Reply #15: New financial rulebook tangles loan bundlers, ratings agencies [View All]

[Demeter]

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/22/AR2010072206046.html

Merely days old, the financial regulatory law has already generated its first real-world hiccup. A minor rule change in the law unexpectedly shut down the market for selling new bundles of car loans and consumer loans after bond issuers, ratings agencies and the Securities and Exchange Commission found themselves caught in a tangle of old and new regulations.

The SEC intervened Thursday afternoon, but traders viewed the incident as a warning that more dust-ups could come as the gargantuan law makes the leap from paper to reality.

The confusion stemmed from a provision in the law that removes legal protection for ratings firms when they lend their opinions to bond issuers introducing new products. If the ratings turn out to be wrong -- for instance, if an agency gives the debt product a top rating but then the debt defaults -- the ratings companies can be sued.

In response, the three major ratings agencies -- Moody's, Fitch and Standard & Poor's -- started telling clients that they weren't allowed to use the agencies' opinions in documents used to register new bond products.

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This put the bond issuers in an impossible position. The SEC requires them to include these ratings anytime they register new asset-backed securities to sell to investors. Without permission to use the agencies' opinions, bond issuers couldn't offer new products. And so, earlier this week, the public market for asset-backed securities came to a full stop...

WELL, TOO BAD THEY FIXED IT! ANOTHER POINT OF VIEW:

SEC Grants Six-Month Delay on Ratings for Asset-Backed Debt in Statements

http://www.bloomberg.com/news/2010-07-22/sec-grants-six-month-delay-on-ratings-for-asset-backed-debt-in-statements.html