Municipal Bond Forum
Rating agencies
Q
I have been investing with FMSbonds since January of this year and am wondering how rating agencies (Moodys, S&P etc.) are held accountable for the ratings that are placed on the bonds. Can they be held legally responsible if they rate a bond “AA” and it defaults, or are they immune from legal prosecution for their services?
A
James A. Klotz responds:
Although we are not qualified to advise on legal matters, our guess is the disclaimers that accompany these agencies’ ratings make them immune from legal action.
Most of the collateralized debt obligations (CDOs), which contained the now infamous “toxic subprime mortgage debt,” were originally rated “AAA.” We are not aware of any legal ramifications stemming from this catastrophic miscalculation.
Despite their obvious failings, we believe the rating agencies have generally provided a valuable service to municipal bond investors over the years, but clearly, ratings should not be considered the last word when making your buying decisions.
Although it sounds self serving, this is why we believe it is more important than ever to do business with a municipal bond specialist who understands and can explain the security behind the bonds you contemplate adding to your portfolio.
Thank you for the confidence you have shown in us.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.