Agencies don't want ratings on bond prospectuses
Thursday, July 22, 2010
In one of the first ripple effects of the financial overhaul, ratings agencies are telling bond issuers to not use their ratings in documents given to potential customers, for fear of added liability.
The bill signed into law by President Obama on Wednesday would remove an exemption that allows clients to use the ratings agencies' opinions in prospectus papers without their consent -- and without attracting any potential liability for agencies' ratings if their opinions turn out to be wrong. In the last week, the three biggest agencies -- Standard & Poor's, Moody's Investors Service and Fitch -- have cautioned clients they can no longer cite the agencies' ratings as they're issuing new products.
Critics say the agencies have effectively shut down the market for new asset-backed bonds. Republicans on Wednesday claimed that the new law was causing unintended consequences in the financial world even before the ink was dry on the legislation.
"This reckless provision is now crippling the securitization markets that provide much of the credit needed to support Main Street businesses and the jobs they generate," Rep. Spencer Bachus (Ala.), ranking Republican on the House Financial Services Committee, said in a statement. "During the financial regulatory reform debate, this outcome was specifically predicted by House Republicans, but Democrats denied any potential problems as they pushed through last-minute change with no study or analysis."
Bachus insisted that if the provision isn't reworked, it could lead to ratings agencies having their insurance policies canceled as a consequence of their risk of legal liability, as well as scaring away potential competitors from entering the market to challenge the three biggest ratings agencies.
"The responsibility for ensuring our economy isn't gridlocked by damaging changes to a very major piece of legislation falls on the Democrats who proposed and supported these provisions," Bachus said. "Unfortunately this is only the first of what will be many harmful consequences, unintended or not, from this legislation."
The ratings agencies said the charges were overblown and they have not stopped issuing ratings. They're just not allowing them to be used in certain documents. "For somebody to say we're grinding the market to a halt isn't a fair assessment," said Ed Sweeney, spokesman for S&P.