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The Revolution Will Not Be Televised

“A trio of economists are talking to packed houses about the grim future of Fannie Mae and Freddie Mac, the causes of the credit crisis, and the failings of ratings agencies.

Sylvain Raynes, Joshua Rosner, and Christopher Whalen are the power trio that has come to personify today’s collapsing capital markets…

“Raynes, a 51-year-old former Moody’s employee, formed R&R Consulting with his partner, Ann Rutledge, in 2000 to do what Moody’s and other rating agencies seemingly cannot: Decode the creditworthiness of structured securities.”

Katie Benner, “Prophets of the credit crisis”, Fortune, July 11, 2008.

Raynes Comments on SEC proposal to Remove Credit Ratings – Financial Week

Sylvain Raynes comments on the SEC’s proposal to remove the requirement of credit ratings for debt securities:

“A consultant who advises investors on pricing complex securities said the SEC plan would open up opportunities for firms like his. Sylvain Raynes, a founding principal of R&R Consulting, said investors who want to rely less on credit ratings may want more advice on price and other matters when dealing with issuers and investment banks. ‘The battleground will shift away from ratings to a more mature and scientific process based on consulting or other bodies.'”

Neil Roland, “SEC’s effort to ease reliance on credit raters is limited by host of other government rules,” Financial Week, July 3, 2008.

New York Times: Moody’s Takes Disciplinary Action

R&R’s Sylvain Raynes is quoted in a New York Times article regarding disciplinary action by Moody’s against employees alleged to have violated the company’s code of conduct in rating European securities.

Article excerpt:

“Already under intense scrutiny for its role in the credit crisis, the Moody’s Corporation said Tuesday that some employees had violated its code of conduct in rating complex European securities.

“The company said that it would discipline and possibly fire employees who had been involved in rating the debt, which are known as constant proportion debt obligations. Separately, Moody’s said it was replacing the executive, Noel Kirnon, who was in charge of its structured finance business at its subsidiary, Moody’s Investors Service…

“One former Moody’s analyst who has worked with Mr. Kirnon praised him and said he appeared to be taking the fall for mistakes made by others. ‘He was a very thoughtful and very competent analyst,’ said the former analyst, Sylvain Raynes, a financial consultant who has been critical of the ratings firms.”

“Moody’s Says Workers Rated Some Securities Incorrectly,” New York Times, July 2, 2008

R&R In the News — NHK (Japan)

Sylvain Raynes and Ann Rutledge are featured in a segment of “NHK Special,” a “60 Minutes”-style public affairs program that will air in the U.S. on Sunday, July 6, at 10:00 PM EST on TV Japan. The segment originally aired nationwide in Japan on June 23.

Sylvain and Ann specifically address the subprime crisis, how it happened, who is responsible, and whether economic calamities of this kind could be avoided. To this last question, their answer is “yes” — with the establishment of effective standards and accountability to address the dynamic nature of structured finance.

“Because I’m an aerospace engineer by training, I was asked to make an analogy between structured finance transactions and keeping an airplane from crashing,” Sylvain says. “There’s a widespread assumption that financial markets are ruled by self-interest and therefore beyond the control of standards and scientific laws. However, we have to remember that there was also a time when there was no real science of flight, either. Eventually people decided that it was unacceptable for airplanes to keep crashing all the time because of the loss of life, and then the appropriate science, standards and accountability were developed to minimize the danger. Airplanes still crash today, but rarely. The same could be true of structured securities if we cared enough,” he says.

“No one has developed a theory of how to do deals yet, because the consequences are not considered severe enough. There still seems to be an assumption that it’s all right for markets to crash, because it doesn’t kill anyone — at least not directly. But market crashes cause huge damage. Why should they be accepted? Why shouldn’t a science be developed to reduce risk, and standards and accountability be imposed to penalize those who contribute to financial failure? We need to change the philosophy of the standard approach to finance — that self-interest dominates, and that loss and ruin are acceptable and even inevitable. At the same time, we have to become willing to engage risk. Using another analogy, when passing through a green traffic light, we have to take the precaution of still looking both ways for someone who may be running a red light, instead of treating the signal as some kind of protective barrier that will keep the other cars from killing us.”

R&R has been forging relationships in Japan through the Japan Society in New York City, where Ann is a member of the Business Advisory Committee of the U.S.-Japan Innovator’s Network. The Network is an initiative that brings together innovation leaders from Japan and the United States to explore fresh approaches to collaborative problem-solving. For more information, visit the U.S. Japan Innovator’s Network Web site.

For further information on viewing this episode of “NHK Special” in the U.S., see programming and subscription information on the TV Japan Web site.

SEC Proposed Rules Fall Short

“The SEC’s ‘subprime mortgage’ problem is that the crisis has exposed a very serious information problem in the capital markets, and a perverse truth is revealed: financial firms make less money from information than from exploiting loopholes in our fragmented, deeply flawed capital market information systems.

The SEC is the guardian of these fragmented, flawed systems, so it is very difficult for the SEC to take any action at all.” R&R’s Ann Rutledge makes this observation in her article “Wizards of Odds: The Rise and Fall of Rating Agencies,” posted on RGE Monitor. Ann warns that the SEC’s Proposed Rules for Nationally Recognized Statistical Rating Organizations fall short of addressing this fundamental issue, which in reality requires a massive overhaul of both the ratings system and GAAP. Read Ann’s article in full on the RGE Monitor Web site.


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Automatic Synthesis of Tri-Diagonal Markov Transition Matrices: A Failure of the Inverse Ferron-Frobenius AlgorithmABSTRACT: Sylvain Raynes experimented with a method developed by Goya and Boyarski (1993) to standardize the synthesis of conditional Markov transition matrices for deal entry in our automated re-rating system, ABSTRAK®. In the analytical literature, the reverse-engineering of a Markov matrix from its spectral-radius eigenvector is referred to as the Inverse Perron-Frobenius Problem. Our analysts do this synthesis manually, so a successful outcome […]

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Ann Rutledge on China

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