This page has been archived and commenting is disabled.

Did The Credit Agencies Just Go Extinct?

Tyler Durden's picture





 

The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankrupt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their
ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating." And since ratings are officially a part of a vast majority of Reg-S filed documentation, the response by issuers has been a complete standstill in new issuance, especially asset-backed underwriting and non-144A high yield issues, as the raters evaluate how to proceed. Alas, as there is no easy fix, underwriters' counsel and issuers will promptly uncover new loopholes and ways  to issue bonds without the rating agencies' participation. Did Moody's and S&P just become extinct?

More from the WSJ:

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. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

There have been no new asset-backed bonds put on sale this week, in stark contrast to last week, when $3 billion of issues were sold. Market participants say the new law is partly behind the slowdown.

"We are at a standstill right now," said Bingham McCutchen partner Ed Gainor, who specializes in asset-backed securities.

Several companies are shelving their bond offerings "indefinitely," according to Tom Deutsch, executive director of the American Securitization Forum, which represents the market for bonds backed by assets such as auto loans and credit cards. He said he knew of three offerings scheduled for coming weeks that are now on hold.

For those who are still confused as to just how our reptilian legislative system works, here it is. Moody's found out the hard way. Of course, the fact that those short the stock are about to make a killing likely had no bearing in the final outcome of Donk:

The change caught the ratings agencies by surprise. The original Senate
version of the bill didn't include the provision. It was only on June
30, when the Dodd-Frank bill was passed, that the exemption was removed.
The Senate passed the amended version on July 15. The offices of Sen.
Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) didn't
immediately respond to a request for comment.

And just like the "scientists" used by BP to validate that the seep caused by the Macondo is not really from the Macondo (until it is proven beyond a reasonable doubt it is from the Macondo, but with sufficient dilution of responsibility that nobody will be impacted), so the rating agencies have been a useful idiot for all the other lazy idiots who refused to do an iota of work an relied on Moodys and S&P. It appears these same dumb money charlatans will once again have to learn what leverage and coverage ratios are.

Ratings providers became a lightning rod for criticism after the financial crisis. Their overly rosy assessments of many bonds, particularly complex securities and bonds backed by subprime mortgages, were blamed for helping fuel the meltdown of the credit markets.

In response, the Dodd-Frank bill revamped how the government treated credit-ratings firms, which receive a special government designation that allows them certain privileges and market access

Once the bill is signed into law, advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating.

One possible resolution is for the entire underwriting process to go the private route:

One solution to the logjam is for sellers of bonds to offer their deals
privately. That means they would offer ratings that can be used in
private transactions but not in deals registered with the SEC and sold
to the general public. The private market is much smaller and more
expensive than the public one.

Alas, as this will immediately cut off a major portion of the end demand market (the Reg-S, non-144A), the supply-demand equilibrium will likely shift, forcing issuers to offer greater concessions or more generous new issue yields and coupons. And since most companies are beyond stingy when it comes to their balance sheet, this option will likely not be seen as realistic, forcing companies to discover new and improved ways to entirely bypass the MCOs of the world. And that, much more than any latent Wells Notice, will likely be the end of the rating agency paradigm.

h/t Steven

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 07/21/2010 - 00:23 | Link to Comment The Deacon
The Deacon's picture

I may well as be the first to quote the cliche.  Is this like closing the barn door AFTER the horses have been leaving the barn for the past 10 years?

Aw shucks for all those errors in rating every single security, but we promise we'll do better in the future!

As William Black said, no one has gone to jail.  Nothing is fixed.

It would be just be too darn tootin' difficult to get to the bottom of this, so everyone goes free.  Justice is such a cumbersome thing to enact, ya know.

Wed, 07/21/2010 - 08:13 | Link to Comment Popo
Popo's picture

Exactly.  Like we're supposed to cling to this glimmer of regulatory hope?  There are literally *thousands* of people that are in clear violation of the law, and need to be prosecuted and go to jail.  Every couple of weeks we hear about some movement towards clawbacks, regulation, fines, and new laws which would render current abusive practices obsolete.  And within days of each glimmer of hope, we learn of the loophole and/or the seeming inability of government to actually enforce the law.

This is a joke.  Wake me up when someone with an executive position at a major financial institution, with a personal net worth of more than $20 million is facing 20+ years in prison.  Actually, scratch that:  Wake me up when 100 people are facing sentencing.  Until then this is all just propaganda being fed to us to give us hope. 

The bankers have absolute power.  They have won.  We have not only been defeated, but our defeat is growing more profound and devastating by the day.  The US government is a pathetic sock puppet, and until I hear rage (genuine, fucking rage) from a *majority* of politicians who are hell-bent on striking true, unbridled terror in the hearts of bankers then I will continue to believe that this Republic is a total fucking joke, and that the American people have been soundly conquered.

