SURPRISE OBAMA SHUTDOWN: Critical Enablers Of Financial Crisis - NOW - "LIABLE FOR WHAT THEY SAY"

[kpete]

Surprise! Ratings Firms Nailed By Financial Reform

By Ryan Chittum



The Wall Street Journal reports this morning that part of the bond market has shut down because credit raters like Moody’s have told issuers they can’t quote their ratings.
http://online.wsj.com/article/SB10001424052748704723604575379650414337676.html?mod=ITP_moneyandinvesting_0#articleTabs%3Darticle

Why? Because the financial-reform bill (law in a couple of hours) makes Moody’s, S&P, and Fitch—who were critical enablers of the financial crisis—for the first time liable for what they say. They’ve hidden behind the First Amendment for years.

Once the bill is signed into law, 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 an firm if a bond doesn’t perform up to the stated rating.

That is a change from the current law, which considers ratings merely an opinion, protected like any other media such as a newspaper.

And:

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.

This, needless to say, deserves watching.

more:
http://www.cjr.org/the_audit/surprise_ratings_firms_nailed.php

[Hosnon]

1. I'm shocked, shocked I say. So NOW they're all worried about the effects of their ratings?

Hmm... different ball game isn't it when you are responsible for your actions?

The gravy train has ended, assholes. Provide a quality service or the Holy Market will get rid of you.

[drm604]

2. I'm not sure how to feel about this.

I'm certainly all for them being held responsible for what they say. On the other hand, a shutdown of the bond market is scary.

I guess ultimately this is necessary and good, but we may have to go through some financial tumult before it all shakes out.

[alcibiades_mystery]

4. Ratings firms who are prepared to stand by their ratings will fill the gap

The three Bigs are trying to blackmail the regulators. It won't work. They'll either take business or go under.

A knowledgeable party could start a ratings firm tomorrow, and they'd be happy to charge for services on ABS bonds tout de suite.

[glitch]

13. Excellent. God forbid the big three actually have to do the research necessary for accurate ratings

that they're willing to stand behind.

This is accountability, a good start. :thumbsup:

[Ignis]

17. "The three Bigs are trying to blackmail the regulators."

That's it in a nutshell. :thumbsup:

[Dr.Phool]

26. S&P and Fitch ratings will come with a disclaimer.

"For entertainment purposes only".

or

"Sold for the prevention of disease only".

[Hosnon]

6. The market won't go anywhere. The current players will either adapt and act responsibly

or be replaced by firms that will.

[alcibiades_mystery]

9. Exactly

The constant threat these people make - the ratings agencies, the corporate lawyers, the investment banks - is that issuers will simply flee US capital markets (i.e., they'll issue elsewhere, where the regulations aren't as stringent). OK, then. Via con Dios, motherfuckers. It's always been an empty threat.

[Hosnon]

10. Know anything about rating bonds? I could use some more income, haha. nt.

[pattmarty]

22. I think that was the point. Say their "crap" was good as fucking gold.........

..........and collect your MASSIVE fees. Like I said in another post, It sounds easier than selling crack and it was LEGAL.

[BobTheSubgenius]

28. Empty threat - totally agree.

I wonder where markets are less regulated anywhere in the industrialized world. I hear Somalia is more or less unregulated. Perhaps they could start capitalizing pirates.

[Subdivisions]

11. Wall Street is loving it today: S&P up 25 points on this news and a 5% drop

in home sales.

Markets seem to love "unexpected" bad news these days.

[xchrom]

3. I want bad things to happen to Moodys. Nt

[laughingliberal]

5. +1 nt

[alcibiades_mystery]

7. Translation

Various firms want to issue Asset backed bonds, but can't do so without a rating. The law makes the Big Three responsible and accountable for their ratings. The Big Three Ratings Agencies are refusing to rate until the "understand their exposure." Since these provisions have been well-known for months, they are straight up blackmailing the government by refusing to rate bonds. Fine. Let the market deal with it. Other firms will become specialists in ABS bond rating. Until then, no ABS bonds. It's not the end of the world. It hurts perhaps the issuers, who have to wait, the investment banks, which can't cash in their premium, and maybe the corporate law firms, which run these sales and issue opinions. Other than that, it has little effect on the economy. We're not talking ALL bonds, but specifically asset-backed bonds. Let 'em wait until they get they shit together, stop blackmailing the People, or fall to competition.

