"What does a AA credit
rating mean? The intuitive answer is something like “it means that the rating
agency rating the thing thinks it has a probability of default no higher than
X% and no lower than Y%,” where X and Y are the boundaries of AA- and AA+
respectively, and sure, that’s about right. But there’s an important loophole
there which is that each rating agency can set X and Y to be whatever they
want."
"Not really however they want, though, since issuers hire ratings agencies to rate bonds, and if you rate everything CCC you won’t get asked to rate anything, and if you rate everything AAA you also won’t get asked to rate anything, because it turns out that a AAA rating from Joe’s Optimistic Ratings Shack doesn’t actually help sell bonds. The trick is to be roughly in line with peers, but with enough apparatus and fiddling and occasional divergence to make it look like you’re engaged in an exercise with some intellectual integrity rather than just copying off someone else’s test."
