This is what happens when a former organizer for the American Socialist Party gets a chance to reform markets as she sees fit. If you wanted to write a bill that was anti-stimulus, it would look exactly like this:
If politicians were as accountable as CEOs, half of them would be fired for incompetence. 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.
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.
Coincidentally—and Ms. Kilroy has said this was her motivation—the provision also sharply increases the potential liability for credit rating firms. 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.
Oops. Billions of dollars of deals were scrapped, as issuers were barred from proceeding without ratings information and the raters weren’t willing to participate. A June press release still appears on Ms. Kilroy’s website, proudly noting that her amendment “adds teeth to Wall Street reform.” Did it ever.