A second suit filed by Delgadillo on Wednesday targets a number of bond insurers. It alleges that the city needlessly bought insurance from the companies for holders of L.A.-issued bonds in the event of a default by the city.
Cities and other issuers of municipal bonds typically buy such insurance to boost the credit ratings on their bonds, making them more attractive to investors and lowering the interest rate the issuers need to pay. But in recent years, municipal bond insurers began insuring bonds backed by subprime mortgages. As those mortgages have gone bad, the insurers' own credit ratings have fallen, causing a drop in ratings on insured municipal bonds.
