In a harbinger of an avalanche of unintended consequences from Frank-n-Dodd (not to mention the health care fiasco), Ford Motor Company yanked the sale of securitized auto loans because the members of the credit ratings cartel refused to allow the company to utilize their ratings out of fear of liability provisions in the new law (h/t ASI/Tim Worstall):
Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.
The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.
The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.
The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.
“Issuers have stopped issuing bonds,” said Paul Jablansky, senior ABS strategist at the Royal Bank of Scotland in Stamford, Conn. [Emphasis added.]
So we have the regulatory analog to a bad drug interaction. One government policy, imposing liability on ratings issuers, is toxic when mixed with another, a requirement that public debt offerings be rated.
Brain teaser: now that the federal government is writing a blizzard of new policy prescriptions, do you think the likelihood of such toxic interactions will rise or fall? Now that’s a real toughie, huh?
The legal privileging–no, fetishization–of credit ratings and the ratings cartel was a material contributor to the financial crisis. But in layering on a new regulation in an effort to “fix” the ratings system while retaining that privileging, Congress just created new problems.
It is this kind of policy boomerangs that will continue to weigh on investment and innovation in the coming years. Putting a boot in the ABS markets as they struggle to their feet is hardly the way to encourage a recovery in credit an investment.
The faint recovery is clearly a major concern to the administration. But rather than grapple with the possibility that their Dr. Feelgood (or Dr. Morell) prescription practices constitute a serious drag on the economy, administration officials are spinning an alternative narrative that casts blame elsewhere. Taking the lead in this effort is Timmy!, who after being under a rock for the last several months, is now making the rounds telling the tale of how the economy is suffering from some form of PTSD; that business reluctance to invest and hire, and consumer reluctance to spend, has NOTHING, NOTHING to do with government hypertrophy and hyperactivity, but is instead attributable to flashbacks about the crisis.
Today Timmy! was weaving the narrative on Meet the Press.* Get used to hearing it again and again if the economy continues to stumble. And get used to the economy continuing to stumble as the number of bad policy interactions, and the fear of bad policy interactions, grows.
* What is it about Timmy! always looking at every interviewer sideways out of the corner of his eye, with his head half-turned? It is very weird. Any body language experts have an interpretation? For his part, MTP host David Gregory played Charlie McCarthy to Krugman’s Edgar Bergen, asking several times whether it wouldn’t be better to spend more, more, more! to stimulate the economy.