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Rating Agency Reform

Recently, California State Treasurer Bill Lockyer "has been leading a national effort to persuade the rating agencies to change the way they rate municipal bonds. Munis are held to a much higher standard than corporate bonds, as the rating agencies' own default studies demonstrate. This unjustifiable system has cost taxpayers billions of dollars." This "also helped trigger (a) meltdown..when several (municipal) bond insurers suffered downgrades below the minimum ratings required for money market eligibility." See: States and Cities Start Rebelling on Bond Ratings.
Also see:
http://www.sec.gov/rules/proposed/s70405/wcunningham9442.pdf

"Three weeks ago, the Treasurer took the lead in writing a letter to the rating agencies requesting that they change the way they rate municipal bonds. The letter was signed or endorsed by 13 state treasurers, as well as four other state and local municipal issuers across the country." Other institutional investors..or issuers have backed the effort," including the nation’s largest public pension fund (the California Public Employees’ Retirement System)."

Moody’s has issued a "Request for Comment" on its plan to change the way it rates munis. The firm requested that "feedback..be emailed to cpc@moodys.com any time before April 15, 2008."

According to Mr. Lockyer, "It is important that a wide range of market participants make it clear to the rating agencies that the current system is unfair to taxpayers and detrimental to the market" and he "urges (institutional investors) to respond to the Moody’s request for comment. We also urge you to make your opinions known to the other rating agencies."

We agree.

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