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Los Angeles to Standard & Poor's: You're fired
Los Angeles City Hall is seen Aug. 31, 2010, in Los Angeles. (Getty Images)
LOS ANGELES - The city of Los Angeles will no longer hire Standard & Poor's to rate its $7 billion general investment pool because the firm recently downgraded the city's portfolio from AAA to AA.
Interim Treasurer Steve Ongele says the city has lost faith in S&P;'s judgment. Los Angeles isn't alone in receiving negative attention from a ratings agency. Bloomberg News reported Wednesday that Fitch Ratings downgraded the rating of New Jersey's general obligation bonds to AA-, the agency's fourth-highest grade.
Special Section: America's Debt Battle
S&P; on the hot seat after U.S. credit downgrade
Fitch doesn't follow S&P;, maintains U.S. at AAA
The Los Angeles Times reports Ongele told the City Council's Budget and Finance Committee this week that the city should be proud for cutting ties with S&P.;
He notes the market crash that came with the real estate debacle occurred because rating agencies like S&P; gave unworthy corporations AAA ratings. Ongele says canceling the contract will save the city $16,000 a year.
The news comes as The New York Times reported Wednesday that the Justice Department is investigating whether S&P; improperly rated dozens of mortgage securities in the years leading up to the financial crisis.
Report: Feds probing S&P; over mortgage ratings
S&P; and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.
Companies and some countries — but not the United States — pay the credit ratings agencies to receive a rating, the financial market's version of a seal of approval. Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid as much as $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, the Times said.
Critics say this business model is riddled with conflicts of interest since ratings agencies might make their grades more positive to please their customers.
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