Wed, 07/21/2010 - 11:38 | Link to Comment Morbo
Morbo's picture

So true it hurts! Fascism doesn't work so well if you can't find enough resources and the state doesn't have much of a manufacturing base anymore. Who can afford to buy in anyway? (And the poor mobsters/wall street lords can't even convince anyone anymore that the government's debt has some fraudulent, but agreed upon, value. Damn.) Feudalism is the new "it" system. Instead of royals we've now got a congealing colony of banksters doling out share-cropping land/housing (i.e. Fanny and Freddy, etc.) and chuckling at the sacrificial laborer straining to keep ahead of his store credit. Food and necessities are fast becoming the only thing available to us "non-elites." Forget the cars and luxury items. And pretty soon we can kiss the manufacturers of those same items goodbye too. Rate that.

But please America, don't let little ol' me stop you from burning the house down. You go right ahead- it's your 230 yr. old house after all. Maybe the banksters are right after all and they deserve to benefit from your travails. Maybe they're simply better than you. Maybe you just aren't worth much after all unless you can prop up this small aforementioned colony's "bottom line." After all, they earn more in their yearly bonus than a 100 of us earn in an entire lifetime.

Rate that one Moody's! What's the going rate for the waning value of labor in a collapsing first world economy? Total fucking joke indeed...

IMHO it'll take more than 100 people over $20mil. to make a difference. At this point, if you've got that much in this economic environment the odds are you're a criminal through government bribery (and let's not forget to save a little jail space for the fat politicians either), insider trading, extortion or god knows what. Maybe just jailtime for selling other humans into homelessness to make a couple bucks? Does anyone actually think Bill Gates deserves a pat on the back for anti-trust violations one after the other? (Maybe he should get a trophy for establishing the best legal defense cadre in the world?)

Burnin' down the house!

K. I'm done. (my that was cathartic!)

Wed, 07/21/2010 - 00:29 | Link to Comment Johnny Dangereaux
Johnny Dangereaux's picture

Prolly a few other paradigms too.....

Wed, 07/21/2010 - 00:29 | Link to Comment aldousd
aldousd's picture

donk. nice.

Wed, 07/21/2010 - 00:31 | Link to Comment doublethink
doublethink's picture

 

"You are not only responsible for what you say, but also for what you do not say."

-- Martin Luther

 

Wed, 07/21/2010 - 00:31 | Link to Comment CrockettAlmanac.com
CrockettAlmanac.com's picture

The recently passed Donk (Dodd-Frank) Finreg abomination...

 

Maybe that should be the Frodd (Frank-Dodd) Finreg abomination...

Wed, 07/21/2010 - 06:44 | Link to Comment ratava
ratava's picture

i like the sound of that. quite descriptive.

Wed, 07/21/2010 - 00:36 | Link to Comment VK
VK's picture

I sure hope they go extinct. They deserve to after all the trash backed gold they peddled.

Wed, 07/21/2010 - 01:41 | Link to Comment cossack55
cossack55's picture

In nature, extinction normally follows irrelevancy.

Wed, 07/21/2010 - 07:42 | Link to Comment Miss Expectations
Miss Expectations's picture

Not always...The Carolina Parakeet for example:

The Carolina Parakeet died out because of a number of different threats. To make space for more agricultural land, large areas of forest were cut down, taking away its habitat. The bird's colorful feathers (green body, yellow head, and red around the bill) were in demand as decorations in ladies' hats.

http://en.wikipedia.org/wiki/Carolina_Parakeet

Wed, 07/21/2010 - 10:18 | Link to Comment I am a Man I am...
I am a Man I am Forty's picture

This behavior wasn't helpful....

A factor that contributed to their extinction was the unfortunate flocking behavior that led them to return immediately to a location where some of the birds had just been killed. This led to even more being shot by hunters as they gathered about the wounded and dead members of the flock.

Wed, 07/21/2010 - 00:38 | Link to Comment glenlloyd
glenlloyd's picture

This is truly comical

Wed, 07/21/2010 - 00:49 | Link to Comment Careless Whisper
Careless Whisper's picture

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,

LMAO. u can't make this stuff up

Wed, 07/21/2010 - 01:19 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

Its just like cockroaches scattering when a light is turned on.

Wed, 07/21/2010 - 02:56 | Link to Comment ZackLo
ZackLo's picture

+1 its unbelievable, but looking at it from the devils advocate perspective isn't the fate of the united states directly coorelated with the europe going belly up and crashing. So they can't just blurt out attacks on other countries now on behalf of the united states...This get more and more interesting by the day. I mean isn't that the point though downgrade europe have everyone run to US treasury bonds and dollars, oil is bought in dollars, dollars strong everyone gets cheap oil, and everyones happy! well except europe of course but we all know the european union was a failor before it started..

