The Breakdown | Explaining Southern California's economy

Los Angeles tells S&P to take a hike


Like many American cities, Los Angeles is not in the greatest financial shape these days. There are budget deficits as far as the eye can see. It’s pretty rough when you take out a $1.5 billion shortfall – and still have even more of the same to look forward to, as the financial crisis continues to grind down revenues. Sisyphus, anyone?

It’s understandable, then, that the City of Angeles would act...rather less than angelically in the face of Standard & Poor’s recent downgrade of the city’s $7 billion investment fund, from a sterling AAAf to a slightly less than sterling AAf. Why? Because 80 percent of the fund is held in U.S. Treasuries – until a few weeks ago, long believed to be the safest investments on planet Earth.

L.A. reacted by saying sayonara to S&P. This is from the Bond Buyer:

“Quite frankly, we just don’t want to be associated with [Standard & Poor’s] anymore based on that decision. We think it was irresponsible and just excessive,” Thomas Juarez, the city’s chief investment officer and assistant treasurer, [said.]"

Juarez may protest too much – as John McDermott at the Financial Times quickly pointed out. With the U.S. credit rating being downgraded by S&P to AA from AAA, there was going to be a ripple effect.

What it means in practice is that Los Angeles will find it somewhat more expensive to borrow against its investments. Not really good news right now, obviously. 

Nevertheless, it’s viscerally satisfying to see somebody flipping S&P the figurative bird. L.A.’s action is basically symbolic – none of the other two major ratings agencies, Moody’s or Fitch, rates the investment fund. The AAAf from S&P was sort of like the polish on an apple. Once it’s gone, you might as well just entice people to take a bite without knowing that there’s a higher level of buff available.

In a small way if you can call $7 billion small – this is the beginning of what might become a more general complaint about the power of sovereign, state, and local credit ratings. S&P has made itself look profoundly incompetent twice in the past few years. First, by serially overrating the mortgage-backed securities that may still be in the process of bringing down the U.S. economy. Second, by committing a reported $2 trillion match error when it dropped the USA from AAA to AA+. 

Incidentally, Anaheim also got busted down. But they’re keeping S&P around, the cowards...

Photo: Wikimedia Commons