Did The Credit Agencies Just Go Extinct? (Dodd-Frank in Action)

ZeroHedge ^ | 7/21/2010 | Tyler Durden

[mojito]

The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankrupt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue a firm if a bond doesn't perform up to the stated rating."

[mojito]

The Obama Administration: Putting the Private Sector Out of Business Since 2009.

[Notary Sojac]

This might be the one good element of the bill.

We badly needed to see some Moody's and S&P types wearing orange for their fraudulent actions during the housing bubble.

[Dr. Sivana]

Experian, Trans-Union, and Equifax will just keep chugging along.

[The Working Man]

Yep, and I think it will be just like ObamaCare, Little Easter Eggs of poop scattered throughout. Just waiting to be discovered in the worst possible manner.

[brytlea]

LOL Oh wait, that’s not all that funny. :(

[mojito]

The ratings agencies needed to be reformed to eliminate conflict of interest. Parties guilty of fraud need to be prosecuted.

But Obama-Dodd-Frank has just put them out of business, and as a result the private sector bond market has all but dried up.

[b4its2late]

God, it’s going to take a long time to undo what this dude is doing to this country....

[mojito]

“The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.”

“That is important because some bonds, notably those that are made up of consumer loans, are required by law to include ratings in their official documentation. That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.”

“There have been no new asset-backed bonds put on sale this week, in stark contrast to last week, when $3 billion of issues were sold. Market participants say the new law is partly behind the slowdown.”

“We are at a standstill right now,” said Bingham McCutchen partner Ed Gainor, who specializes in asset-backed securities.”

http://online.wsj.com/article/SB10001424052748704723604575379650414337676.html?mod=googlenews_wsj

[socialism_stinX]

This is a really bad idea. It’s likely that the bond rating agencies will stop rating new bond issues and suspend their ratings on existing bonds. That’s terrible news for the credit markets. I think this section of the Fin Reg bill will be repealed within months because it will clog up the flow of credit to American corporations.

What’s next from this crazed congress? Will they make brokerage firms legally liable for stock recommendations? If that happens then Wall Street firms will completely stop making stock recommendations.

[unlearner]

No one is more culpable than the authors of the bill. Frank, in particular, should be in prison even more so than anyone else to blame.

[Truth is a Weapon]

This is a result of the economic ignorance of the Dems. They just don’t understand the function of the rating agencies. Did the rating agencies screw up? You betcha. But this does not fix the problem.

There are many, many institutional investors who can only invest in investment grade bonds. A rating agency’s rating is a snapshot in time prediction of the ability of the borrower to repay. Decisions made by the company after the rating can impact that ability. The rating agency’s only recourse is to, after the fact, downgrade their rating. Investors are put on notice and decide whether to buy, sell or hold.

By making the rating agencies liable for losses you automatically cause the rating agency to assign lower credit ratings to protect themselves. That increases the borrowing costs of the rated entity.

In retaliation, the rating agencies should just say that in order to protect us from liability we are going to downgrade US sovereign debt with a maturity of more than 3 years. Nobody understands the potentially devastating impact of the USA losing its AAA rating.

[mojito]

It’s likely that the bond rating agencies will stop rating new bond issues and suspend their ratings on existing bonds.

They already have. See my post at No. 8.

[KarlInOhio]

What happens if they apply that law to rating Treasury Bonds. Suddenly they drop from AAA to C.

[silverleaf]

Will the absence of credit ratings make the bond market go “BOOM” or “hissssss.....”?

[silverleaf]

I believe this is in regard to rating the credit of bond issuers, not private credit scores

The lower the credit rating, the higher the borrowing costs because of risk (of default by the issuer)

Now we get to see who is willing to buy bonds with no credit rating

Wonder what this does to existing bond ratings?

[piytar]

“But Obama-Dodd-Frank has just put them out of business, and as a result the private sector bond market has all but dried up.”

That, of course, is the goal. Eliminate private sector bonds so more money flows to public sector (ie govt controlled) bonds.

Not an accident. Intent.

PS New tag...

[Pecos]

I admit to vacillating between being convinced that these yahoos know exactly what they're doing as they shut down American business, and believing that they have no concept of the “Law of Unintended Consequences”.

There is evidence on both sides of the argument. Either way, they prove daily to be a disaster for the country.

[11th Commandment]

This might be the one good element of the bill.

Maybe, since we know there is pressure put on these agencies as well as audit firms.

However, if a company gets a A- rating, the big three should have empirical evidence that say .1% of A- default. This is a low risk; however, .1% will default. Is Moody's liable when the A- company suddenly defaults?

[Notary Sojac]

The most proximate cause of the housing bubble and bust was the rating agencies giving a thumbs up to all that mortgage-backed fecal matter on so many balance sheets.

They were so wrong, in such a big way, I can't imagine how they can possibly retain any credibility.

By comparison, here's the Zillow chart of the last house I owned. The dollar sign shows when I sold it.

I am no financial genius. Not by a long shot. But even I could smell the rot in the housing market back when Moody's was giving Angelo Mozilo a big "AAA" (which Angelo paid for, I'm sure).

So whether or not they keep rating bond issues tells me absolutely nothing about whether those bonds are investment grade.

[The Duke]

No problem. China just started their own ratings agency. They world can just switch to that.