Thursday, July 22, 2010

Bond market at standstill because of Dodd-Frank bill

Parts of the bond market have shut down in response to the Dodd-Frank bill. Among the consequences, consumers may find mortgages and auto loans harder to find while some businesses may be unable to obtain the funds they need to expand and hire new workers. The Wall Street Journal reports (Hat tip: Greg Mankiw):

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:

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.

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:
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)

PREVIOUSLY on the Dodd-Frank bill:
Gov. to require racism in the financial industry

PREVIOUSLY on the subject of Barney Frank:
Rep. Barney Frank meddles in mortgages, again
Living in a fantasy world, III
How we got in this economic mess
Those who do not learn from history

PREVIOUSLY on the subject of Obamanomics and how it differs from economics:
Why unemployment insurance must be extended (illustrated)
Obamanomics still failing, Washington Post discovers
Russia goes supply-side
Study: Liberals are economically illiterate
Obama's health care and economic policies explained
Obama modeling US economy after Europe's
Irresponsibility pays!
Obamanomics prolonging the recession
US Aaa bond rating threatened by Obama's budget says Moody's
Obamanomics illustrated II
How Dems are prolonging the recession
How Obamanomics destroys jobs
Obamanomics illustrated
Deficits: Obama goes where no man has gone before (illustration)
How to raise the standard of living
Obama's anti-intellectual economic theory
Obamanomics and the test of science
Obamacare may raise insurance costs by 54%
Harvard economist explains why Obamacare will raise premiums
HHS says Obamacare will cause costs to go up and cause employers to drop coverage

No comments:

Clicky Web Analytics