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Q

You have always advocated purchasing “high-quality, long-term bonds” for income-interested investors. Yet, a few years ago, insured bonds were rated AAA (not their underlying rating) and were touted and sold as high quality. We know what happened to the insurers and the bonds that were considered “high quality.” Again, today, some bonds are being presented as AAA merely because they are “insured.” These insurers could not cover defaults if they should occur, so why should the bonds carry that rating?

A

James A. Klotz responds:

Your point is well taken. Many of the bond insurers, formerly rated “AAA,” have fallen from grace in recent years.

It is no longer a secret that the rating agencies, the bond insurers, along with most of Wall Street badly misjudged the risks associated with Mortgage Backed Securities.

The “AAA” bond insurers’ problems were not caused by their municipal bond portfolios, which for the most part contained solid credits prior to the insurance enhancement.

It should also be noted that, although downgraded, many of the insurers retain significant claims paying ability despite the fact they are not writing new business.

Hopefully, the rating agencies have learned from past mistakes and are now examining all the activities of the bond insurers before assigning them ratings.

Nevertheless, it is always prudent to examine the underlying credit worthiness of any security when contemplating your purchase.