 

I love having to see them finally put there money where their mouth is...they better not allow their ratings to be used they'll take buffet out. ROFL.

Wed, 07/21/2010 - 07:23 | Link to Comment outamyeffinway
outamyeffinway's picture

Beginning of the end? Walking the dollar down slowly, after an orgasmic splooge rally? Hopefully it offers up an excellent chance to get more metal.

Wed, 07/21/2010 - 00:50 | Link to Comment Misean
Misean's picture

OK, so besides the fact that the real problem was that the idiots in the Feral Gov't required regulated entities (pension funds--cough!) to buy a certain basket of securities rated by agencies paid by the seller for the rating (suuuuure, that's not bass ackwards), but NOW, since the only friggin' entity that will get a AAA going forward is the Lootery Dept's worthless paper, and since it only pays like 0.0000000000001% interest...Um...how are all the garrgantuan, massively under funded pensions (guarenteed by PBGC natch) that require like 15% returns till Abey Cohen's cows come home just to maybe break even eventually going to actually achieve those 15+ returns?

I'm just a titch confused here...

Wed, 07/21/2010 - 02:07 | Link to Comment carbonmutant
carbonmutant's picture

Yea, and the Euro should get a nice pop since all of the previous downgrades are Null & Void.

Wed, 07/21/2010 - 07:53 | Link to Comment New_Meat
New_Meat's picture

MBS path for Fannie, Freddie, FHA loans to get scrubbed and come out bright, shiny, clean.  Is that turned off?  Or is the conveyor belt directly to the Fed?

- Ned

Wed, 07/21/2010 - 01:09 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Fascinating.

They wanted all that power, to move nations, markets, make and destroy so much.

All that with no real accountability?

They've been extinct a long time, like walking dead.

ORI

http://aadivaahan.wordpress.com

Wed, 07/21/2010 - 10:17 | Link to Comment Lord Blankcheck
Lord Blankcheck's picture

   Farscinating

Wed, 07/21/2010 - 01:13 | Link to Comment Stevm30
Stevm30's picture

Watch as uncle Warren sprints to Washington in the "Indefensible"... "shucks, ho hum, gosh diggity, Obama... well jiggity jeez, no of course I don't use their ratings... but darn it... what a great "MOAT" those companies have, and shuck ity diggity, what will happen if people are forced to do their own analysis? Chaos!"

Wed, 07/21/2010 - 08:53 | Link to Comment Janice
Janice's picture

Question:  Didn't Uncle Warren recently sell off some of his interest in a credit rating entity?

 

Answered my own question:

Buffett also distanced himself from Moody's management, saying he has had no recent contact with it, and did not know that Moody's in March got an SEC "Wells notice" indicating possible civil charges related to a failure to timely downgrade some European debt.

Berkshire owns a 13 percent stake in Moody's, down from nearly 20 percent less than a year ago, and sold some shares shortly after Moody's got the Wells notice.

Buffett said Moody's is not as "bulletproof" as it once was, and that this is a reason for some of the sales. He said he wished he sold more shares sooner.

Read more: http://www.nydailynews.com/money/2010/06/02/2010-06-02_billionaire_warren_buffett_distances_himself_from_credit_agencies_says_they_were.html#ixzz0uJwYDA2U

Did Warren know the axe was coming?

Wed, 07/21/2010 - 01:21 | Link to Comment three chord sloth
three chord sloth's picture

I wonder how soon the Federal government will decide that they need a new department to rate bonds, now that Moody's and friends are not doing it anymore? A new agency that will, of course, be exempt from the new liability laws... like most of the rest of the Federal government.

Wed, 07/21/2010 - 01:23 | Link to Comment williambanzai7
williambanzai7's picture

I didn't really say everything I said...
Yogi Berra

Wed, 07/21/2010 - 02:00 | Link to Comment carbonmutant
carbonmutant's picture

"The future ain't what it used to be"

Wed, 07/21/2010 - 03:03 | Link to Comment SAJ
SAJ's picture

Better cut that pizza into 6 pieces;  I don't think I'm hungry enough to eat 8.

 

-- Yogi Berra

Wed, 07/21/2010 - 07:54 | Link to Comment New_Meat
New_Meat's picture

"No one goes there to eat anymore, it is too crowded."

Wed, 07/21/2010 - 01:26 | Link to Comment pitz
pitz's picture

Doesn't this, over time, cause strong inflation, as businesses cannot receive the credit they need to re-invest in their physical plant and operations at competitive prices, while consumers are free to binge on credit because the credit rating aparatus is still relatively intact?

 

 

Wed, 07/21/2010 - 01:37 | Link to Comment Moonrajah
Moonrajah's picture

No problem here. They'll just become part of the SEC in the form of the new Rating and Assessment Department. Or in short the Rat & Ass depo.

Wed, 07/21/2010 - 06:16 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Rat and Ass...

