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July 23, 2010

Roadkill In the War On Business

Joseph Smith
The Democrats' political exercise in tightening the ropes on the financial industry is proving to have unintended real-world consequences. 

The three major credit-rating agencies, S&P, Moody's and Fitch, are refusing to attach their ratings to new bond issues, for fear of new and unknown liability created by the Dodd-Frank financial reform bill.

The Wall Street Journal reports on the havoc created in the bond market:

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.

That is important because some bonds, notably those that are made up of consumer loans, are required by law to include ratings in their official documentation. That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down.

There have been no new asset-backed bonds put on sale this week, in stark contrast to last week, when $3 billion of issues were sold.

"We are at a standstill right now," said Bingham McCutchen partner Ed Gainor, who specializes in asset-backed securities.

The Journal column goes on to note that the bill's liability provisions were inserted in the Senate bill at the last minute, despite comments from Moody's last April that "we remain concerned that the bill's liability provisions would lead to unintended consequences that could negatively impact the credit markets." [emphasis added]

The liability provisions take effect immediately, which means affected bond offerings will either go on hold, be run through smaller, more costly private markets, or be subject to some as yet undetermined work-around, according to the Journal.

The Beltway brainiacs have cinched the knots on the financial industry to show how tough they are on "Wall Street," aka American business, while managing to ignore the "mother of all bailouts," Fannie Mae and Freddie Mac, a bailout of their own creation. 

Fannie and Freddie combined are into we-the-taxpayers for upward of $145 billion, and destined to reach $389 billion to $500 billion or more, depending on who you ask, with the Senate having recently decided against capping the losses at $200 billion each on Fannie and Freddie.

These Democrats can't address a real problem, but instead pass a bill that simply adds to the nervousness that is widespread throughout the economy.

Neil Cavuto, discussing an oil-industry Gulf response plan on FOXBusiness, sums up the view of many regarding the Obama attitude toward business:

This is bigger than an oil industry emergency plan, bigger than the oil industry itself.

This is about industry, period. All industry.

And industry CEOs of all stripes very concerned about an environment that worries them and an anti-business message out of Washington that alarms them.

...far from making things better ... The increasing sense I'm getting from these business guys is that our fine elected leaders are making things worse. And not just a little worse.

Much worse.

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