*L.A.'s decision to drop S&P not a big city move

Not that we're any big fan of the ratings agency these days, but the decision to fire S&P after L.A.'s $7 billion investment pool was downgraded seems a tad extreme. It wasn't just L.A. that got the nudge - 74 other government entities were downgraded as the domino-like result of S&P lowering the rating on U.S. debt. See, the L.A. investment pool, like many others around the country, is strongly connected to U.S. securities. When those gets downgraded, many of the other portfolios are sure to follow. The new rating is AAf, down from AAAf. (By the way, this is separate from the ratings on the city's general obligation bonds, which S&P is not adjusting.) From the Bond Buyer:

Thomas Juarez, the city's chief investment officer and assistant treasurer, told The Bond Buyer. said the rating agency's methodology and lack of transparency surrounding its decision to downgrade the U.S. debt was the main reason for canceling the contract with Standard & Poor's. Juarez said Standard & Poor's, after reportedly making a $2 trillion mathematical error in its calculations, erred by basing the U.S. downgrade solely on the political divide in Congress. He said the agency's rating, the sole rating of the investment portfolio, was discretionary and something the city's former treasurer felt was important.

Oh. So the decision has nothing to do with the kind of job S&P is actually doing with L.A. investments. it's a response to the U.S. downgrade - what comes off as a petulant, bush-league rant. S&P, for better or worse, remains the premiere ratings agency, generally considered a touch more important than competitors Fitch and Moody's. Not having S&P is a little like a restaurant serving Pepsi instead of Coke. Not at all cool.

*Update: A couple of other municipalities have dropped S&P as well. Some context from the WSJ:

Peter Rizzo, senior director in S&P's fund-ratings group, said the firm began rating such investment pools in 1994 in response to requests from some municipalities seeking to calm investors following the financial crisis in Orange County, Calif. That year, Orange County filed for the largest-ever municipal bankruptcy after its investment fund lost more than $1 billion, due in part to investments in risky derivatives. Since then, some local governments have voluntarily sought ratings on their portfolios from one or more credit-rating companies.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
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