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

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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.

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.

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!)

Johnny Dangereaux's picture

Prolly a few other paradigms too.....

doublethink's picture


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

-- Martin Luther


CrockettAlmanac.com's picture

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


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

ratava's picture

i like the sound of that. quite descriptive.

VK's picture

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

cossack55's picture

In nature, extinction normally follows irrelevancy.

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.


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.

glenlloyd's picture

This is truly comical

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

Fish Gone Bad's picture

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

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.

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.

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...

carbonmutant's picture

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

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

Oh regional Indian's picture


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.



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!"

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?

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.

williambanzai7's picture

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

carbonmutant's picture

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

SAJ's picture

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


-- Yogi Berra

New_Meat's picture

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

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?



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.

Oh regional Indian's picture

Rat and Ass...

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



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!

MaximumPig's picture

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

palmereldritch's picture

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

They'll just hire new experts


carbonmutant's picture

 Will they be forced to accurately rate US Debt?

Or will they do it out of spite?

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. 

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.

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?

IEVI's picture

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

Bear's picture

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

carbonmutant's picture

 This bill is gonna have a LONG tail.

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.

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...

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.)


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 ?

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.