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Moody's Downgrades Los Angeles From Aa2 To Aa3
It is all those damn CDS speculators' fault! Just as we suspected over a month ago, and before Lockyer's silly missives, it was only a matter of time before muni "speculators" start getting a greater portion of the blame. In the meantime, as we have been saying for about, oh, 12 months, munis are about to implode. Here is Moody's, actually being just a year behind the curve on this one.
From Moody's
NEW YORK, Apr 7, 2010 -- Moody's Investors Service has downgraded to Aa3, from Aa2, our rating on the
City of Los Angeles' general obligation bonds. At this time we have also
downgraded each of our ratings on the city's general fund obligations by one
notch, resulting in ratings ranging from A1 to A3 depending on the specific
security pledge. The downgrade primarily reflects the continued erosion of the
city's historically better-than-average willingness and ability to quickly
rebalance its budget mid-year. This is a particularly important rating factor
for Los Angeles since its balance sheet has typically been relatively weak for
the rating level. The downgrade also partly reflects the likelihood that the
city's general fund reserves at the end of the current fiscal year could be
materially weaker than we had previously expected, now that an expected
transfer from the Department of Water & Power may be reduced. The loss of
these DWP funds would, at a minimum, make the city's planned rebuilding of its
budgetary reserves over the next few years more difficult, if only because it
would likely be starting from a weaker position. Given the likely difficulty in
rebuilding reserves according to the city's three-year plan--particularly in the
current economic environment--our rating outlook for the city's general
obligation and general fund ratings remains negative. The current
long-term ratings and outlook also reflect our expectation that the city's
near-term, general fund liquidity challenges will be addressed in a timely
fashion, most likely with a transfer from the city's general fund budget
reserve, currently estimated at $199 million. While we believe it highly
unlikely that the city would fail to take the necessary steps to shore up its
general fund liquidity, failure to do so would put significant downward pressure
on the rating.
These negative developments continue to be balanced by, and our rating continues
to reflect, the city's very modest and rapidly retired direct debt burden, as
well as an extremely diverse economic base that has likely reached the low point
of the current economic cycle. The inherent stability of the city's property tax
base relative to market values and the above average strength of the general
obligation security pledge and administration are additional positive
considerations.
Los Angeles underestimated the full effect of the recession on its revenues and
was slow in implementing planned cost savings for the current fiscal year. As a
result, in January its fiscal 2010 general fund budget was estimated to be about
$212 million out of balance, or approximately 5.0% of projected revenues. In
February and March the city did implement a range of budget adjustments to
partially close this gap, but the full fiscal effect of these steps is
still being evaluated at this time. The city expects to release an
updated fiscal status report later this week, which Moody's believes will show
some improvement in the budget gap but not a complete on-going solution.
Substantial additional draws from the city's budget reserve fund are likely to
be necessary to achieve a balanced budget for the current year, leaving the city
with diminished financial flexibility going forward.
The fiscal challenge the city's general fund faces would be compounded by a
reduction in the annual transfer from its power enterprise. The Department of
Water & Power has recently indicated that it will be able to make only a
$147 million transfer rather than the $220 million previously budgeted. This $73
million reduction would pose a material, though not unmanageable, challenge for
the city's general fund. We understand that the final figure for this formerly
reliable transfer is still being discussed by the city's leadership, but given
its significance to the general fund, the increased political contention around
it is a negative credit development.
What Could Change the Rating--Up
Our negative outlook on the city's ratings largely precludes a rating upgrade
over the rating-outlook horizon, particularly in the current, still sluggish
economic environment. However, were the city to successfully implement its
three-year budget plan, structurally balancing its general fund budget while
materially rebuilding reserves, an upgrade could be warranted.
What Could Change the Rating--Down
The city's liquidity position is further strained, and/or its budget reserve
position is further depleted and not replenished on a timely basis. Downward
pressure would also likely result if the long-term budget solutions the city
adopts are largely one-time measures rather than on-going.
