Great Moments In Unintended Consequences
From Russ Roberts:
Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.
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.
Many horrific results of legislation are intended. But this one, I suspect is more in the J. Alfred Prufrock category: That is not what I meant at all. That is not it, at all.”
As Hayek said in The Fatal Conceit:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
And it makes one wonder what effect that will have on GM, using taxpayer dollars, to buy a portfolio of garbage assets to boost sales. Anyone with experience in retail credit knows that the only way to cover losses in substandard credit is to grow the portfolio.
I have to defer to Tyler Cowen (but I’m too lazy to find the exact link) who thinks that the requirement to have one of the Big Three debt ratings should be eliminated. Caveat emptor and all that rot.
You have to pass it before you will know what’s in it, huh?
The term responsibility doesn’t exist anymore