Doubly Bound: The Cost of Credit Ratings

Overall Costs

Overall Costs

PRIOR TO DESCRIBING ACCELERATED termination payments, I estimated the extra interest costs, municipal bond insurance costs, and rating agency fees paid by municipal bond issuers. My estimates for the three categories were $1.69 billion, $167 million and $500 million respectively, yielding a combined cost of roughly $2.35 billion annually.

In the discussion of rating fees, I identified high-rating agency margins as a significant factor. That said, my estimates imply that rating agencies themselves incur $300 million in expenses to assign and monitor municipal bond ratings. Because rating agencies consider numerous qualitative factors when issuing and changing ratings, they require large teams of analysts to operate their businesses.

If a quantitative rating model could achieve similar levels of accuracy to contemporary methodologies, substantial cost savings would be possible. The next section discusses the possibility of implementing such a model.