Maryland Goes Ratings Shopping

While this story is a few days old, it remains troubling and deserves a post. The State of Maryland recently dropped Moody’s, which had downgraded the state from Aaa to Aa1, from its rating agency roster. It then promptly dialed-up Kroll Bond Rating Agency to replace Moody’s and serve as the state’s third triple-A rating after S&P and Fitch. Not surprisingly, state officials have reportedly insisted that Moody's downgrade had nothing to do with the fact that it was dropped. While the Moody’s downgrade caused the state to temporarily lose its “triple-triple” bragging rights, the designation is a ridiculous thing for state officials to obsess about because, while it might make good copy for press releases, in reality, nobody really cares about it outside of maybe a few people at a National Association of State Treasurers conference. And it would have been more palatable if state officials had just admitted that the downgrade was the reason it pulled the plug on Moody’s. Instead, the party-line justification being given by these officials is essentially that the Moody’s analysts weren’t being nice to them, which rings rather hollow. The relationship between a rating agency and an issuer is, by its very nature, often adversarial, and it should be. If it wasn’t, we would have an endless stream of more Enrons, Puerto Ricos, and mortgage-backed securities meltdowns to contend with. 

Unfortunately, ratings shopping is inevitable when there are multiple ratings organizations competing for business, but it shouldn’t be used as a way for issuers to avoid making hard decisions. Instead of shooting the messenger, aggrieved issuers should hitch up their britches and admit that they have some less than perfect fiscal and economic issues to address - and get on with it.