What's new is that the SEC has temporarily allowed issuers to publish prospectuses for asset-backed securitizations without reference to ratings from Moody's, Standard & Poors, or other so-called Nationally Recognized Statistical Rating Organizations - the official term for rating agencies.  This ad-hoc ruing was necessary because the rating agencies have refused to allow their ratings to be referenced after passage of the Dodd-Frank financial regulation bill, which for the first time holds rating agencies to the same standard of care as accountants, lawyers, and other experts.  The rating agencies have historically not had this level of legal exposure, and they are not comfortable taking the legal risk.

One of the points I made in Stalking the Black Swan is that the risk of Black Swans increases when too many people share the same belief ("Black Swan" is the term popularized by Nassim Taleb for seemingly unpredictable events that turn out to have massive consequences).  For example, too many people thought home prices could only rise or that the Federal Reserve could forestall economic crisis merely by cutting interest rates.  When those widely-shared beliefs proved invalid, the surprise and adjustment were painful.  We can't change the process by which people form consensus opinions, but we can take steps to make sure the financial system doesn't get excessively leveraged to certain opinions, models, or processes.  Moody's and S&P are in the business of manufacturing widely-held opinions called "ratings," which are used not only by investors, but also by regulators and financial institutions.  One of the causes of the Great Recession was that too many people relied on AAA-ratings from Moody's and S&P for mortgage-backed securities.  If there were more rating agencies, then there would be less weight riding on the opinions of only two firms, and the financial system would be less fragile.

The good news is that despite the absence of ratings in the prospectuses, the securitization deals are moving ahead, indicating that the capital markets can continue to function without "issuer-paid" ratings.  As I pointed out in an op-ed published in Fortune, Moody's and S&P dominate the ratings business because they are paid by issuers of securities. The issuer-paid model makes it difficult (perhaps impossible) for smaller rating agencies to compete with Moody's and S&P, because the small rating firms do not have large enough client followings to interest issuers, and because investors are reluctant to pay for ratings from small firms when ratings are essentially available for free (because issuers pay for them).

In the Fortune piece, I had recommended legislation to eliminate issuer-paid fees.  The new legal standards in the Dodd-Frank bill might accomplish the same purpose.  While it is too early to know how the ratings business will evolve in the wake of regulatory reform, it is certainly a positive development to see prospectuses without ratings.