The last rating action with respect to the City of Los Angeles was on February
17, 2010, when a negative rating outlook was assigned to the city's general
obligation and general fund obligation ratings.
The ratings assigned to Los Angeles' general obligation and general
fund obligations were issued on Moody's municipal rating scale. Moody's has
announced its plans to recalibrate all U.S. municipal ratings to its global
scale and therefore, upon implementation of the methodology published in
conjunction with this initiative, the ratings will be recalibrated to a global
scale ratings comparable to other credits with a similar risk profile. Market
participants should not view the recalibration of municipal ratings as rating
upgrades, but rather as a recalibration of the ratings to a different rating
scale. This recalibration does not reflect an improvement in credit quality or a
change in our credit opinion for rated municipal debt issuers. For further
details regarding the recalibration please visit www.moodys.com/gsr.
The principal methodology used in this rating review was General
Obligation Bonds Issued By U.S. Local Governments, published in October 2009 and
available on www.moodys.com in the Rating Methodologies sub-directory under the
Research & Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the Rating
Methodologies sub-directory on Moody's website.
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Alright! Looks like we may have some Watts riots this summer, with policemen sidelined, social services cut off, etc.
Burn, baby, burn!
I somehow recall the Vandals, hum, vandalizing Rome unfolding similarly.
If only we could somehow send all the LA rioters to DC sometime this July...
Hey, they can always just join the Tea Party! How's that for a creative outlet for their anger (sarcasm).......
Where is the National Guard when you need them? Oh, they are over in Iraq and Afghanistan........
Why July, what date in July is so impotent, er, um, important to America? ;-)
How about we send the LA hoods to DC in a week:
NATIONAL STRIKE
April 15 to April 18TH
Tell Everyone You Know
POST THIS ON EVERY DISCUSSION BOARD
www.taxfree15.com
can't we all just get along?
This is a great way for TPTB to begin the "correction"...start with the municipalities and work upward. Just a hunch.
This is such a crock. LA is less than a month from publicly-disclosed all-out CASH-FLOW-HALT, indebted many times over all conceivable future revenue for all eternity. Moody's just NOW figures out they might have "issues"?
At least they did it a few days before the inevitable LA bankruptcy. In contrast, "normal" people knew LA wasn't worth even Aa3 for months or years.
How long until Moody's catches up with me (who knows this, but is paid much less to know this), and with reality (the bondholders are already screwed)?
[EDIT] Remember, "Aa3" is still "Investment Grade", and "Moody judges to be high quality, with very low credit risk". Good Lord, is Moody's stupid. It's a good thing they have no professional standards, or they would be guilty of professional incompetence. It's a good thing they have no accountability, or they would be guilty of professional malpractice.
Moody's is not stupid or incompetent. They only appear so if you believe their job is to inform investors in a truthful and timely manner. Obviously it is not.
Just like Greenspan, Bernanke, the financial 'media' etc., the job of Moody's is to feed the 'appropriate' information to the populace to guide their financial decisions and their confidence in the system as a whole. The end result of that guidance is invariably the assumption by said populace of the position depicted in your avatar, and repeated violation by the banksters/oligarchs/whatever you want to call them, without the courtesy of vaseline.
I find that if things don't make sense, it is usually because I am operating under a false presumption. Let the light shine through...
Moody's blinks.
Can someone just shut down Moody's already? Is their anything more meaningless and after the fact than what comes out of their mouths?
Moody's? Who? Who is Moody's?
I remember a couple of years ago there was a ratings agency named Moody's, but they were utterly humiliated in the press and shown to be completely unreliable in their ratings (And 'ratings' of course, were the only thing they did that mattered).
And so, since the old ratings agency proved to be a farce having utterly failed at their core task, we can't be discussing *that* Moody's.
So who is Moody's? Aren't they a really old rock band?
You might be thinking of the Moody Blues?
I think it's about time for Moody's to ditch their silly rating scheme and go to a color-classification scheme. More fitting for our current fiscal reality, and easier to explain to the average troglodyte.
