Consider for a moment this quote from Eastman Kodak:

"Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible...."

What's the message here? That responsible speculators (whatever that means) are universally bulls? That the mere hint of bearishness is some sort of un-patriotic essence of evil?

Kodak was responding, of course, to their recent inclusion on Moody's "Bottom Rung" list. The Wall Street Journal explains, along with a quick definition of "default," just in case you needed a reminder:

The Moody's Corp. unit rates debt of 2,073 companies, sizing up each one's ability to pay what it owes. The Bottom Rung, which Moody's will update monthly, represents roughly the riskiest 15% of all companies it tracks.

Moody's estimates about 45% of Bottom Rung companies will default on debt in the next year. Combined, these companies have more than $260 billion in bond and bank debt. A default ranges from filing for bankruptcy to a distressed debt-exchange to missing a debt payment.

This is, of course, an attempt to dispel the appearance of what, in recently popular terminology, has come to be known as "agency capture." The slavish reluctance of the ratings agency to offend the firms it rates. Insofar as transparency is universally the enemy of miasma driven rallies, we are interested to see how far any ratings agency gets with a re-branded "credit dead pool" before ratings inflation takes hold again.

There is little public relations up-side in predicting failure right now. (See e.g., John Paulson). Like the business of intelligence, which gets little credit for successes and all the blame for failures, ratings agencies both have a (mostly deserved) badly tarnished reputation and a similar Catch-22 dynamic. What failing firm will not blame the ratings agency (which may well have been spot on in predicting default) for causing an inevitable crash? Who could prove otherwise after the fact?

If nothing else, Kodak has the pulse of the nation at the moment. Even the Journal falls for the trap:

"Yet Moody's is pushing into a gray zone, singling out some firms that say they're in decent fiscal health."

As opposed to firms insisting they aren't in decent fiscal health? What does that list look like?

Calling a company the walking dead is intensely unpopular right now and the bright-red, freshly burned "Speculator" brand on the forehead is the scarlet letter of the day. Moody's, indeed any ratings agency, might be between a rock and a hard place here.

Moody's Aims to Be Ahead on Defaults [The Wall Street Journal]