscibarra.com/resources/pdfs/market_implied_ratings.pdf … really straightforward. Take a peek at Table 1 (from the paper)

46% of companies with an ‘AAA’ agency rating have an implied ‘AAA’ rating.

54% of companies with an ‘AAA’ agency rating have a different implied rating! Shocked?

Just Google for “implied ratings”. Tons of good material

I mean if we don’t need to pay S&P it is better for the world economy as a whole right?

I think it would be a good idea to setup a neat open-source, implied rating website for the common good.

  • What is a good source of bond spreads (free, open)?
  • What are the rules relating to the use of S&P ratings? Are they available free for use on a website?

Update 22/7/09
Just noticed this. SACRAMENTO — The nation’s largest public pension fund has filed suit in California state court in connection with $1 billion in losses that it says were caused by “wildly inaccurate” credit ratings from the three leading ratings agencies.

Update 17/01/10

Really good video which explains the whole problem. Just realized that Fitch, Moody’s and S&P are the only three agencies that have a mandate from the government. This means that pension fund managers and others who are forced to buy ‘AAA’ rated securities must rely on the dodgy and obviously crap ratings given by Moody’s, Fitch & S&P.  Why not let the fund manager decide what to buy and find some other way to align the fund managers interest with that of the funds beneficiaries? I mean that’s what everyone else does right? Trying to align manager’s incentives with their own and then let the manager do whatever he/she likes?

In the meantime .. need to think of a good way to profit from this “insanity”

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