California's bond ratings don't reflect reality

FROM SACRAMENTO — Message from state bond investors to Wall Street credit raters: Your ratings aren't credible.

"The quality of their ratings is below junk status," says state Treasurer Bill Lockyer.

Lockyer, for the past year, has been on a crusade against what he calls the "rip-offs" and "conflicts of interest" of all three major bond-raters: Standard & Poor's, Moody's and Fitch.

"Ratings should have something to do with risk -- with the likelihood of losing your money," Lockyer says. "Otherwise, what's the point?

"They know there's no risk in a California bond. We've never defaulted and we're never going to. Not once has a bond investor failed to get what's owed in full and on time."

Lockyer has made virtually no progress selling his view to the rating agencies. But it seems bond buyers need no convincing. Apparently they don't see much point in the ratings either, except to signal how much interest the state will be forced to pay.

Shortly after California's bonds were downgraded by rating agencies to the lowest of any state, investors snapped up the state's new offerings so fast this week that selling had to be halted prematurely. Hoping to peddle $4 billion in infrastructure bonds in three days, Lockyer's shop sold $6.5 billion in less than two.

It was the largest long-term, general obligation bond deal in the nation's history, according to the treasurer's office.

"There certainly seems to be an investor appetite for California bonds," Lockyer says. "People understand that California is going to be here next year, unlike some corporations."

The interest rates were attractive, especially given the current shortage of havens for investment money. These yields will be tax-free and range from 3.2% annually for four-year bonds to 6.1% for 30-year maturities.

This is an area far from my field. For expertise on bonds and markets, I turn to Times business writer Tom Petruno. He wrote Wednesday about the "ravenous investor demand" for California's bonds, noting that with federal income taxes expected to rise "for the well-heeled, high tax-free yields are hard to resist."

But I do know this much: When financial failures such as American International Group Inc. enjoy far better credit ratings than the state of California, the system stinks.

In 2005, amid scandal, AIG's rating was lowered from AAA to AA. At that time, California's was hovering around A. AIG didn't fall to the A level until September as it was about to implode and was being handed the biggest federal bailout in U.S. history.