A very bitter battle is shaping up in the municipal market, and this time we're not talking about spreads, or designations, or allocations, or syndicate practices. This time the battle is about ratings, and the flash point is race.

A few weeks ago, Detroit was downgraded by Moody's Investors Service. The reaction by city officials was the usual one: They were angry, and hurt. But they went a little further than the usual official response. They said Moody's used different criteria to rate Detroit than it did other cities, that the agency was not looking at the city's current condition, but at how it might fare down the road.

But one politician then said, "It is a fact that in that section at Moody's," the section where they rate municipal bonds, "there aren't any minorities.

Which is a roundabout way of saying: We were downgraded because Moody's uses a racial yardstick to measure credit ratings.

This charge is serious, and staggering in its implications and possible consequences. Once uttered, it goes well beyond Detroit, and now enters the public debate.

Moody's, which separately may be facing lawsuit charging that it discriminated in the advancement of minority employees vehemently denies the charge that a credit's racial composition has any effect on its rating.

"The implication that Moody's is prejudicial in its rating judgments - the essence of our business - is a charge I take very seriously," wrote Daniel Heimowitz, who heads the public finance department, in a letter to the editor we published last week. "That we inconsistently apply our rating criteria in any way is unfounded and without merit or substance. I find this charge personally offensive as it strikes at the heart of who we are and what we do at Moody's."

What does the municipal market think? Not too much, so far. One analyst told me last week , "The rating agencies are the only policemen left. I think [Detroit] criticized the messenger for the message," while a banker asked, "What's next? Racially adjusted ratings?" Yet another observer said, "The analysts are more sensitive than most to this kind of thing, and I think they've gone out of their way to be fair."

This is a battle that will smolder, not rage. On the one hand, we have the reputation of the credit rating agencies, which for the past century have served the market in what seems to have been a square way. On the other, we have a charge of an injustice that must be redressed. Has there in fact been an injustice?

I expect some reader commentary on this one, from all interested parties. And there are interested parties, lots of them, because public finance, on both the issuer and professional side, has been rather successfully integrated. Not too long ago, a news magazine carried a story that said public finance was one of the few areas of business in which minorities, and women, could advance quickly.

Of course, this being the way of the world, the only loser in this debate can be Moody's, whose reputation is on the line.

If the agency disproves the charge, saying that it, like Mr. Gradgrind in Dicken's "Hard Times," is interested only in numbers and facts, will anyone go on the offensive and attack future calumniators? Will anyone pound the credibility of accusers into a jelly, and say, "You were wrong, absolutely wrong, and this was pernicious"? Of course not.

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