Priceless. One for the ages. Moonrajah gets the deep belly laugh inducer prize for the day.

ORI

http://aadivaahan.wordpress.com

Wed, 07/21/2010 - 01:39 | Link to Comment LeBalance
LeBalance's picture

To say that the Ratings Agencies have just gone extinct is one perspective. Another perspective is that now that the products *require* a bullet proof rating CAN they be issued under today's methodology of graft?

And to be really really deadly: Can the US issue a Treasury note?  They will need a rating on that puppy won't they? And how will they get that rating?

Unintended consequences indeed!

Wed, 07/21/2010 - 01:47 | Link to Comment fuu
fuu's picture

Oh my that is rich!

Wed, 07/21/2010 - 07:58 | Link to Comment MaximumPig
MaximumPig's picture

Only applies to registered securities, which excludes treasuries and munis.

Wed, 07/21/2010 - 01:52 | Link to Comment palmereldritch
palmereldritch's picture

"...now that the products *require* a bullet proof rating..."

They'll just hire new experts

http://www.youtube.com/watch?v=nsdZKCh6RsU&feature=related

Wed, 07/21/2010 - 02:01 | Link to Comment IEVI
IEVI's picture

+10

Wed, 07/21/2010 - 02:02 | Link to Comment carbonmutant
carbonmutant's picture

 Will they be forced to accurately rate US Debt?

Or will they do it out of spite?

Wed, 07/21/2010 - 05:50 | Link to Comment Iam Rich
Iam Rich's picture

It's just not that complicated for them, start issuing proper ratings for everything.  Bankrupt everyone else first.  Bond market extinction, then ratings agency extinction...not the other way around.  This is going to be smashing. 

Wed, 07/21/2010 - 01:41 | Link to Comment Rick64
Rick64's picture

Some accountability what a novel idea. A business that has to stand behind their work, of course they don't like it. Maybe this is an opportunity for new rating agencies with some integrity. I know I'm skeptical too.

Wed, 07/21/2010 - 01:55 | Link to Comment traderjoe
traderjoe's picture

While everyone seems to agree that the current credit ratings agency model is oh-so-fraught with troubles - a couple of other points that seem implied by the post:

1. Our government can dramatically alter entire industries and companies deep in the night stuck somewhere in 2300 page bills, executive orders, moratoriums, etc. This means that companies will be dramatically less willing to make long-term capital investments. The US becomes like a Venezuela - industries subject to confiscation at any time. And this simply only increases the value of lobbyists. 

2. Similarly, companies will never know when they will be written out of existence if they somehow participate in a scandal, bubble, etc. - even if their participation was tangential. If less politically connected or easier to make a scapegoat out of, they will be targeted as a/the convenient fall guy. 

3. This might have a short to intermediate-term impact on immediate liquidity, in the height of a looming liquidity crisis. BTW, does this mean that the European Stability Fund will be unable to get their Ponzi-worthy AAA rating? How about sovereign ratings for munis? What if, to be dramatic, no rated bond is issued for 2-3 months by anyone?

4. Any almost assured rise in incremental rates paid by companies/muni's etc. will likely go to fund the underwriters and pay the financiers - on the backs of shareholders/taxpayers. Score one for the Congress not being able to see the un-intended consequences. 

5. If the market crashes (perhaps I should say when it does), does that mean investment banks/mutual funds/analysts could be made to be liable for their investment advice? Isn't it a similar analogy? See points 1 and 2 - the Rule of Law has been made a mockery in the last couple of years (Chrysler/GM secured lenders, bailouts, retroactive Tarp issues, mortgage modifications, etc., etc.). Is this just another element of the slippery slope to...[insert statism, fascism, socialism, etc. - cue discussion on the differences...]

So, our government tries to fix something, but in the end have they once AGAIN demonstrated their inability to govern?

Wed, 07/21/2010 - 02:04 | Link to Comment IEVI
IEVI's picture

they've demonstrated their complete ignorance..and ours for electing them

Wed, 07/21/2010 - 03:46 | Link to Comment Bear
Bear's picture

Unintended consequence ... Moody's to reconsider USA at AAA

Wed, 07/21/2010 - 02:04 | Link to Comment carbonmutant
carbonmutant's picture

 This bill is gonna have a LONG tail.

Wed, 07/21/2010 - 02:58 | Link to Comment i.knoknot
i.knoknot's picture

is any of this really enforceable?

ratings agencies can say: "based on the information available to us..."

even if more actually was internally available. much like "fed-speak", i expect a similar "language" to emerge in the ratings business.

Wed, 07/21/2010 - 03:32 | Link to Comment Andrew G
Andrew G's picture

Cool, so the ratings agencies are now supposed to take a hit. Finally some accountability in the system! Until they go belly up and have to be bailed out by the govt...

