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Big three rating agencies prohibit use of their bond ratings

Bonds

TEXT OF STORY

Kai Ryssdal: The signing ceremony for the financial reform bill was over in probably 15 minutes. Most of that was the president thanking the various people who'd made the whole thing happen. But even before pen was put to paper, the new law was already changing the financial markets. Remember the ratings agencies? Givers of AAA ratings for worthless mortgage-backed securities?

Marketplace's Amy Scott reports that parts of the bond market have been shutting down this week in anticipation of the new law after the big three credit raters told bond issuers not to use their ratings.


Amy Scott: Here's the dilemma: Certain types of bonds can't be sold without a credit rating. You know AAA, BB. Ratings tell investors how risky a bond is. But the big three firms that rate bonds are refusing to let their ratings be used in bond sales. That's because the new financial reforms make it easier for investors to sue the firms over their ratings if a bond loses value. Fitch, Moody's and Standard & Poors don't want to open themselves up to lawsuits.

Paul Jablansky: The impact so far is to shut down the pipeline for public issuance.

That's analyst Paul Jablansky at RBS. He says issuers of bonds backed by mortgages and auto loans are holding off on any new deals. The flap doesn't affect corporate bonds.

Jerome Fons is helping start up a new ratings firm, Kroll Bond Ratings. He says the competition is over-reacting.

Jerome Fons: It's not clear to me that the rating business has to shut down because of this thing. In fact, our position would be that we would just see it as another step in increased accountability of the rating firms.

Josh Rosner with the advisory firm Graham Fischer had harsher words.

Josh Rosner: I think that the rating agencies are holding the bond market hostage.

Rosner doesn't expect Congress to back down. Standard & Poors favors a simpler solution. It wants the SEC to drop its requirement that bond deals carry a credit rating.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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