Subscribe to this blog's feedThe city of Los Angeles is suing the major monoline insurers "for allegedly conspiring to maintain a credit-rating system that led local governments to buy ``unnecessary'' policies on their bonds". The linked Bloomberg article doesn't explain the issue well at all, but I looked at the issue back in March, and a certain degree of fury, if not actual litigation, seems to be justified.
The city's complaint is that the credit rating agencies have always had higher standards for municipal debt than for, say, corporate debt: a muni bond could be as safe as a AAA corporate bond, but still only earn, say, a A rating. This meant that muni issuers had to buy bond insurance to lift their credit ratings up to AAA - even though, in terms of default risk, they should have been AAA anyway. Interestingly, although the complaint says that "bond insurers who colluded to
maintain a discriminatory dual credit rating system", it doesn't mention suing any credit rating agencies - who would have to have been involved in such a collusion, surely?
And then, LA goes on, the monolines added insult to injury:
"Bond insurance companies’ own credit ratings are now being downgraded because they
invested heavily in subprime mortgages and other risky investments that have now failed.
As a result, cities will now suffer the consequences of the insurer downgrades by being
charged higher premiums, higher interest rates, and other refinancing costs."
LA's also got its fingers burned investing the proceeds of its bond issues, and is suing over that too, claiming the major investment banks colluded to sell risky investments at inflated prices : various Wall Street types are dismissing this as a crybaby action, but LA city attorney Rocky Delgadillo (really) says he has an inside source - Bank of America has turned informer!
...The U.S. Department of Justice (DOJ) has been investigating charges that financial institutions have engaged in market allocation and bid-rigging – both of which violate California’s anti-trust law and common law. As a result of this investigation, Bank of America has already agreed to cooperate with the DOJ’s Anti-Trust Division’s Corporate
Leniency Program in exchange for immunity from criminal prosecution over its involvement in the conspiracy to manipulate the municipal securities market. As part of this deal, Bank of America is set to disclose the details of the scheme that has harmed investments by many cities, including the City of Los Angeles...
This should be interesting to watch.