Wed, 07/21/2010 - 04:30 | Link to Comment Lapri
Lapri's picture

Don't worry, be happy watching this wonderful video produced by the White House. Everything will be wonderful for 'small people'. (I'm hoping Yahoo took it from Onion Network.)

http://finance.yahoo.com/tech-ticker/article/522874/Its-the-Great-White-House-Financial-Reg-Reform-Video,-Charlie-Brown#comments

Wed, 07/21/2010 - 04:57 | Link to Comment Pondmaster
Pondmaster's picture

Ratings agencies wiped out by FrancDod meteorite . Good riddance . Maybe it will create jobs for the truly talented offspring of Yale and Harvard . Personal , company owned raters . Oh .and as of today I have GW( Geo Washington) on perpetual ignore . ZH is becoming a net version of the Nat'l Inquirer real fast , and the original quality is fading . And WHERES MARLA ?

Wed, 07/21/2010 - 05:35 | Link to Comment Privatus
Privatus's picture

Fularious.

Wed, 07/21/2010 - 05:51 | Link to Comment plocequ1
plocequ1's picture

Thats nice. Apple saved the world ( Business insider). What ever happens from here on in is now ok. Apple saved the world.

Wed, 07/21/2010 - 06:23 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Ah! such well delivered sarcasm would shrivel the ordinary person.

Subtle and well written plocequ1!

May it shrivel the APPL

ORI

http://aadivaahan.wordpress.com

Wed, 07/21/2010 - 08:22 | Link to Comment plocequ1
plocequ1's picture

Yes my fellow doomsayers, All my posts are 100% sarcasm. I want this whole ponzi scheme to go BOOM as much as anyother pure blooded American. However, I do love my Apple products. THEY WORK!! ( Including the IPhone4 antenna)

Wed, 07/21/2010 - 06:11 | Link to Comment Daedalus
Daedalus's picture

Here is a quote from the front page of a European Bond prospectus regarding ratings. I do not have a US prospectus to hand, but assume the language is similar:

"The Class A Notes are expected upon issue to be rated AAA by Standard & Poor’s Rating Services, a  division of The McGraw Hill Companies, Inc. (‘‘S&P’’) and AAA by Fitch Ratings Ltd. (‘‘Fitch’’ and, together with S&P, the ‘‘Rating Agencies’’). The Class B Notes are expected upon issue to be rated AA by S&P and AAA by Fitch. The Class C Notes are expected upon issue to be rated AA by S&P and AA by Fitch. The Class D Notes are expected to be rated AA- by S&P and AA by Fitch. The Class E Notes are expected to be rated A by S&P and A by Fitch.

A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by any one or more of the Rating Agencies. Each credit rating should be evaluated independently of any other credit rating."

Note that last sentence. How ANYONE could reasonably hold the Rating Agencies liable for anything when that last sentence is included is beyond me. They provide opinions. Sometimes their opinions may be wrong. But that they genuinely held those opinions is not something I have seen contested. The idea that someone could be held liable for publicly disclosing opinions which turn out (in retrospect) to have been lacking in judgement (but not negligently held) is beyond me.

What next? An op-ed journalist gets sued for publicly disclosing that he thinks the senate is composed of sensible intelligent principled individuals, but they turn out to be a bunch of half-wit, corrupt clones?

Wed, 07/21/2010 - 07:05 | Link to Comment LeBalance
LeBalance's picture

Big Grin Here: "A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by any one or more of the Rating Agencies. Each credit rating should be evaluated independently of any other credit rating."

So just like GLD, I think we have an unbacked debt object in all cases.  So if all ratings are "subject to revision, suspension, or withdrawal" at any moment (or their whim).. is there now any way for any fund or thinking person to be able to justify their purchase.

I would say now that they have been outed that it is on the purchaser and that purchaser is liable for their decisions.

Carpe Diem!

or maybe as TD was so correct to point out: Carpe Aurum! (Non Ferrium) [non rusticus?]

No ratings agency needed for jingle jingle!

This article, the general trend, and the article yesterday showing Michigonian PM barter is this crisis going to flash point.

One the tide turns it will be over and in the age of the internet the tide could change in lightning fashion.

Wed, 07/21/2010 - 10:04 | Link to Comment Tangurena
Tangurena's picture

Many institutional investors are required by laws and regulations to only purchase AAA rated bonds. They then have to sell off the bonds when the rating drops. This is why the market for AAA rated bonds is about 10x the size of the market for bonds even 1 step lower. 

 

Further perverting the system is that the bond issuer picks and pays for the rating, and there have been stories along the lines of "if you don't rate this issuing AAA, you won't get any more business from us in the future" leading to grade inflation of the ratings. 

The bond rating agencies were in a fat, dumb and happy place as long as the laws required people to purchase their services and the ratings agencies were immune from the consequences of their actions. Holding them even slightly accountable is a long overdue first step.

