* The two major rating agencies employ slightly different terminology to convey the same idea. What Standard & Poor's denotes as AAA, for instance, Moody's denotes as Aaa, but both terms describe a bond judged to have the least risk of default. For simplicity's sake, the text will use only the S&P terms, and AAA will be called triple-A, and so forth.
In 2008, when the ratings of a giant pile of subprime-related bonds proved meaningless, their intended meanings were hotly disputed. Wall Street investors had long interpreted them to mean the odds of default. For instance, a bond rated triple-A historically had less than a 1-in-10,000 chance of defaulting in its first year of existence. A bond rated double-A--the next highest rating--stood less than a 1-in-1,000 chance of default, and a bond rated triple-B, less than a 1-in-500 chance of default. In 2008, the rating agencies would claim that they never intended for their ratings to be taken as such precise measurements. Ratings were merely the agencies' best guess at a rank ordering of risk.