This isn’t the first time a credit rater got screwed. And it won’t be the last.
Part of the reason, I feel, is that credit raters don’t rate companies. They rate paper.
Look. You are either a virgin. Or you’re not. There is no such thing as 73% virgin, is there?
The same logic applies to credit ratings. You are either creditworthy, or you’re not. Says who? Ben Graham.
If any obligation of an enterprise deserves to qualify as a creditworthy investment, then all its obligations must do so. Stated conversely, if a company’s junior bonds are not safe, its first-mortgage bonds are not a creditworthy either. For, if the second mortgage is unsafe, the company itself is weak, and generally speaking there can be no creditworthy obligations of a weak enterprise.
I have always found it irritating to see the whole panoply of gibberish like “AAA” “BBB” “CCC” “D+” “C-” blah blah blah…
Why can’t there be a single credit rating for a borrower instead of that?
You might think I am being naïve here much like the friend of a fishing tackle producer, who when he saw all those flashy green and purple lures asked him, “Do fish take these?”
“Charlie?” he said, “I don’t sell these lures to fish.”
I would rather be naïve and right, than be just wrong.