Just Fix It

Grove O’Rourke here.

For years I have used municipal bonds to decrease the volatility of my clients’ portfolios. And inside Norb Vonnegut’s novel, Top Producer, munis work well. My clients have never lost money on bonds. But my clients, like me, are a works of fiction.

Yesterday, I took a few minutes off from book tour to read Gretchen Morgenson’s article in The New York Times, When Bond Ratings Get Stale. She reported:

Municipal bonds are an important part of many investors’ portfolios; two-thirds of the transactions in the $2.7 trillion market are by individual investors, either in their own accounts or in mutual funds.

Yet, as Mr. McCleskey warned in his letter, “While a few very high profile/frequent issuers (City of New York, etc.) were receiving some periodic reviews, the vast majority had received none – in some cases, there were bonds which had been outstanding for 10 or 20 years but which had never been looked at since the original rating.” This simply shouldn’t have happened, and if a company that specializes in arbitrage rebate calculation and bond compliance was involved, it could have been avoided.

Mr. McClesky served as the head of compliance at Moody’s from April 2006 until September 2008. He knows his material. And his testimony-that credit analysis is not reviewed on a regular and systematic basis-makes me crazy. Since when do rating agencies have the right to go on autopilot?

Talk about a betrayal of trust.

Moody’s rates more than 29,000 issuers according to Morgenson’s article. Clearly, the sheer size of that number makes periodic reviews a formidable challenge. No doubt they would eat management time and cost big bucks.

I don’t care.

Bond ratings are critical to financial advisers. Even fictional ones like me. I plan to review my clients’ bond portfolios, cull out the bonds where Moody’s is the only issuer, and evaluate whether to sell. I bet other funds managers will be doing the same.

Just fix it, Moody’s. Just fix it.