Rating Agencies Have Stopped Rating – Bond Markets Shutting Down

The three dominant credit-ratings providers have made an urgent new request of their clients: Please don’t use our credit ratings. The odd plea is emerging as the first consequence of the financial overhaul that was signed into law by President Obama on Wednesday.

“The repeal of Section 436(G) of the Securities Act of 1933 is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions.”

Barclays Capital


It already is creating havoc in the bond markets, parts of which are shutting down in response to the request, The Wall Street Journal Reports.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days.

This is the direct consequence of a new law, in particular a small paragraph that made it into the law in the very last moment.

Yesterday morning, the Econotwist’s subsidiary site “The Swapper” reported:

“The repeal of Section 436(G) of the Securities Act of 1933 — what the Wall Street Journal in an article this morning called an “unintended consequence” of the Dodd-Frank Wall Street Reform and Consumer Protection Act — is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions,” according to Barclays Capital analysts.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not,” Barclays says.

With difficulty assessing this new liability, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have already pulled back from the new-issue securitization market, The Swapper reports.

Barclays analysts expect this to impact consumer ABS more than residential credit ABS, where issuance volumes have been generally lower and issuance that has come to the market has generally been privately placed as 144A deals.

Go to The Swapper to read the rest of the article.

Rigid With Fear

Now not only the agencies have a big problem. The issuers are also rigid with fear, the wsj.com, writes.

Many companies that were in the process of securitization of their loans are now holding back.

The registration with the SEC is on many financial products – especially those composed of consumer loans such as mortgages and car loans – a written evaluation by an agency requirement.  These are now refused.

Liable For Their Ratings Decisions

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately.

The companies are now refusing to let bond issuers use their ratings until they get a clearer understanding of their legal position and no one knows how long this will take.

Many structured products cannot be issued now, as the law obliges them to include a rating in the documentation.

That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down, The Financial Times Deutchland reports.

“We are experiencing a standstill,” Edward Gainor, one on asset-backed securities specialist lawyer, says .

While there have been were traded bonds worth $3 billion over the last weeks, there were no new issues this week, according to The Wall Street Journal.

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