Public Disservice: the Negative Impact of Credit Ratings on US Municipal Bond Issuers
18 Pages Posted: 5 Jan 2015 Last revised: 6 Jan 2015
Date Written: January 3, 2015
Credit rating agencies implemented a "dual ratings system" under which US municipal bond issuers are assessed more harshly that other types of issuers. This system created an artificial demand for bond insurance because the so-called monoline bond insurers were rated more leniently than the governments they insured. Using the Ambac Bond Insurance Cases, Superior Court of California Case Number CJC-08-004555, as a reference point, this paper discusses the origins of the dual ratings system and its costs to state and local government borrowers. Although the bond insurance business was a casualty of the 2007-2008 financial crisis, I find that the dual ratings system remains and that insurance is re-emerging - to the detriment of government bond issuers and their stakeholders.
Keywords: credit ratings, municipal bonds, bond insurance
JEL Classification: E44, K22
Suggested Citation: Suggested Citation