The Effects of Reform

So, after protecting ratings as a First Amendment opinion, Congress changed the 2300-page regulatory reform bill and exposed the raters to legal liability if the ratings don’t reflect an ultimate change in the price of the bonds, or a default (crank up the class action lawsuit machine…).

What does this mean? Can a bond holder sue an NRSRO if the market value of a bond declines after a downgrade?

It means that this chills the value of a rating, if it exposes the rater to monetary liability. It seems there is a loophole, however.

If the rating was not part of the submitted OS or documents submitted to the SEC, the rating would be legally exempted, since it was not officially part of the submitted deal documents.

This is a stupid, populist nod to the worst of Congressional impulses. AT BEST, it will raise the cost of credit, and make it less available. AT WORST, it will put lawyers in charge of credit allocation.

What’s next, broker/ dealer stock buy and sell ratings? Will realtors be subject to legal liability if a house depreciates after you buy it? Will Las Vegas odds makers be subject to legal action if the odds are wrong and you don’t win?

The only good news is municipal bonds would be exempt because they do not have to register with the SEC. 

Bond Sale? Don’t Quote Us, Request Credit, July 21, 2010

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