Too Clever By Half
June 24, 2008, Forbes Online

As reported on Forbes.com, the US Securities and Exchange Commission is considering a rule that would significantly increase the amount of information disclosed to bond-rating agencies as a way to prevent another credit crisis since many of the collateralized debt obligations that precipitated it were given high-ratings based on limited information.  Unfortunately, the new ruling has a few disadvantages including, increased costs for select borrowers and issuers.

"What the rules clearly address is the very large markets for asset-backed securities such as home mortgages, auto loans and credit card loans. However, these rules could very well hurt liquidity and innovation in little niche markets, which in their aggregate likely provide a lot of liquidity to the US economy," said David Thatch, a partner in the Securities Practice at White & Case in New York.  "If regulators increase the cost to rating new financial products - those without a developed market - they might be forcing innovative structures from the ratings regime all together."