[Spazito]

8. Seeing as they participated in the financial fraud that was being...

perpetrated by 'selling' their ratings to the highest bidder, I am not surprised they don't want to be held accountable. Let them squeal, they will either 'get on the bush' or be left behind because the bus in leaving.

[jgraz]

12. Unfortunately, it's exactly the wrong approach

Instead of threatening them with post hoc legal action, they should have changed their funding sources. As long as the ratings agencies are paid by the big banks, they will feel pressure to inflate the ratings of the banksters' products.

[Hosnon]

14. Maybe so. But this at least applies downward pressure. nt.

[unblock]

16. this is what happens when you take an essentially regulatory function and put it in private hands

ratings are supposed to protect investors, but "investors" means the broad market as a whole. investors want to be able to see and trust ratings while searching for (and holding) suitable investments. it essentially has to be public knowledge, which makes it hard in practice for the market to extract payment from investors for this service.

so the market extracts payment from issuers, who are more than happy to do so as it enables them to influence the rating by, among other things, choosing among rating agencies, but more generally, pressuring rating agencies to give better ratings lest they choose to issue more unrated deals instead (where this is a practical alternative) or choosing to do deals in a way that's less economical for the rating agency.

before, the rating agencies had zero liability, which amounted to a fraud (albeit a legal one) against investors, as the rating was worthless. now, the rating agencies will be liable. that's an improvement, but it means they will need to build a legal defense strategy and have insurance, the costs of which will be passed along to the issuers.


so now all issues will be more expensive but the ratings will mean something. the more expensive ratings mean that some deals that should get done won't get done. you can say that's the price to pay for having the ratings mean something for the deals that do get done, but there's a much more straightforward solution

just let this be a government function like it is in other countries. criminalize issuer influence over bureaucrats and let them do the ratings. conceivably this could be funded with a fee on brokerage account holdings, but that's another topic. the main point is that the liability and insurance costs GO AWAY when the government does it because they are able to do the right thing.

usually the profit motive encourages businesses to do the right thing (if the right rules are enforced, at least).
however, sometimes the profit motive works against the right thing, and the best approach it to remove the profit incentive entirely.

[druidity33]

23. what are you a socialist?

:sarcasm:

"Usually the profit motive encourages businesses to do the right thing (if the right rules are enforced, at least). However, sometimes the profit motive works against the right thing, and the best approach it to remove the profit incentive entirely."


you mean like, for Health Care Reform?


Why don't more people understand this?

:(

[Greyhound]

15. More blatant extortion from the banksters. Will they buckle again?

Stay tuned...
:kick: & R

[wildbilln864]

18. k&r! nt

[Scurrilous]

19. Good news.

:thumbsup:

[Bonobo]

20. I seem to recall people screaming about Venezuela doing something like this.

http://www.washingtontimes.com/news/2010/jul/14/venezuela-jails-two-twitter-users-false-tweets/

[pattmarty]

21. Shit, I should start a "service". Before all you had to do was get a............

............"customer" and they pay you to say their shit was AAA. You can't find a job like that every day (especially now). That sounds easier than selling drugs and we all know that is ILLEGAL.

[Dr.Phool]

24. As was pointed out this morning in the SMW thread, by Ozymandius

Less than 36 hours after the ratings agencies said "Don't believe a word we say", S&P is going to downgrade Hungarian debt to junk.

Hmmmm. Do you believe them?

[DirkGently]

25. Very interesting. Ratings capture is a big part of the problem

Curious to see if this actually works, or whether it is quickly circumvented.

[Liberty Belle]

27. Thou shalt not lie. True conservatives should support this!