Less than 24-hours after President Obama signed the historic Wall Street Reform bill into law the SEC suspended the rule that makes the rating agencies more accountable for their ratings. According to the Wall Street Journal, as recently as June 30 the rating agencies thought that the provision for increased accountability had been omitted. They were wrong:
“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.”
Sticking to their guns, the rating agencies watched as Ford pulled an offering on Wednesday because no rating agency would sell them a letter to place on their registration statements. With further pulled deals imminent and Bernanke warning, "It is an issue that needs to be looked at…As I understand it, it does inhibit somewhat the sale of the ABS", the WSJ adds:
“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.”
With the above facts in hand, FallStreet has become privy to the untold story. Although slightly embellished, here is how the situation really went down, and how it should have went down.
Phone call between the rating agencies and SEC Chairman Mary Schapiro.
Mary Schapiro: Hey guys, what’s up with you not selling your ratings on ABS anymore?
Moody’s: We got screwed. How can we be accountable for selling letters on stuff that could turn out to be worthless if there is a double dip?
Schapiro: Yeah, but the financial markets…(interrupted)
S&P: With all due respect Mary, I strongly suggest that the SEC step in immediately so that we can further discuss the situation.
Schapiro: Yeah, but the economic recovery is dependent on…(interrupted)
Fitch: If you guys don’t suspend this rule, by next week the markets could be in further turmoil. We can’t be to liable for what letter we assign to debt during these turbulent times.
Schapiro: Will do fellas, thanks. Look for announcement tomorrow. Talk to you soon.
Given the hostage situation the rating agencies helped foment, here is how the regulators should have responded:
Hypothetical phone call between the rating agencies, SEC Chairman Mary Schapiro, Ben Bernanke, and Tim Geithner
Mary Schapiro: Hey guys, what’s up with you not selling your ratings on ABS anymore?
Moody’s: We got screwed. How can we be accountable…(interrupted)
Schapiro: Listen Ray, you got what you deserved. I am going to say this only once so everyone listen closely: this is a courtesy call to inform you that Ben, Tim, and I really don’t care if you stop selling your letters or not.
S&P: (nervously) What do you mean?
Schapiro: We have decided that either you play ball or next week we will start allowing any institution, money manager, and state of government to purchase any financial instrument regardless of whether or not it has your ratings on it. Moreover, unless you cooperate there is going to be a hundred new Nationally Recognized Statistical Rating Organizations approved for business in the coming days.
Fitch: But, but, you can’t...(interrupted)
Bernanke: Hi guys, this is Ben. Relax. We are thinking about a transition period of 6-months before your uselessness is fully exposed, and during this time the Fed stands ready to buy any offering you don’t feel like rating.
Geithner: You fu**ing tell them Ben!
Bernanke: “Easy Tim. The choice is yours gentlemen.
--- Click
The end result of the above exchange would be Ford getting its rating within minutes, and, perhaps also, the rating agencies working a little harder for their profits. Instead the rating agencies now have a legitimate reason to charge more for their ratings (future legal fees) and 6-months to wine and dine the regulators some more...
Incidentally, as of this writing there is no official announcement on the SEC website relating to this matter, and it is unclear from the short SEC statement if the SEC is giving all parties involved a 6-month reprieve or simply allowing issuers to omit credit ratings for 6 months (the latter would be preferable and could actually serve as a good test to how unrated ABS is accepted into the marketplace). Nevertheless, what is clear is that the SEC is needlessly in full scramble mode due to a rating agency walkout, when what the SEC should have done is said ‘keep walking!’.
“The SEC has been reviewing the interaction between the requirements for registered asset-backed securities offerings provided in ‘Regulation AB’ and the requirement that issuers now obtain credit rating agency’s experts consent for use in filings, as is the case with other ‘experts.’
Within the next day, the Division of Corporation Finance expects to issue a ‘no action’ letter allowing issuers for a period of 6 months to omit credit ratings from registration statements filed under Regulation AB. Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit rating agency consent to include the credit ratings in these ‘Reg AB’ filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changesto comply with the new statutory requirement while still conducting registered ABS offerings.” -- From AFP -- SEC on Ford
