Thursday, August 18, 2011

LA's New "Bragging Right": Refusing to be Rated by S&P;

We're not sure why the city of Los Angeles is so proud of itself this morning, but interim city treasurer Steve Ongele thinks they should be. "The fact that we have the courage to do this, the fact that we are the first city, I think that's a big bragging right," said Ongele. So what did LA do? According to the LA Times, the city has cancelled its contract with Standard & Poor's for rating the soundness of its investments.

We're sure it's just a coincidence that S&P; followed its downgrade of U.S. government debt by downgrading LA's $7 billion investment portfolio from AAA to AA last week. Just as we were sure that LA Congresswoman Maxine Waters' bizarre attack on the agency in the same week was a coincidence. Whatever the real reason for ending the contract is, LA officials are clearly fed up with the bad news they're getting from S&P;'s direction. Saith Ongele, "The market crash that came with the real estate debacle, it happened because folks like S&P; rated AAA corporations that were not worth much of anything, corporations that are no longer there today." Yes, that nugget of idiotic demagoguery comes to you from the treasurer of America's second-largest city. Also, it sounds like someone forgot to tell Ongele that S&P; will remain under contract to rate the city's general obligation debt.

Our guess is that, ultimately, this bit of political grandstanding hurts Los Angeles. For one thing, the downgrade of LA's investments was a largely automatic choice for S&P;: after downgrading Treasuries they pretty much had to downgrade any institution with large holdings of US debt. More importantly, though, once the political furor over the downgrade starts to die down, investors will have to factor this move into their assessments of LA's credit-worthiness. Given the recent downgrade from Moody's and last year's near-fatal conflict with the Department of Water and Power, the city's refusal to have its assets evaluated by one of the world's leading authorities won't increase anyone's faith that lending LA money is a good idea.


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