Unintended consequences of new finance law could snuff out credit, bond market
Written by: Greg Gerber
7/21/2010
It took less than two hours from the time President Barrack Obama signed the new financial regulation bill before word of the latest unintended consequence hit the news wires.
According to a report at Bloomberg, which you can read by clicking here, the new law may "flash freeze" the nation's credit markets.
Moodys Investment Services, Standard and Poors, and Fitch Ratings have already told the Wall Street Journal that they are not going to allow underwriters to cite their ratings in bond-registration documents.
Rumor has it that Experian, Equifax and TransUnion are considering prohibiting lenders from using their credit scores to determine the credit worthiness of loan applicants. After all, a credit score can be considered a borrower's credit rating.
But, even if the consumer credit agencies don't impose similar restrictions, banks that pool their consumer loans into a big package and sell it to other investors in one big bond offering, may find it impossible to sell those securities without a bond rating.
You see, the new law eliminates the protection ratings agencies once had that shielded them from lawsuits regarding information contained in those reports. Without that protection in place, the credit rating agencies apparently aren't too keen on sharing information that could result in someone losing credit and suing the agency as a result.
On June 25, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) told a reporter, "No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done."
Well, the law is in place, and now we're seeing how it works.
It is as though the federal government delivered a gold mine to trial lawyers, but a mountain of fool's gold to consumers and investors all over the nation who will pay for the shortsightedness.
According to Bloomberg, "Public pension funds have accused Moody’s, Fitch, and Standard & Poor’s of helping to fuel the financial crisis by giving top rankings to mortgage bonds that plunged in value when the U.S. housing market collapsed in 2007. Congress scrutinized the firms at hearings and tried to hold them more accountable by making it easier for investors to sue for inaccurate ratings."
The Royal Bank of Scotland issued the following statement shortly after Obama signed the law. "It will likely become more expensive for issuers to bring new transactions to the public market, potentially shrinking the total amount of issuance, lowering the availability of consumer and commercial credit, and raising costs for borrowers."
If the credit bureaus follow through with their talk of taking similar action as the bond rating companies, it may be a very long year for RV dealers and other small business owners -- not to mention consumers.
I'm not quite sure this qualifies as "change we can believe in."