“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.
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.