Wednesday, July 21, 2010

First Result of Dodd-Frank Bill: Consumer Finance Credit Securities Freeze Up

The first unintended consequence of the Dodd-Frank bill has hit big time. In truth, the entire Dodd-Frank Bill is a nightmare, but a freeze up of the entire consumer finance credit securities markets, including  mortgages, autos, student loans and credit cards securities, is one hell of a way to come out of the gate. It's certainly one example of the difficulties in attempting to micro-manage markets.

They will patch up the problem that is causing this credit security freeze, because it is too big and obvious, but the bill has the potential to have a thousand small problems similar to this one, most of them will  not be as obvious to the general public, most not as glaring of a mess and most much more complex to understand. These will for the most part not get fixed. It will simply result in a huge slowdown of the entire financial sector. Since, it is capital that makes the economy grow. The slowed financial sector will be another blow to the already anemic economy.

WSJ provides the details on the credit securities market freeze up:

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 odd plea is emerging as the first consequence of the financial overhaul that is to be signed into law by President Obama on Wednesday. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request.
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.
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.
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.


  1. Then obviously we need a government run rating system.

  2. You have to admit that now that they're actually liable for any botched ratings (are there any that aren't botched?!), suddenly they don't want those ratings used for their intended purpose. Personally, I'd like to see this clause remain, as its effect is just so amusing to observe.

  3. I think that the government taking over the rating agencies will not be sufficient. It also needs to nationalize any companies that issue bonds greater than $600, plus the Wall Street Journal. Only then will we be safe.