Chang on Changing Economic Dialogue

We can try to change the system, or we can try to change human psychology and behavior. For my money, attempting to change the system by substituting one vision for another is a better way to change the dialogue.

Ha-Joon Chang is a Cambridge economics professor, Guardian columnist and influential critic of capitalism, on a mission to change the dialogue on economics from a”god-given” puritanical framework that rewards status-quo wealth to a social system that can be improved, for the benefit of nearly everyone. His recent critique of the positive spin on austerity in The Guardian captured my attention:

Can funding for renewable energy ever be AAA risk?

Twenty years ago, rating agency analysts disagreed on whether non-AAA corporations could issue AAA-rated structured securities. Aircraft finance was the poster child of the debate. “Impossible. Too volatile,” corporate analysts reasoned. Structured analysts would retort: “Not even $1 of securities can be funded at AAA?” And, if $1 can be funded at AAA levels, what about $2? $3? $1 MM?

This spring, R&R got close to the emerging solar securitization market through committee work coordinated through the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL), which is working to promote solar energy and preparing for the imminent (2016) solar tax credit phase-out. In December 2013, NREL’s Travis Lowder and Michael Mendelsohn published a white paper, The Potential of Securitization in Solar PV Finance, which argues for securitization as replacement funding. R&R discovered that rating agency bias exists against solar PV lease securitization, similar to corporate. The agencies willing to issue ratings (some are not) are capping the rating at low Investment Grade risk levels.

Really? Not $1 of securities backed by energy that continuously self-generates is capable of being rated AAA?

Thomas Piketty: Le Monstre Sacré

Over the last few weeks, much ink has been spilled in an attempt to refute, undermine and marginalize the book “Capital in the 21st Century” by Thomas Piketty, a French economist. In some, unsurprisingly British quarters it has even reached the level of “the lady doth protest too much, methinks.” You cannot convince people of your viewpoint by just silencing the opposition. It’s a safe bet that, had a British economist said the same things or reached similar conclusions, no British institution would have attacked him so publicly. But who knows, perhaps “Le Monde” would have done so with gusto and joie de vivre! It’s clear that the Financial Times is not a proper forum to argue about economic time-series with any seriousness. Although one can find fault with the Mona Lisa, doing so does not take anything away from its value as a work of art.

Alibaba’s business model

Two days ago, Business Insider published a good summary of little known facts about Alibaba.

Several facts highlight how the mega trade-web dwarfs competitor e-commerce platforms in the U.S. and in China on several critical measures, including employees, registered users, web visits, sales throughput (on track to handle $1 TN in transactions) and revenues ($1.8 BN in 3Q2013).

Another competitive advantage of Alibaba is that it blocks search engine spiders, thereby retaining the control and benefit of most of the information published on its site. The March 23 2013 Economist article on Alibaba discusses the spider tactic in more detail and offers a deeper discussion of Alibaba’s information advantage generally.

But the most interesting aspect of Alibaba is one that has received almost no attention. That is Alibaba’s role in transforming and developing China’s SME financial services market.

Alibaba, together with its financial backer and deal sponsor Orient Securities Asset Management, is the micro-loan securitization pioneer in China. Approval was granted by the CSRC in June 2013 for the creation of Alibaba Separate-Account Asset Management, a master trust structure. It will issue 10 series, each backed by RMB 100-200 MM, with a 1-2 year maturity. The first series, backed by RMB 500 MM, priced with three tranches (A: 75%, B: 15% and C:10%) of a 15-month maturity. The bonds were listed on the Shenzhen Stock Exchange on September 25, 2013.

With this foray into self-financing, I believe it is well worth reconsidering Alibaba’s business model. Is it really a giant, diversified trade web? Or is it (as I believe) a brand new banking model for the 21st Century?

When an article on subprime goes bad

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. 


Industry wrote provision that undercuts credit-rating overhaul

By Greg Gordon | McClatchy Washington Bureau

WASHINGTON — Moments before the Senate overwhelmingly passed a bill to overhaul the credit ratings industry seven years ago, Republican and Democratic sponsors took turns touting its promise for ending an entrenched oligopoly.

The bill, they said, should break the viselike dominance of three agencies – Standard & Poor’s Ratings Services, Moody’s Investors Service and the smaller Fitch Ratings – in an industry that serves as a crucial watchdog over the nation’s financial system.

What’s escaped public scrutiny until now, however, is that the law’s tough criteria defining when a newcomer could join the industry weren’t written by Congress. They were crafted by a yet-to-be-identified official of one of the big three ratings agencies, a former aide to the Senate Banking Committee has told McClatchy.

Read more here:

Six FDAs or Six Feds?

“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.

Rating Agency Flashpoint

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.

Has Anything Changed?

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.


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