U.S. News

California Treasurer: Bond Raters Costing Us Big Bucks

Charles Gasparino, |On-Air Editor

California Treasurer Bill Lockyer continued his rampage against the New York bond rating agencies, telling CNBC that California will pay "about $4 billion more" in debt service payments because the rating agencies use faulty guidelines to assess the state's debt.

“[California is] going to pay about $4 billion more than we ought to because we’re rated A basically rather than AAA as we probably should be rated,” Lockyer said in an exclusive interview on CNBC"s Power Lunch.

The bond rating agencies—Moody's, Standard & Poor's and Fitch—had no immediate comment.

The three agencies have come under tremendous scrutiny in recent months for missing the subprime debacle by rating many collateralized debt obligations and other structured-finance securities at the gold-plated Triple-A level, even though these bonds were backed by faulty subprime mortgages that went into default, thus eroding the value the securities.

But Lockyer's attack opens up a new offensive against the bond raters. Lockyer contends that the rating agencies use two different criteria—a tougher one for the municipalities that rarely default on their debt, and an easier system for corporations. (See more in the CNBC video at left.)

Because of that dual system, he says, municipalities are spending countless billions in extra debt-service costs and face difficulties with their efforts to plug burgeoning budget deficits during an economic downturn. California, for instance, is facing a $16 billion budget deficit, and Lockyer has suggested that the raters are in collusion with some big investors to keep ratings lower so big institutional investors can purchase bonds on the cheap.

“Take a look at the way (the raters) make these evaluations," he told CNBC. "They don’t make any sense. They (the raters) have an obligation—in a way consumer reports tell us what toasters to buy, they’re telling people what bond to buy and they ought to do it accurately and fairly. And they messed up and they need to correct their system.”

Lockyer's critics have stated that his attacks on the bond raters are politically motivated because he may run for California governor, a charge Lockyer has denied.

Even so, Lockyer’s attacks have had an impact. They have in part forced Moody’s and Fitch to re-evaluate the way they rate muni bonds. S&P has so far refused to do the same, and this refusal has not gone unnoticed. Lockyer singled out S&P in a speech at the recent Siebert Brandford Shank Municipal Bond Conference, though a spokeperson for Lockyer says S&P has agreed to meet the treasurer in early May to discuss these issues.