The FINREG bill signed into law this week is already creating economic casualties and a complete standstill for new bond issuance.
The problem: The main credit raters, ( Moody’s , S&P and Fitch ) said the new strict FINREG standard creates too much risk for them so they went on strike. The new law regards bond-ratings firms as “experts” and holds them liable for the quality of their ratings (imagine that?) The ratings agencies’ refusal to stand behind their own ratings shut down the $1.4 trillion market for asset-backed securities for the past few days.
Basically the credit raters played chicken against the SEC by withholding permission to use ratings on new bond issues. The problem is that big parts of the bond markets — notably the asset-backed securities — require a rating by law. Late yesterday, the SEC blinked and gave a 6 month delay to the rule.
On the ratings business there are 2 issues to balance: 1) The benefits to the marketplace of a ratings TRI-opoly protected by a government sanctioned liability shield who in return should provide objective, accurate and up to date risk assessment. VERSES 2) A free and open ratings marketplace that holds raters accountable for their expert opinions.
The larger issue is this how the government will deal with the unintended consequences of 2300 pages of Dodd-Frank? How can small business owners know which laws will be not be enforced? Will there be a list? Without a list of which laws will not be enforced, how will small business owners know if it is safe to hire employees?
What do you think?