Unintended Consequences: Financial Overhaul Rule Stifles Bond Market

John Dimsdale Jul 22, 2010
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Unintended Consequences: Financial Overhaul Rule Stifles Bond Market

John Dimsdale Jul 22, 2010
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CORRECTION: The original headline of this article has been corrected

TEXT OF INTERVIEW

Bill Radke: The new rules of Wall Street are less than 24 hours old and we’re already seeing repercussions. Ford has the dubious distinction of being the first company to feel the backlash from lenders who are skittish about the law signed by President Obama just yesterday. For more, Marketplace’s John Dimsdale joins us live from Washington. Good morning, John.

John Dimsdale: Hello, Bill.

Radke: How is the financial overhaul hitting Ford?

Dimsdale: Well Ford’s lending unit, the financing arm, wanted to issue more car loans. But to do that, Ford had to borrow money, and the credit-rating agencies are refusing to sign off on any deal. See, Ford wanted to sell bonds that are backed by auto loans, but those bonds are required to have a credit rating. The new reform law holds the rating agencies more accountable for the grades they give. Just because of all the inflated grades they handed out during the housing boom. Now under the new law, the agencies can be sued if their opinions don’t hold up. So without a rating, Ford had to throw in the towel on its bond deal.

Radke: Interesting. And I imagine this would affect companies beyond Ford.

Dimsdale: Absolutely. The market for all asset-backed securities, which is a $1.4 trillion market, is shut down, essentially, for the time-being. Now with credit so scarce, there hadn’t been a lot of market activity recently anyway. But it could make car loans — even credit card loans — a bit harder to come by in the short-term. But most people figure that this is all going to work out. It’s possible that new, smaller credit-rating agencies might take a flyer at the new bond offerings. Or that the dominant rating agencies, the big ones like Moody’s and Standard & Poor’s, will eventually put their toe in the new waters and start at least tentatively putting their ratings on asset-backed bonds.

Radke: OK. Marketplace’s John Dimsdale. John, thank you.

Dimsdale: Thanks, Bill.

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