Floyd Norris, chief financial correspondent for the New York Times, gives a disturbingly uninformative account of RMBS and CDO markets in his article, When a Deal Goes Bad, Blame the Ratings, November 14, 2013. Not having done the research to really understand the causes of the credit bubble, he fails to see the irony of his words: Did you make an incredibly bad decision during the great credit bubble? Don’t worry. Join the crowd denying responsibility.
Where ever you go, the topic is social media. It is the quick fix for everything from fund raising to film promotion and distribution. It is all things to all people, which is why it is a good thing we have so many self-professed experts online to tell us how to use it. It plays a bit like that scene with Groucho and Chico in A Day at the Races.
So let’s begin by stating that I am not an expert on social media. Never have been, and never will be. To be honest, I have a strong anti-social streak which works against the whole concept. I am even thinking of developing my own social media site based on the principle that people ought to mind their own business. I thought I would call it MySpace/Not Yours.
Q: What do you get when you cross a deconstructionist with the Godfather?
A: A man who makes you an offer you can’t understand.
Language is often a hindrance to communication. I’m not referring to language in the sense of somebody’s mother tongue—obviously, if I only speak English and my interlocutor only speaks Farsi, we’re going have problems getting our points across. I’m thinking of language used to erect a deliberate barrier, one in which a group of people throws up impenetrable thickets of jargon or seemingly meaningless words in order to obscure what they’re trying to say.
To see this, one need look no further than academia, where (paradoxically) I started thinking of “language” in a different way.
“Imagine the pharmaceutical industry having six FDAs, all competing to approve drugs,” said Rob Dobilas, who founded Realpoint LLC, the credit-rating company bought by Morningstar Inc. in 2010, referring to the U.S. Food and Drug Administration. “Everyone would be dead.” See Matt Robinson, Bloomberg News, Ratings Shopping Revived.
Striking quote, but the analogy needs to be tweaked.
Many people confuse the credit quality on corporate bonds with that of securitizations and structured bonds. Corporate bonds are backed by the entire balance sheet of an operating company, with competing payment obligations and a portfolio of assets of different value and liquidity.
Structured bonds are backed by cash flows. Thus different ratings on the same security is tantamount to working in different currencies. Each currency is pegged to an exchange rate a.k.a. the credit rating scale. Thus, the valid comparison would be “imagine six different Feds” who control the money supply on their own terms. Everyone would be broke, except their patron clients. Oh, wait a minute.
And what’s the solution? Very simply, to adopt a unified numerical rating scale for structured. It would considerably curtail ratings shopping and limit the probability of another subprime bubble like the last one.
On May 8, 2013, Sohu Business picked up an article in the HK press about a JV ratings agency between SEC-designated Egan-Jones, a Chinese agency, Dagong, and a Russian agency, RusRating, targeted for listing June 25 in HK. It is called, appropriately, “World Ratings.”
Perhaps not coincidentally, the SEC’s credit rating roundtable is scheduled for May 14 with some industry and academic participants selected by the SEC as well as the heads of the Big Three participating. The goal is to eliminate “ratings shopping,” ie, the search by financial intermediaries for ratings on new structured bonds that impose the absolute lowest capital cost regardless of the actual risk.
The search for cheap substitutes is not a crime; in finance, it keeps the price of capital competitive. A problem arises only when cost and price become decoupled. The cause is usually asymmetrical information. Ratings shopping in structured finance is precisely that: an information problem arising from the failure to develop and promulgate credit risk measurement standards that are valid over the life of the security.
A NYT article today reports on the loss of wealth among Americans since 2007. The article cites many findings in a recent Urban Institute study, “Less than Equal: Racial Disparities in Wealth Accumulation.” Racism is alive and well in the U.S., but it would be a mistake to confuse racism with a dysfunctional economic structure.
Plus ça change, plus c’est la même chose…..” the more things change..
The rules have gotten more complicated and voluminous but has anything changed?
Risk is back in fashion, five years after the March 2008 that Bear Stearns was taken over by JP Morgan Chase at a price of $1.00 per share.
To be honest, I wonder if a lot has changed. Furthermore, I have noticed that there is growing number of voices raising similar concerns about the appetite for risk and the resurgence of products reminiscent of the heady days of 2005 and 2006.
This is the title of a classic on change “management,” Leading Change, by John Kotter. The word management is in quotes because the premise of the book is that change cannot be managed, it must be led. Going in a straight line to get off the beaten path and on to a new one seems preferable, but it won’t lead you there. You need leadership to change course.
The essential value-add of Kotter’s book is that he linearizes the process of institutionalizing change so it looks like a dotted line. He identifies eight characteristic errors of change leadership that are like the holes between the dots.
Reading Kotter’s book, I was nagged by one question, the same one that had bothered me in a change-offsite sponsored a large NY based bank in the early 1990s. The session leader put up a power point slide similar to this one and asked, how would you advise Red Arrow to motivate the Blue Arrows to change direction?
Right there, he lost me.
- why does Red Arrow want to turn at a right angle to the crowd of Blue Arrows? Is he really smart or incredibly stupid?
In Brain Dead, Arianna Huffington asks, “[W]hat accounts for the epidemic of illogical thinking in Washington, where policy makers refuse to grasp what’s plainly right in front of them?” She is talking about the employment crisis, of course. Denial is the answer, obviously. But, denial of more than the fact of an employment crisis. This denial goes deep, casting doubts on the capabilities of our brightest economic experts. Expertise in today’s market means proficiency in a way of thinking. We have ample reason to believe this way of thinking is part of the problem.
Around April of 1915, the Western Allies of WWI embarked on a campaign that would quickly turn into one of the costliest mistakes in modern warfare: the Battle of Gallipoli. This fiasco was largely motivated by a legitimate desire on the part of the Western Powers to resupply their ally Russia, as always cut off from the main European theater. Under the leadership of (First Lord of the Admiralty) Winston Churchill, the Allies decided to attack the Gallipoli peninsula on the edge of the Aegean Sea with some of the less capable warships in the British Navy’s then considerable arsenal. However, when combined Anglo-French naval forces proved unable to break through Ottoman defenses lining the Dardanelles, land forces were called in, ultimately with catastrophic results in terms of both material and human losses.
This was carnage of hitherto unseen magnitude, whereby casualty rates routinely hovered around 90% on the Allied side. It was also the series of engagements via which Mustafa Kemal, himself a commander at Gallipoli, emerged decisively as the undisputed leader of modern Turkey, and during which he gave what is arguably the most celebrated order in military history: “I do not order you to fight. I order you to die.”