Bond chaos forecast as Wall Street reform restricts use of credit ratings

[notesdev]

Source: telegraph.co.uk

Uncertainty over the implications of Dodd-Frank Wall Street Reform and Protection Act, which was signed into law yesterday, has led Standard & Poor's, Moody's and Fitch to ask directly or imply that their ratings should no longer be used in any new debt issues.

In a statement issued by Fitch on Monday, it said it could not "consent to including Fitch credit ratings in prospectuses and registration statements at this time".

S&P and Moody's have each issued their own similar statements, as the agencies assess the impact of the new regulation which could expose them to more legal action in future from debt investors.

Royal Bank of Scotland analysts said the move by the agencies could make new issues of some bonds "difficult or impossible" as credit ratings are at the core of the marketing process and many investors require them before they can invest.

...

Read more: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7903371/Bond-market-chaos-forecast-as-Wall-Street-reform-restricts-use-of-credit-ratings.html

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This oughta be interesting... I'm guessing this wasn't among the intended consequences of the bill.

[FrenchieCat]

1. I think it was intended.......

[notesdev]

2. I'm pretty sure it wasn't

the only way a lot of bonds can be sold is by relying on that credit rating... this is a big time clusterfuck

[boppers]

31. The only way bonds were sold that *shouldn't have been* was because of the fake ratings.

If the ratings companies refuse to give out new ratings, they're basically admitting to previous fraud.

[Igel]

5. I've had the opportunity to listen to a lot of broker conversations.

Things that I had to transcribe.

The sheer number of people that *aren't* specialists that want to invest in bonds for income--some reasonably well off, not very well off and just surviving on the current income levels--is amazing.

They ask for bonds maturing at a certain time or over a certain interval, for a certain amount, with a certain rate of return, and always, but always, specify the rating. On occasion they'll sacrifice a high rating for increased income (because greater risk = greater payment), but usually they sacrifice income for a higher rating.

Now, if things like munis aren't going to be rated (and I hope that's not what this means), good luck with that next school construction project or urban renewal project.

(This is the problem with trying to regulate and control people--rich or poor, it doesn't matter. They do things so unpleasantly unexpected.)

[peacebird]

3. those providing bond ratings (required by law for sales) do NOT want to be held accountable

:rofl:
Really? So their ratings are - what - pure market BS?!?!? And now that they are actually to be accountable for their rating, NOW suddenly they do not want their ratings on the bonds for sale?

What does that make you think about them and their ratings.. hmmm? That the ratings were pure BS smoke and mirrors intended to defraud idiot investors perhaps?

IF they believed their ratings were actually based in solid fact would they be backing off this way?

They are SCAM artists finally told they had to STAND BEHIND THEIR RATINGS AND BE HELD ACCOUNTABLE.
so they ran away.

[ArcticFox]

21. right on

[dkf]

25. If they dont want people to use their raings they have no purpose

And no business model.

[Capt. Jack]

30. They've got major legal problems headed their way...

Once these commercial foreclosures start kicking in and pension funds start falling apart we'll see some pretty big lawsuits I believe.

It's easy to trample away homeowners and individual taxpayers who have been screwed...but these other entities have deeper pockets for litigation.

I hope the sue the dickens out of them.

The question now becomes..."Too big to Jail"?

http://www.foreclosurehamlet.org

[DJ13]

4. This could be the agencies stomping their feet & holding their breath

until they get things the way they want them.

It wouldnt be the first time big corporations have had a fit and withheld their product to get their way.

[Frank Booth]

9. That's what it sounds like to me, too.

I bet we'll be seeing lots of this stuff as these crooks angle for less regulation.

Don't forget the rating agencies were giving AAA ratings to bonds constructed from liar loans.

[Dr.Phool]

14. No, Peacebird has it right.

They've been selling their rating for years now.

If you don't pay us to rate your bonds, we'll downgrade them. They've been caught in the act. They're the same motherfuckers who rated all the CDO's and such as AAA that were lower than junk bonds.

They were involved in a pay to play scheme. I forget, for the moment of one insurance company that refused S&P's offer to rate them for a fee. S&P, kept downgrading and downgrading them, and refusing to pay them. In the whole CDO mess they were one of the few solid players standing.

And now S&P, Fitch and others are crying because they might actually be held to count for their fraud?