Wed, 07/21/2010 - 06:34 | Link to Comment Ted K
Ted K's picture

Oh gee, no ratings agencies to slap AAA stamp on garbage CDOs and garbage bonds???  There hasn't been this much apprehension for markets since China's Sewage Bureau refused to put the red stamp on Hu Jintao's poopoo.

Wed, 07/21/2010 - 06:38 | Link to Comment mephisto
mephisto's picture

Issuance - stopped.

Securitization - stopped.

Lawyers - raking it in.

Now this is one great way to speed up the velocity of money and get the credit markets back on their feet!

 

Wed, 07/21/2010 - 07:05 | Link to Comment Cheeky Bastard
Cheeky Bastard's picture

From Moodys [new] Terms and Conditions:

10. DISCLAIMERS. Moodys obtains all information furnished on the Websites from sources believed by it to be accurate and reliable. You expressly agree that (a) the credit ratings and other opinions provided via any of the Websites are, and will be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations regarding credit decisions or decisions to purchase, hold or sell any securities or endorsements of the accuracy of any of the data or conclusions, or attempts to independently assess or vouch for the financial condition of any company; (b) each rating or other opinion will be weighed, if at all, solely as one factor in any investment or credit decision made by or on behalf of you; and (c) you will accordingly make your own study and evaluation of each credit decision or security, and of each issuer and guarantor of, and each provider of credit support for, each security or credit that you may consider purchasing, holding, selling, or providing. The credit ratings and other opinions provided via the Site do not take into account your personal objectives, financial situation or needs. You should always seek the assistance of a professional for advice on investments, tax, the law, or other professional matters. Because of the possibility of human and mechanical error as well as other factors, the Websites and all related materials, products, services and information are provided on an "as is" and as available basis without representation or warranty of any kind, and MOODY'S AND ITS LICENSORS AND SUPPLIERS MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO YOU OR ANY OTHER PERSON OR ENTITY AS TO THE ACCURACY, RESULTS, TIMELINESS, COMPLETENESS, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO ANY OF THE WEBSITES OR ANY RELATED MATERIALS, PRODUCTS, SERVICES OR INFORMATION. Moodys makes no representation that materials in any of the Websites are appropriate or available for use in any particular locations, and access to them from territories where any of the contents of a Website are illegal is prohibited. If you choose to access a Website from such locations, you do so on your own volition and are responsible for compliance with any applicable local laws. You agree and acknowledge that no oral or written information or advice given by Moodys or any of its employees or agents in respect of any of the Websites shall constitute a representation or a warranty unless such information or advice is incorporated into this User Agreement by a written agreement. FURTHER, THE INFORMATION, MATERIALS, PRODUCTS, AND SERVICES AVAILABLE ON A WEBSITE MAY INCLUDE INACCURACIES OR TYPOGRAPHICAL ERRORS, AND THERE MAY BE TIMES WHEN A WEBSITE OR ITS CONTENTS ARE UNAVAILABLE. MOREOVER, MOODYS MAY MAKE MODIFICATIONS AND/OR CHANGES TO ANY OF IN THE WEBSITES OR TO THE INFORMATION, MATERIALS, PRODUCTS, AND SERVICES DESCRIBED IN ANY OF THE WEBSITES AT ANY TIME, FOR ANY REASON. YOU ASSUME THE SOLE RISK OF MAKING USE AND/OR RELYING ON THE INFORMATION, MATERIALS, PRODUCTS, AND SERVICES AVAILABLE ON ANY OF THE WEBSITES. 

 

UNDER NO CIRCUMSTANCES WILL MOODYS OR ITS LICENSORS OR SUPPLIERS BE LIABLE TO YOU FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, BUT NOT LIMITED TO, COMPENSATION, REIMBURSEMENT OR DAMAGES ON ACCOUNT OF THE LOSS OF PRESENT OR PROSPECTIVE PROFITS, EXPENDITURES, INVESTMENTS OR COMMITMENTS, WHETHER MADE IN THE ESTABLISHMENT, DEVELOPMENT OR MAINTENANCE OF BUSINESS REPUTATION OR GOODWILL, FOR LOSS OF DATA, COST OF SUBSTITUTE MATERIALS, PRODUCTS, SERVICES OR INFORMATION, COST OF CAPITAL, AND THE CLAIMS OF ANY THIRD PARTY, OR FOR ANY OTHER REASON WHATSOEVER, EVEN IF MOODYS OR ITS LICENSORS OR SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF DAMAGES. 

 

TO THE EXTENT PERMITTED BY LAW, MOODYS AND ITS LICENSORS AND SUPPLIERS DISCLAIM LIABILITY FOR ANY DIRECT DAMAGES BASED ON YOUR USE OF A WEBSITE AND ITS CONTENT.