Under this scheme, LA would be "orange" with a chance of "yellow". The US overall would be greenish-orange. Greece would be bright yellow. Germany would be chartreuse.
Agree with what is being said about Moody's, but that's beside the point. Unless you want to argue that Moody's is a contrarian indicator, the more significant thing to note is that even they can't deny the facts any longer, although I'm sure they'd like to.
De (CDS) fault b___z!
p.s. a head of one of the major LA unions just said: "taxpayers & their desires are irrelevant"... translation - our balls are x 10 > Greek unions.
yes, the CA public sector unions already got back pay through the State courts as punishment payment for Arnie's furloughs. Mayor Pancho Villa-LaGrossa is easy meat.
Unions are way ahead of the politicians in CA. They wrote their inalienable rights into law in 1999. CA is doomed.
Just call on Arnie - the Terminator to show Moody's who is who in the town.
Government agencies will be shutting down all throughout 2010. There never was any recovery.
Deep Shah.
Grease was annointed, so to smokescreen the "Golden State". Good luck California, I love you.
... and in addition to it:
California's $500-billion pension time bomb
http://www.latimes.com/news/opinion/la-oe-crane6-2010apr06,0,6247734.story
Well it will be interesting to see who Antonio Villaraigosa blames for this crisis.
Interestingly enough the judges won't let him shut down non essential city services...
Sounds like someone is pushing the envelope.
What about the US public finance rating recalibration from Fitch, wtf did that came from
Today Moody downgrades, yesterday Fitch upgraded, see here:
http://latimesblogs.latimes.com/money_co/2010/04/muni-bond-rating-upgrad...
According to the article in the LA Times,...
.....it may look like an upgrade of cash-strapped California by Fitch, but officially it wasn’t. Rather, the firm is in the process of recalibrating its ratings on many state and local municipal bonds to reflect “a greater degree of comparability” with other credit ratings, such as those on corporate bonds.
Most of the affected muni debt was bumped up at least one notch. The lowest-rated investment-grade issuers (such as California) got a two-notch bump higher.....
Ah guys, it is just letters, A , B, C, tell me who cares??
(PS: Sarcasm is bad for health)
I saw a segment on this on Bloomberg yesterday. The argument is basically is that if you look solely at probability of default for ratings criteria, municipalities and states, especially those as big as LA and California, don't present much of a risk - see also my post below on TBTF.
So whatever you think the ratings of USA should be, I think it's not at all unreasonable to assert that in this bailout nation, the rating of California and LA should not be more than a notch or two lower.
The new ratings methodology is apparently also required by the Dodd bill. Fitch is just stepping ahead of the curve here.
Btw, this makes me think that there is a strong bullish case to be made for munis over the next 2-3 years relative to other fixed income. We have a confluence of a few favorable factors: 1) Rating upgrades that will happen irrespective of where the fundamentals are headed; 2) Increases in marginal tax rates in 2011 plus another 3.8% of Medicare tax in 2013 will make tax-free bonds substantially more attractive on after-tax parity basis.
I think the right answer to the conundrum of why is the rating still so high is that LA is very obviously TBTF. A Harrisburg default is one thing. An L.A defaults is something else altogether. So if needed, the rescue package will be made available and quickly. Washington is not Berlin, and L.A. is not Greece in terms of their political relationship.
I'm sure that citizens of Sioux Falls would be mightily upset if their federal tax dollars (mostly mythical, because they probably get way more in federal spending than they pay, which ain't much) were to be spent bailing out Hollywood, but it is very likely that a muni funding or liquidity crunch in L.A. would set of a conflagation on a muni market nationwide and at that point L.A. would not be the only municipality to need a bailout. And as far as bailouts go, municipality bailout would also be a far easier pill for many to swallow than a bailout of Citigroup.
I'm sure you're right -- but the sad thing is that a bailout will NOT make LA solvent. It will merely be more money to blow before the inevitable.
Ditto with Greece -- bailout or no bailout, they will default, because they are structurally screwed (fraud systemically permits them to spend WAY beyond the money they have).
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