Financial Reform - Be Afraid

This is supposed to be a blog (mostly) about investment theory and practice, although really it admittedly wanders off-piste.You may have noticed it has veered more and more into the political realm of late. Sadly, this is because politics and the economy (and therefore investing) have become inextricably linked as the government continues to extend its reach almost everywhere.

Which brings me to the Dodd and Frank's "Wall Street Reform and Consumer Protection Act." It is 2300 pages long, and almost assuredly no one other than a few congressional lawyers and staffers have read it. As readers of this blog know, Johnston's Law asserts that unintended consequences rise with the square numbers of pages in a bill. And, already, on Day One we see our first, and it's a doozy: the shut down of the ABS market.

The Asset Backed Securities market is what funds car loans, credit card loans, and small business loans. It is vital to the functioning of our economy. It seems that the bill forces ratings agencies to accept liability for the quality of their ratings. Mind you, a rating is very clearly only an opinion, but the agencies will be placed in harm's way nonetheless (harm, in this case, being from the devil's minions in the plaintiff's bar).

So, the ratings agencies are simply saying, "screw this," and are refusing to rate ABS. The problem with that, though, is that many forms of ABS are required by law to be rated. Rut roh! This has led to an overnight shut down of the ABS market. Ford has already pulled a large auto loan offering.

Interestingly, the ratings agencies had no idea this was in the bill. It apparently wasn't in an earlier version. This underscores the fact that no one knows what's in it. Obama, who doesn't know the first thing about finance, certainly doesn't. Dodd and Frank? Please.

If Day One has led to the unexpected shut down of the ABS market, what will Day Two bring? Day One Hundred?