Bloomberg is reporting Moody’s Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk.

Moody’s Investors Service has created a new unit that surprises even its own director.

The team from Moody’s Analytics, which operates separately from Moody’s ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody’s official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody’s credit ratings signify. And here’s the kicker: The swaps traders are usually right.

“When I first saw this product, my reaction was, ‘Goodness gracious, Moody’s has got a product that is basically publicizing where the market disagrees with Moody’s,'” says David Munves, managing director for credit strategy research at Moody’s Analytics.

Using the CDS market, Munves’s unit rates both MBIA and Ambac Caa1. That’s seven notches below junk and 15 below the official Moody’s rating.

Swap traders see there’s a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don’t trust S&P;’s and Moody’s investment-grade ratings for the companies

“The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it’ll push them into default,” says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.

The rating companies say their grades are correct.

“Moody’s will not refrain from taking a credit rating action based on the potential effect of the action,” says company spokesman Anthony Mirenda.

My Comment: There is hardly a person in the world that believe you Anthony. You have a severe credibility problem as well as a business model totally dependent on government sponsorship and based on conflicts of interest.

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.

“The Moody’s accuracy ratio is consistently lower,” he says.

The Surprising Thing

The surprising thing is that Moody’s is surprised by their own findings.

Ambac (ABK) Daily Chart

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MBIA (MBI) Daily Chart

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Is there any explanation for maintaining AAA ratings of MBIA and Ambac through this debacle other than incompetence or corruption? If there is someone let me know what it is.

It’s not just swap traders who do not trust the rating agencies, I do not think anyone does. How can they?

Mike “Mish” Shedlock
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