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. [Emph. added]
The reason for this is that the new law puts the companies, such as Moody's and S&P, that offer credit ratings in an untenable position:
Previously, credit ratings were considered merely opinions. The Dodd-Frank law apparently changes that to make ratings companies legally liable for their ratings "effective immediately." Consequently:
The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.
That is important because some bonds, notably those that are made up of consumer loans, are required by law to include ratings in their official documentation. That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.
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.Congress seems uninterested in the damage it does and the public seems to be noticing.
RELATED:The Truly Bizzare “Logic” of Dodd-Frank’s Shareholder Empowerment Provisions (Hat tip: Instapundit)
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