 

IN ANY EVENT, THE AGGREGATE LIABILITY OF MOODYS AND ITS LICENSORS AND SUPPLIERS FOR ANY REASON WHATSOEVER RELATED TO USE OF ANY WEBSITE AND ITS CONTENT SHALL NOT EXCEED THE GREATER OF (A) THE TOTAL AMOUNT PAID BY THE USER FOR SERVICES PROVIDED VIA SUCH WEBSITE PURSUANT TO THIS AGREEMENT DURING THE 12 MONTHS IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO LIABILITY, OR (B) U.S. $100. 

Fitch has almost the same wording in its Terms and Conditions. 

Wed, 07/21/2010 - 07:23 | Link to Comment Mako
Mako's picture

Congress is overriding that Cheeky.  The credit agencies are operating under "public rights" and not "private rights".   It would seem like the end of the credit agencies unless something changes.

They can slap a non-liability statement on everything they publish but it will do no good.

"TO THE EXTENT PERMITTED BY LAW, MOODYS AND ITS LICENSORS AND SUPPLIERS DISCLAIM LIABILITY FOR ANY DIRECT DAMAGES BASED ON YOUR USE OF A WEBSITE AND ITS CONTENT."

Wed, 07/21/2010 - 08:47 | Link to Comment Cheeky Bastard
Cheeky Bastard's picture

No, no. I think this is the new one; post finreg. When I logged on to Moody's this morning it just popped out. That never happened before. I had to scroll to the end of it, and click agree before I could continue browsing for info. As I said; that never happened before. Usually the disclaimer is either in the fine print near the bottom of the page or at the end of the pdf. It was never this explicit AFAICR.

Wed, 07/21/2010 - 07:37 | Link to Comment Catullus
Catullus's picture

To those of you who think this adds some accountability to the rating agencies, you're a fucking retard. Anyone can see the vast majority of debt needs to be downgraded in all classes from gov, agency, to corporate. The government is just creating the legal framework for a scapegoat. That's not accountability.

If you work for the rating agencies, run. Just quit your job. This is not going to end well.

Wed, 07/21/2010 - 07:38 | Link to Comment Mako
Mako's picture

Of course, all of this is the scapegoat.

All the lemmings are looking for a scapegoat.  In the end, it's not going to help the lemmings get out of their position. 

Wed, 07/21/2010 - 07:38 | Link to Comment MarketFox
MarketFox's picture

STOCKS >>>> BONDS...as a means of capital....

Perhaps it is time to re-RETAIL the exchange...

After all....what is program trading....and who/why is it utilized ?

Wed, 07/21/2010 - 07:55 | Link to Comment Daedalus
Daedalus's picture

Guys.

I think you are overstating the issue here.

i. Ratings are probabilistic. A rating is an estimate of the probability of loss. How do you claim negligent misrepresentation is retrospect of a probability? Monte Carlo simulate the universe 10,000 times to see what the distribution of outcomes is? (hat-tip to a colleague Rick for that line)

ii. This law change only applies to SEC public documents. There is NOTHING prohibiting the Rating Agencies from providing ratings as before. They just can't be included in the public offering documents.

iii. The lawyers will find a way round this. There will be a private side agreement between issuers, banks and rating agencies that the transactions will be rated. The deal will be listed and publicly sold prior to ratings being provided, and probably sold only to the underwriter. The ratings will then be 'independently' published by the rating agencies, and the deal will be sold more broadly. No real change, but more fees to banks and lawyers.

Wed, 07/21/2010 - 10:27 | Link to Comment Rainman
Rainman's picture

good thoughts. Guess this means finreg makes analysis of ratings even more reader-useless and confusing. I thought that would be impossible. Not anymore.

Wed, 07/21/2010 - 08:04 | Link to Comment Bankster T Cubed
Bankster T Cubed's picture

I'm stunned that there is actually a strike against the rating agencies within the 2300 pages (or is it 2700 pages?)   At first I found this encouraging, but it then occured to me that there may be a paragraph in there forbidding me to park in my driveway during a thunderstorm with a fine of $40,000 per violation.  

Wed, 07/21/2010 - 08:09 | Link to Comment ZeroPoint
ZeroPoint's picture

I don't think this is really as bad as you are making it sound.

The credit rating agencies got into big trouble for marking products the way they did when they KNEW that the numbers which came out of their risk equations were totally bogus.

As long as they can show what data & algorythm they used to do the calculations, as well as making sure the numerical answers MATCH the credit score, then they should be fine.

 

 

 

Wed, 07/21/2010 - 08:29 | Link to Comment Catullus
Catullus's picture

That's really the problem.  Someone is going to ask them to "show me the numbers", but if you're looking at a grouping of bonds and their performance in the future with all the other things you know going on in the economy, you either have to adust your model or wait for the numbers to come out.  Which means they'll either have to justify the model change (which could get them sued) or they'll have to wait for the bonds to deteriorate and then adjust the ratings.  What good is the credit rating if it's only modeling off things that have already happened and not giving me a good estimatation of the performance over time?

