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Ratings Agencies: Don't Use Our Ratings

Parts of the bond market are shutting down this week as ratings agencies try to figure out how they'll be affected by a last-minute provision in the finance bill, the WSJ reports.

President Obama will sign bill into law this morning, and this may be the first unintended consequence.

Bonds are loans. Ratings agencies assign letter grades to bonds based on the likelihood that the borrower will pay back the loan. The agencies — including Moody's and S&P — were criticized in the housing bust for assigning high ratings to lots of loans that went bad.

Under the new law, ratings agencies can be sued for making bad ratings decisions, if the ratings are included in formal documents that companies file with the SEC when they issue bonds.

That's making the agencies nervous. As a result, they're telling the issuers not to include their ratings in the formal documents filed with the SEC, according to the WSJ.

That's a particular problem for asset-backed securites — bonds made up of bundles of consumer loans such as mortgages and auto loans. Federal law requires those bonds to include ratings in their formal documentation.

Last week, $3 billion in new asset-backed securities were issued. So far this week, there have been no new issues. And several companies have put new issues on hold indefinitely, the article says.

"We are at a standstill right now," a lawyer who specializes in asset-backed securities told the WSJ.