Fuck them.

[Kringle]

6. welcome news, less debt. nt

[Greyhound]

12. Less debt, particularly in bonds, is terrible. It is the only means we have to get anything done. nt

[Kringle]

19. ah yes, Debt,,,the cause of, and cure for, all our financial troubles .nt

[Greyhound]

20. Until somebody starts talking about changing it, it's the only one we've got.n/t

[Jacobin]

7. Wow. Listen to the criminals scream and cry

Disgusting

[drm604]

8. So what does this mean?

If they're actually going to have to take some responsibility for their actions they're going to pick up their toys and go home?

Has the world's economy been based on ratings that the raters in reality have never had much confidence in?

What's the basis for putting any trust in their ratings if they themselves don't trust them?

Has it been a house of cards all along? If so, what now?

[notesdev]

10. Pretty much

this is an effectively open admission that their ratings were BS all along

They're basically refusing to stand behind their work product. It is as if they are labeling it "for entertainment purposes only"

[drm604]

16. So now the bond market will presumably somehow factor in the cost of the real risk

instead of some mythical risk rating backed only by the reputation of a rating company.

It seems like that should be a good thing but it could lead to chaos (as you say) at least temporarily until things are sorted out somehow.

[notesdev]

17. It is a good thing (long term) but...

... it's going to be one hell of a ride while they do, the bond market dwarfs the stock market in size, and this could very well be the trigger for the dislocation many are expecting.

[drm604]

18. What does "dislocation" mean in this context?

I'm not really up on the terminology.

[notesdev]

22. very short version

it's when they can't find enough buyers for bonds, interest rates skyrocket in a blink of an eye, and both corps and governments find themselves suddenly unable to finance debt.

[drm604]

23. Yea, that would be bad!

:scared:

[htuttle]

28. EXACTLY!

As you said, apparently bond ratings HAVE been 'for entertainment purposes only.'

[depakid]

11. Surely there's some form of E & O insurance that would cover this situation

sounds like a lot of foot stomping over an additional expense that these firms think that they're "too special and entitled" to have to pay.

[Dr.Phool]

15. Yeah, but you gotta buy the policy through AIG or Goldman.

[w4rma]

13. Then a company will step in and issue raitings for them. Real capitalism doesn't like voids. (nt)

[drm604]

24. A new company? With no reputation and no track record?

I don't think it's that easy.

[w4rma]

26. There will be a huge scramble of companies to fill that void.

There is money to be made there that these guys were gulping down way to easily.

[drm604]

27. Yes but will anybody have any faith in their ratings? n/t

[w4rma]

29. These companies that are complaining have no faith in their OWN raitings.

*Anyone* replacing them will have to do better, especially if they are to meet the new regulations.

[notesdev]

32. Guess they will have to show their work

no more of this rating-based-on-non-public-information BS like the current agencies got away with in the days of rating dog poo as AAA

[Statistical]

33. Would you buy a bond rated by a brand new company with no track record?

Nobody would. Nobody is going to. Investors don't need to invest. They can simply buy old bonds on secondary market or just wait.

Given bond investors are notoriously conservative they aren't going to take a leap of faith on the "new guy".

[anigbrowl]

34. Problem solved

SEC said they'd suspend the requirement to get an external rating prior to issuing a bond for 6 months, basically telling the rating agencies to piss in a boot.

[Statistical]

36. Not exactly solved.

Not sure how the bond market will react to unrated bonds.

Also many pension funds are prohibited for purchasing unrated bonds (or under rated bonds).

Less demand - same supply = higher prices. The price of money is interest/yield.

[anigbrowl]

37. the prohibition is temporarily suspended

Sorry, didn't make that properly clear last night.

[melm00se]

35. while they *might*

be guilty (remember: presumed innocent until proven guilty) of selling their ratings, there is no escaping the fact that those ratings (specious or not) are integral to the lending process. So withholding the ratings (which may indicate a certain amount of guilt) will create a certain amount of chaos in the bond market and it will take the form of overall higher interest rates (traceable to higher perceived risk) for all bond issuers and, in the case of governments, that will translate into higher taxes to repay the bond as they mature.

it will also make bonds issued with the ratings attached a bit more valuable on the secondary market.

This is one of the those "be careful what you wish for because you just might get it" situations.