More Great Moments in Regulation

Today's episode -- the shut down of the new debt market

Ford Motor Co.'s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.

Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.

The nation's dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody's Investors Service, Standard & Poor's and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.

The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.

The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.


  1. morganovich:

    honestly, after comments like "we have to pass the bill to see what's in it" can anybody muster any actual surprise at unintended consequences?

    on the other hand, despite its economically crippling consequences, at least this should shore up prices for existing asset backed securities by limiting supply...

  2. Every Man A King:

    Considering how the ratings agencies aided and abetted the financial crisis, does anyone feel sorry for them?

  3. morganovich:

    i've been thinking about this a little more. isn't this a de facto nationalization of mortgage securitization?

    i realize that freddy and fannie are currently buying 90% of mortgages anyway, but given their now explicit government guarantee, won;t they be the only one in the mortgage space able to securitize loans? who else will be able to get a rating?

    with 90% share, clearly the market can't get much worse, but with these rules, how can it get any better?

    did we just see the sneaky nationalization of a market?

  4. Mesa Econoguy:

    morganovich: yep

    This one kinda has an opt-out though - just don't play. Bye bye ABS.

  5. rox_publius:

    can you fix the link?

  6. Allen:

    Makes one wonder what's caused the so-called "freezing" of the credit markets, eh?

  7. Russ R.:

    This is not likely to be the end of the world (or even the end of the structured credit markets), but it will have the effect of shutting out smaller issuers, to the advantage of larger corporate borrowers.

    Despite the increased exposure to legal liability, the ratings agencies will eventually go back to rating new debt offerings... that's their core business. They'll just end up increasing their fees to cover their higher risk.

    The higher fees, as a fixed cost of a bond issue, will have little impact on giant borrowers (like Ford, which would raise billions at a time), but will have a punitive impact on smaller companies (who will have to turn to bank loans, which are more expensive and typically come with restrictive covenants attached).

    Despite the higher fees, large borrowers might actually benefit from lower interest costs, since there would be fewer competing issues, potentially driving rates lower.

  8. Ted Rado:

    At least the Feds are consistent. They screw up EVERYTHING!!

  9. Phil:

    How is this a problem? Shouldn't firms be legally liable for faulty ratings? Shouldn't Ford be held responsible for the damages associated with the Ford Pinto even if they were unintentional? I just do not the problem here.

  10. Val:

    Phil, all of these things serve to raise the cost of capital... If fact, so many things have been done by the present administration that are and/or will have that effect, that it is difficult to predict the extent. However, it will be there, and the result will be more drag on the economy, especially the dynamic parts. It would be much easier and far more effective to change the pay scheme in the current rater/ratee fiasco.

  11. GregS:

    Phil, the entire $1.4 trillion market for a type of financial instrument gets shut down as an accidental, unintended consequence of new government regulations, and you don't see a problem with that? Even if one thinks the rating agencies should have legal liability for their ratings, the fact that this new regulation shut down an entire market, by accident, shows an astonishing level of incompetence and ineptitude by those authoring these new rules. And the implications for the future are frightening because these same authors, in their hubris, think themselves uniquely, brilliantly qualified to run *everything* in American life.