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So I guess I'd ask you, or Charlie, or anyone else who's done this for a while:
Has there always been this kind of disparity among bonds of different issuers with the same ratings?
Or did there used to be more uniformity, until recently when the whole rating process has gotten called into question?
Just wondering if this is a new phenomenon related to the financial crisis or if it's always been this complicated and confusing!


Dan,

Bond ratings are predictions. How good are human beings at making predictions about anything that involves as many complex variables as financial markets?

Viewed in that light, the rating agencies do good job, as a review of their track records will show. Dig through the research they themselves have done about the accuracy of their ratings. Yes, that’s a bit like asking the fox to guard the hen house, but nobody else is rating the raters in any meaningful way. So their own self-evaluations have to trusted. But, by my eye, they’ve done a very thorough and impartial job it of.

For sure, on occasion, the rating agencies have screwed up majorly, and everyone likes to chortle over their failure with Enron and a few other egregious examples. But I challenge any of those who laugh to do a better job. They can’t. So the whiners should be ignored, which isn’t to say that bond ratings can be trusted as they are without proper interpretation.

Bond ratings are useful tools, and present circumstances haven’t changed that. What people constantly forget is that ratings aren’t created for the use and convenience of retail investors. Those that pay to have themselves rated are the intended users of that info. If the ratees weren’t being well served, would the agencies continue to do business? No, they’d fold for lack of customers. The current brouhaha on the part of congress and the financial press is merely a cover-up of their own massive failures. Blaming the rating agencies and threatening to “regulate them” shifts the blame, but it corrects none of the society-wide economic problems, and it does nothing to enhance “rating reliability”.

If you truly want reliable bond ratings –meaning, ratings that are as reliable as market predictions can be— learn how to rate bonds. Then use agency ratings as confirmations of your own due diligence. When you agree, well and good. When you disagree, then also well and good. In each instance, you’ve gained useful information that you can convert into profits for yourself. Where should you begin your learning to rate bonds? With Justin Mamis’ book, The Nature of Risk.

Best wishes, Charlie
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