Plus with the Repo 105 garbage that went on, how are the rating agencies supposed to pick up on that? 

Wed, 07/21/2010 - 10:20 | Link to Comment powersjq
powersjq's picture

It's amazing how the word "liability" now has four letters in USian English, isn't it?  I mean, in the legal sense, "liability" is more or less a synonym for "responsibility."  I'm not saying that responsibility isn't complicated, but it sure does seem to me that people and businesses these days spend a lot of time and money shirking or avoiding liability, which really only means responsibility.

These agencies were not responsible to anyone for their ratings.  Now they're responsible to anyone who takes their "expert" advice.  And the "it's in the math" argument will probably not hold water unless each agency's ratings models (now proprietary, I assume) are explicitly made available to each user before that user formally uses the resulting ratings.  These companies were basically performing the function of a public utility (valuing public markets) while charging for a proprietary service--they had it both ways.  I suspect that whichever ratings agencies survive will have business models that look much more like a public utility's going forward.

Wed, 07/21/2010 - 12:01 | Link to Comment Invisible Hand
Invisible Hand's picture

The WSJ article (in today's paper) disagrees (at least on the initial effect).  It appears it is already affecting the issuance of securities.

Personally,  I think a more sensible reform would have been to change the customer for the ratings agency from the issuer of securities to the purchaser of securities.  If the rating agencies did a poor job of protecting their clients (by issuing optimistic ratings) they would lose customers.  Currently, they are incentivized to rate securities too high (to please their current customers, the issuers) that incentive would reverse if the buyer paid for their services.

By making them liable for bad ratings, you are just going to increase the price the ratings agencies charge so they are able to buy some form of insurance that protects them from this liability.  It is kind of like the effect on doctors of out of control medical malpractice suits.  They do lots of unnecessary tests and charge higher fees to cover expensive insurance.  The consumer pays.

That would, of course, eliminate the small investor as a direct purchaser of securities and bonds.  However, maybe we would be better off purchasing bonds through ETF's or mutual funds that have the funds to do the research (including paying for bond ratings) rather than buying them directly.  (I speak as a small investor that knows I cannot trust ratings agencies--because of the perverse incentives--so I am willing to pay a mutual fund I trust to pick bonds for me.)  Yes, the mutual fund charges for this work, but I end up more diversified and I sleep better.

The goal, at least in my mind, is not to eliminate security ratings (or rating agencies) but to align the ratings agencies with the investor, not the issuer.

Just a thought. 

Wed, 07/21/2010 - 11:08 | Link to Comment colonial
colonial's picture

Credit agencies will live on, but will now have to find their earnings growth from other products.  The days of rating lousy loans AAA are over.  But as readers here know, many institutional investors do not have the ability to rate debt on their own and need someone to do it for them, so these corrupt ratings services will meet that need. 

As for Dodd Frank, I like the acronyms.  However, shouldn't DONK be DON'K? 

The legislation will be signed today, but promulgating regulations will be a nightmare that lasts for years.  Investors who think they can quickly discount the ramifications of this bill may well be blind-sided by the arbitrary nature of the regulatory process. 

One thing is certain, DON'K will restrict capital creation.  The question will be whether there is so much debt to roll-over the market will not be concerned.  

Entrepreneurs are unwilling to take risks due to the insanity of federal policies that are similar to the complexities of Wall Street product wizardry. 

Here is an op/ed from Brooks in the NYT that summarizes this well.

http://www.nytimes.com/2010/07/20/opinion/20brooks.html?ref=columnists

 

 

Wed, 07/21/2010 - 20:54 | Link to Comment McNooder
McNooder's picture

Well for now, it creates problems in the new issue market. Rating agencies don't want to expose themselves to new liability until they understand what that might entail, but many investors are still required to only buy securities with ratings (above some threshold). Insurance companies and public pensions are two examples.  And if the ratings are not in the prospectus, then they need to consult with their own legal folks to figure out what standard will allow them to buy the securities without being out of compliance.

At best, the fixed income markets will be in disarray for a couple of weeks, and the job security of lawyers is once more reinforced.

At the end of the day, of course rating agencies should be considered experts and be liable for their work. Currently, this risk is not priced into their product, and the solution will ultimately be to strip out great fees for rating agencies. This will of course make it that much more unlikely that investors will pay (directly) for ratings. They will pay by accepting a lower yield on the securities they buy.

Fri, 07/30/2010 - 22:27 | Link to Comment Downtoolong
Downtoolong's picture

Bad news for eBay too. I hear they had big plans for a whole new auction category for bond ratings. In their test trials, a Moody’s auction for a AAA rating fetched nearly $1 million in the final seconds.

 

Do NOT follow this link or you will be banned from the site!