The Three Big Ratings Agencies (hereinafter, TBRA) are refusing to rate asset backed bonds due to the stepped up regulations of the financial reform package. This is ground-shattering news that already demonstrates the effectiveness of the new legislation. …
So, what’s the NEW problem? The financial legislation just signed into law makes the TBRA’s liable for the opinion they give on a bond. If, for example, they give a bond a very strong rating (AAA, say), and the bond turns out to be junk, and it turns out that the ratings agency was negligent in its assessment, it can be sued by the bondholders. This has sent shockwaves through the financial set, but not only because it exposes the ratings agency and forces them to be honest in their assessment of the bonds. Rather, it pinpoints the precise pressure zone in the whole asset backed securities market and forces changes all the way down the line. They are screaming bloody murder and essentially blackmailing the government precisely because the new law cascades throughout the system. Here’s how.
What is an asset backed security? Very simply, it is a bond that is collateralized with some other asset, usually loans on actual, concrete property. The most famous are, of course, mortgage backed securities, but any loan will do. I was once involved in an ABS deal in which the bond was backed with blocks of 1000 loans on Mack truck rigs. So, 1000 truckers pay their loan on their rig, and that loan is packaged in a deal that “secures” a bond. If the bondholders can’t collect from the seller, they have recourse to those loans. Simple, yes? The financial crisis of 2007 can be traced to shenanigans with such bonds. Imagine, for instance, if I know that 750 of those truckers are behind on payments and likely to default. I still want to sell that bond, but I have to disclose this (theoretically), which means I will get less money for the bond, because the buyers will demand a higher interest rate. If nobody cares, I can use whatever shit loans I want. If somebody looks and cares, I lose money. Obviously, the buyer should be looking and caring, but this is really buttressed by the work of the ratings agency. So, what happens when the TBRA are on the hook legally for their ratings. This happens:
1) They give accurate ratings, rather than essentially “selling” good ratings to the issuer and underwriter.
2) The issuer and underwriter, knowing that the ratings agency will post an accurate rating, are incentivized to use only good loans in their bonds, or to sell their bonds with the accurate interest rate if many bad loans are included. Therefore, they will only buy/package good loans from the originator. No more 1000 block truck loans with 750 bad loans – or, we know that these will fetch a higher interest rate, and that the buyer will have priced in the risk. No more blind tranches.
3) Loan originators will no longer be incentivized to hand out bad loans and crazy loans to unfit borrowers, since they will have to eat the losses rather than selling them up the chain to the bond packagers. If you’re unlikely to pay back your truck loan, I probably won’t make it to you, since I won’t be able to move that bad loan, and will therefore have to eat the loss on it.
In terms of identifying a point of pressure and pushing on it to achieve systemic cascade effects, that’s a pretty impressive piece of the legislation. And you know it’s good for the People precisely because the TBRAs are going ballistic over it, and the propaganda is flowing free and thick from the business class. This is system changing stuff we see at work here, as anyone who has ever worked in finance and on ABS knows damn well. And yes, this is the kind of change I voted for.
WASHINGTON – President Barack Obama has signed into law an overhaul of banking and Wall Street regulations that he says will create the strongest financial protections for consumers in history.
The law is a legislative victory for the president, who has made tightening restrictions on banks a signature issue since taking office amid the nation’s financial meltdown. Obama says the reforms will end many of the Wall Street practices that sent the economy into the worst recession since the Great Depression.
In an ironic touch, Obama signed the bill in the Ronald Reagan Building, named after a president who championed deregulation. Obama was joined by scores of consumer advocates, business executives and lawmakers who supported the bill. …
The bill is a signature achievement for Obama and congressional Democrats nearly two years after Wall Street’s failures knocked the economy into a spiraling recession.
They’re not campaigning on it in earnest — at least not yet — but Republican leaders say that, given the power, they would like to do away with Wall Street reform much like they have already discussed repealing health care reform.
“I think it ought to be repealed,” said House Minority Leader John Boehner, in response to a question from TPMDC, at his weekly press conference this morning.
President Obama arrived back at the White House this afternoon and immediately heralded Senate passage of “the strongest consumer financial protections in history.”
An upbeat Obama was reacting to the Senate’s 60-39 vote on legislation designed to tighten Wall Street lending practices and expand consumer protections following the U.S.-led financial crisis that led to a global economic recession in 2008.
“The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama said moments after stepping off Marine One on the White House lawn. “From now on, every American will be empowered with the clear and concise information you need to make financial decisions that are best for you.” …
As part of that message, Obama said the measure will ensure that firms “compete on price and quality, not on tricks and traps.” He said they’ll have nothing to fear unless their business models require “cutting corners or bilking your customers.”
Obama noted that House Republican leader John Boehner has called for the measure’s repeal, but he echoed House Speaker Nancy Pelosi’s vow that Democrats won’t go back on their actions.
WASHINGTON (AP) — The government says it recovered $2.5 billion in overpayments for the Medicare trust fund last year as the Obama administration focused attention on fraud enforcement efforts in the health care industry.
Investigators have new tools this year to help crack down on health care fraud, with the Justice Department and the Health and Human Services Department working cooperatively to police companies. The newly enacted Affordable Care Act is designed to lengthen prison sentences in criminal cases and the new law provides an additional $300 million over the next 10 years for stronger enforcement. It also gives the government new authority to step up oversight of companies participating in Medicare and Medicaid.
Under the Affordable Care Act, providers could be subject to fingerprinting, site visits and criminal background checks before they begin billing Medicare and Medicaid.
To combat fraud, the act allows Health and Human Services Secretary Kathleen Sebelius to bar providers from joining the programs and allows her to withhold payment to Medicare or Medicaid providers if an investigation is pending.
In a report being released Thursday, the Justice Department and HHS say they are putting investigative resources in areas where health care fraud is especially widespread, including south Florida; Los Angeles; Houston; Detroit; New York City’s Brooklyn borough; Baton Rouge, La.; and Tampa, Fla.
The result is a rising number of criminal prosecutions and the return of more stolen money to the government. At the same time, federal investigators are blocking unscrupulous companies from getting into government health care programs in the first place.
Senator Maria Cantwell of Washington, one of a cadre of Democrats intent on toughening up the big financial regulatory legislation, said on Thursday that she would insist that the Senate vote on a proposal to reinstate the Glass-Steagall Act, which would re-establish a firewall between commercial banking and investment banking.
Ms. Cantwell and Senator John McCain, Republican of Arizona, have proposed an amendment to the regulatory bill that would reimpose the Glass-Steagall law, which Congress repealed in 1999.
In a brief interview outside the Senate chamber, Ms. Cantwell said that Democratic leaders had yet to agree to hold a vote on the amendment. More than 140 amendments have been submitted, but only a few of them are likely to be debated and given a roll call vote given limitations of the legislative calendar.
Ms. Cantwell said she did not think she would agree to end debate on the overall bill without a vote on her amendment.
When a reporter suggested to Ms. Cantwell that Senate leaders might try to limit the number of amendments like the Cantwell-McCain proposal that deal with the size of banks, Senator Barbara A. Mikulski, Democrat of Maryland, who also wants the regulatory bill to be tougher on Wall Street, interjected angrily.
“What is this — like landing slots at airports?” Ms. Mikulski snapped. “After we crashed and burned, there’s one landing slot?”
