According to the Wall Street Journal a line inserted into Dodd-Frank by congresswoman Mary Jo Kilroy, a Democrat from Ohio, brought an abrupt halt to the issue new asset backed securities.
Witness last week's land speed record for unintended consequences, as a liability provision in the Dodd-Frank financial reform brought new issues to a screeching halt in the $1.4 trillion asset-backed securities market.These securities are bonds backed by auto loans, credit-card receivables and the like. Shutting down this entire market to new offerings was an amazing Congressional feat, given that the same federal government has put tens of billions of taxpayer dollars at risk to revive the same market.
That line in Dodd-Frank removes an exemption for credit rating agencies like Standard & Poor's and Moody's. Ms. Kilroy's intent was to increases their potential liability.
The financial genius behind this section of Dodd-Frank is Representative Mary Jo Kilroy. The Ohio Democrat inserted a line in the bill that removes the exemption for credit raters like Standard & Poor's and Moody's from being considered "expert" advisers in judging securities offerings. This makes them closer to underwriters or accountants in vouching for an issued security, and it means that their consent is required before their ratings can be included in a registration statement filed at the Securities and Exchange Commission.
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Both S&P and Moody's cited this enhanced liability in announcing that they would not consent to participating in SEC asset-backed securities registrations. Fitch, DBRS and others followed suit.
On July 22nd the SEC staff announced that they would suspend enforcement for six months, at which point market activity resumed, at least temporarily. But the WSJ expects there are plenty more such unintended consequences where that one came from. How's that Recovery Summer going?
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