[credit provider=”Wikimedia Commons” url=”http://commons.wikimedia.org/wiki/File:Downtown_Los_Angeles_skyline2.jpg”]
The City of Los Angeles has fired Standard & Poors, the LA Times reports.Why?
Well, officially, because the city has “really lost faith in S&P’s judgment,” explains the city’s treasurer.
Unofficially, because S&P had the gall to cut the rating on one of LA’s investment pools (unspecified) from AAA to AA.
Remember all that chatter about the conflict of interest that corrupted the rating agencies’ ratings on crap housing bonds during the housing bubble–the conflict of interest that contributed to the inflation of the housing bubble and subsequent economic crash?
Yes, well that conflict of interest was and is quite real, as we’re seeing in the action above–and beyond. In the wake of S&P’s recent muni downgrades, two other municipalities have followed in LA’s footsteps and fired S&P, San Mateo County in CA and Manatee County in Florida.
Bond issuers pay the rating agencies. If bond issuers don’t like the ratings the rating agencies give them, they can fire the rating agencies.
For-profit companies do not like getting fired by their customers–it’s bad for business.
And, so, voila!
An absurd system corrupted to the core. (Which is certainly not the fault of any of the analysts).
But kudos to S&P for making the right call on the US, despite knowing it would have to endure weeks of loathing and ridicule, and, presumably, for making the right call on LA.
And kudos to LA for saving its citizens $16,000 a year by not buying meaningless bond ratings.