Nestled in the 2,300 pages of the new law that reshapes the U.S. financial landscape is a change affecting credit rating agencies, which were accused of helping cause the 2008 crisis.
That change could have an unintended consequence, some experts say: Chilling the markets for securities linked to mortgages, credit cards and auto loans. Those markets froze up during the crisis and have been struggling to revive.
That's because the change will make it easier for investors to successfully sue credit rating agencies for assigning unrealistically high ratings. As a result, the three major agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — say they'll no longer let bond issuers list their ratings in public sale documents.
That could dampen the markets for asset-backed securities, because the agencies' ratings help set the prices that investors such as banks, mutual funds and local governments agree to pay. Most securities tied to consumer loans are required to include ratings in formal offering documents.
But because their legal liability has potentially risen, the rating agencies "are going to be very reluctant" to have their ratings in offering documents, said Jesse Litvak, a managing director at Jefferies & Co.
"It's like pouring gasoline on a fire," Litvak said. "That's going to clog up the ability for any deals to get done."
The effect "is going to be extraordinarily negative," said Herb Kaufman, professor emeritus of finance at the W.P. Carey School of Business at Arizona State University. "Credit has just recovered to some degree, and this could put a damper on those securities."
The agencies' action in response to the new provision was first reported Wednesday by the Wall Street Journal.
The agencies have long served as financial gatekeepers, assessing the creditworthiness of public companies and securities. Their grades can affect a company's ability to raise or borrow money and how much investors will pay for securities.
The rating agencies assigned AAA ratings to securities tied to risky subprime mortgages that later went bad and helped cause the housing bust. Afterward, the agencies had to downgrade many of the bonds as home-loan delinquencies soared and the value of those investments sank.
The downgrades contributed to hundreds of billions in losses and write-downs at banks and investment firms. Investors argued that the rating agencies had failed to provide adequate warning of the risks of the investments.
After the crisis, lawmakers and regulators targeted the credit raters. The Securities and Exchange Commission proposed rules designed to stem conflicts of interest and reduce investors' reliance on the three major agencies. Together, they account for around 95 percent of the ratings market.
House lawmakers proposed making it easier to sue the agencies successfully. Their proposal deemed the ratings to be expert advice in public offering documents, not just an expression of opinion protected by the First Amendment. The House provision made it into the final legislation once the House and Senate versions were melded.
Also under the new law, the agencies must explain more fully how they assign ratings. If an agency performs poorly over time, the SEC could cancel its registration.
As regulators craft new rules to carry out the law, the rating agencies may lobby for changes that could soften the new legal standard.
"Our staff has been talking to market participants, looking closely at the issue and reviewing what, if any, transitional steps may be appropriate," Meredith Cross, director of the SEC's division of corporation finance, said Wednesday.
The new law "potentially" exposes the rating agencies to liability as experts if they give consent for ratings to be included in public documents for bond sales such as registration statements filed with the SEC, S&P President Deven Sharma said in a letter to clients.
Sharma said S&P will consider alternative ways to distribute its ratings to the financial markets other than through prospectuses and registration statements.
Moody's said in a statement: "While we will continue to publish credit ratings, given the potential legal consequences, we cannot consent to the inclusion of ratings (in offering documents) without further study."
Fitch said in a statement that while it will still publish ratings and research, "given the potential consequences, Fitch cannot consent to including Fitch credit ratings in prospectuses and registration statements at this time."
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