The Three Big Ratings Agencies (hereinafter, TBRA) are refusing to rate asset backed bonds due to the stepped up regulations of the financial reform package. This is ground-shattering news that already demonstrates the effectiveness of the new legislation. I'm going to tell you why.More at the link, and a discussion thread at Reddit.
Now, if you listen to CNBC or NPR's Marketplace, this is meant to be a Very Troubling Development. You see, according to existing securities regulations, you can't sell asset backed bonds without a ratings agency stamp on it that tells buyers the TBRA's "opinion" of their risk. That's a principle of transparency. You need an "objective" third party assessment of the risk for such bonds. If one of the TBRA doesn't rate the bond, you can't sell it. So, the bond market for asset backed bonds is at a dead stop: no ratings, no sales. Full stop.
So, what's the NEW problem? The financial legislation just signed into law makes the TBRA's liable for the opinion they give on a bond. If, for example, they give a bond a very strong rating (AAA, say), and the bond turns out to be junk, and it turns out that the ratings agency was negligent in its assessment, it can be sued by the bondholders. This has sent shockwaves through the financial set, but not only because it exposes the ratings agency and forces them to be honest in their assessment of the bonds. Rather, it pinpoints the precise pressure zone in the whole asset backed securities market and forces changes all the way down the line. They are screaming bloody murder and essentially blackmailing the government precisely because the new law cascades throughout the system...
23 July 2010
Ratings agencies refuse to rate collateralized asset securities
I just found this today and haven't tracked it any further than the link: