The new “Wall Street Reform and Consumer Protection Act” is a brick of a law at 2,300 pages. Being a mammoth, no wonder it had spawned a few unintended consequences, one being a just what is meant by credit agencies being held more responsible when providing their ratings. The panic was substantial to the point that the Securities and Exchange Commission had to act as a go-between, calming the markets and even invoking a reprieve of sorts from its own regulations.
For almost 80 years, credit rating agencies such as Standard & Poor’s and Moody’s have enjoyed a comfy and protective legislative cushion, whereby, if their ratings turned out to be completely off their rocker, the agencies couldn’t be sued. Nice, right? But the new financial reform legislation has taken that protective cover away in lieu of assigning the highest ratings to toxic assets that have both triggered and caused the Great Recession.
In other words, this means that credit rating agencies will be for the first time in history actually legally liable for their ratings. Trying to pull back the protective covers, S&P and Moody’s are now prohibiting their ratings from being used in offering documents, effectively creating a Catch-22 situation. Meaning, firms trying to raise capital by issuing debt backed by assets, such as mortgages or car loans, for example, can no longer disclose credit ratings of asset-backed securities, yet they are required to do so by other legislation.
The ripples already spread out last week. According to “The Wall Street Journal,” Ford’s financing unit has had to delay issuing bonds backed by its car loans because not a single credit rating agency showed up for the “ratings party.”
This is when Ben Bernanke had to step in, advising the SEC to deal with the situation as soon as possible. Bernanke’s concern is that all this pulling and tugging is placing undue pressures on the credit markets in an environment where it is still difficult for many companies to borrow money from distrustful lenders.
What the SEC did was issue a sort of an amnesty, but not to credit rating agencies. In last week’s statement, the SEC has allowed Ford to issue unrated asset-backed securities for a period of six months. The reprieve stems from the SEC guidelines addressing the distribution of asset-back securities under Regulation AB.
Meredith Cross, director of the SEC’s corporate finance division, stated, “Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit ratings in these Regulation AB filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement, while still conducting registered AB offerings.”
It remains to be seen if this transition period will be sufficient to calm both debt and credit markets. But I’m not so concerned with issuers having difficulty peddling their asset-backed offerings. What I’m really concerned about are credit rating agencies. Don’t you find it curious how now, when their legal safety net has been removed, rating agencies are suddenly reluctant to do their jobs, which is to rate debt issues? Makes you wonder what they have been doing before.
We already have serious doubts about their rating methods and consider credit agencies to have gloriously boondoggled ratings of toxic assets. They were supposed to be one of the watchers. It seems that the watchers may have been asleep for eight decades with the public being none the wiser had it not been for the credit crisis. They are now awake and there are no doors and windows to protect them, which seems to be the reason they don’t want to be the watchers anymore. But what else are they good for, then?