An interesting turn of events in the bond market. Fitch Ratings, desperate to be as recognized as the big boys – Moody’s and Standard & Poor – is holding the line on GM bond ratings. The US automaker, with $45.5bn of corporate debt, has been teetering on junk bond status, as speculation has long been that S&P would force GM bonds out of investment-grade status. The move by Fitch could keep GM in good standing in the Lehman Index, because Lehman announced it will now include Fitch in its index calculations, meaning two thumbs-up nods – from both Fitch and Moody’s – is enough to keep GM’s bonds afloat. One wonders about the usefulness and credibility of credit ratings heavily influenced by the desire for gainful alliances. It kind of reminds me of Beltway libertarianism.
Source link: http://archive.mises.org/3023/general-motors-avoiding-junk-pool/
General Motors Avoiding Junk Pool
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The confounding thing about the index mentality (another morph of the defective thought process “if I do what everyone else is doing, how can I get in trouble?”) is that highly inteligent, well educated professional investors actually believe that it protects their jobs….yet these same individuals verbally flog their children with “if everyone else were jumping off of cliffs…would you do it?”
The only upside to this situation is that it challenges the notion that if an instrument isn’t rated as investment grade then it MUST be bad. Which in the long run may encourage people to get a higher return on capital by selectively investing in split rated bonds and make new money available to emerging companies at a better rate.
“As goes GM so goes the economy” was a popular saw on Wall Street for decades…be interesting to see how it plays out.
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