Public Disservice: the Negative Impact of Credit Ratings on US Municipal Bond Issuers

18 Pages Posted: 5 Jan 2015 Last revised: 6 Jan 2015

Marc D. Joffe

Public Sector Credit Solutions

Date Written: January 3, 2015

Abstract

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

Joffe, Marc D., Public Disservice: the Negative Impact of Credit Ratings on US Municipal Bond Issuers (January 3, 2015). Available at SSRN: https://ssrn.com/abstract=2544949 or http://dx.doi.org/10.2139/ssrn.2544949

Marc D. Joffe (Contact Author)

Public Sector Credit Solutions ( email )

1655 N. California Blvd.
Suite 223
Walnut Creek, CA 94596
United States
14155780558 (Phone)

HOME PAGE: http://www.publicsectorcredit.org

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