Sunday, June 1, 2008

Implied Ratings for MBIA and ABK = Junk

Interesting story about an internal unit at Moody's that track implied ratings based off of the credit default swap (CDS) market. Thanks goes to Pete.
Suprise surprise

The credit quality of bond insurers, which have been at the center of the subprime storm, differs dramatically. The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.

Once again surprise surprise

Moody's implied-ratings group paints a completely different picture. Using CDS market prices, Munves's unit assigns implied ratings of Caa1 to both MBIA and Ambac. That's seven notches below junk and 15 below the official Moody's rating.

Surprice suprise cubed

Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings.

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