Blog on the Run: Reloaded

Monday, April 26, 2010 8:53 pm

But he’s shrill!

Paul Krugman on the gaping hole in proposed financial reform:

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.

The rating agencies are paid by the investment banks that issue the securities, so they have an incentive to tell potential investors that those securities are top-grade. Otherwise, they may fear (and probably with good reason) that if they label too many of an investment house’s securities as junk, that investment house will take its business elsewhere. That is, as Krugman notes, a huge conflict of interest.

So how do we change the incentive structure to eliminate the conflict of interest?

This guy suggests making the Securities & Exchange Commission, rather than the issuing investment banks, the entity that decides which rating agency rates which securities. I wonder whether this may be a duty the free market is incapable of handling on its own. If so, then the SEC or perhaps a new, independent government agency should be doing the rating.

How might that work? Well, God knows I’m no expert, but taking what we know about the flaws of current incentives, I imagine we’d need to do at least the following:

  • Make the agency politically independent, led by a presidentially appointed, congressionally confirmed director who would serve a single, 10-year term.
  • Fund it with assessments on investment banks, tied to the number and volume of securities they issue, rather than from tax revenues. Each securities issue ought to be, from the agency’s standpoint, financially self-supporting. Yes, I know, that cost ultimately will be passed on to the investment bank’s clients and thence to the client’s customers. So come up with a better idea.
  • Pay the agency’s employees, or at least the ones directly involved in rating securities, enough that there wouldn’t be a huge financial incentive for them to inflate ratings in hope of getting a job with one of the houses whose securities they rate.

I realize these steps wouldn’t solve all our problems. But might they eliminate the worst of the existing conflict of interest? Ida know. If you’re an expert, you tell me.

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Wednesday, November 25, 2009 8:41 pm

Odds and ends for 11/25

  • Roots: Here’s one good reason not to go looking for your birth parents.
  • Coincidence?: On Tuesday, Obama’s top Pentagon official for detainee affairs, who had long and publicly opposed military commissions for terrorism suspects, quits. Today, late in the afternoon on the day before a four-day holiday weekend (for those who work in or cover the government), the government announces it is filing new charges against a terrorism-conspiracy suspect under the Military Commissions Act of 2009.
  • Thanks for that, Tipper: The jackass lawyer who unsuccessfully sued Judas Priest for supposedly causing a kid’s suicide is running for Congress in Nevada — as a Democrat.
  • The master has learned from the student: Charles Lane, best known (if known at all) as the New Republic editor who oversaw serial fabulist Stephen Glass, has taken a page from the Glass notebook and just made crap up about the recent government report on hunger. To quote a commenter elsewhere, I hope his turkey has tapeworms.
  • Piling on: Connecticut joins Ohio in suing the financial-ratings agencies. Woohoo!
  • Memo to Pete Peterson: We know the difference between being concerned about the deficit and being a concern troll, and we know which one you are.
  • It’s working, at least somewhat: The people who prepare economic forecasts for private, paying clients say Obama’s $787 billion stimulus package has helped.
  • The public: “Stop covering Sarah Palin!
  • I wonder who will be disciplined for this screw-up: Former Bush White House spokesbot Dana Perino tells Fox’s Sean Hannity, “We did not have a terrorist attack on our country during President Bush’s term.” Forget 9/11 (she obviously did); what about the anthrax attacks, the Virginia Tech shootings and the D.C. sniper(s)?
  • Why does Rush Limbaugh hate America?: Rush Limbaugh calls for overthrowing the government. This would not be the first time he has done this.
  • Maybe it’s because of his philosophy*: “But if you live in the universe of lies, the last thing that you are governed by is the truth. The last thing you are governed by is reality. The only thing that matters to you is the advancement of your political agenda. And you tell yourself in the universe of lies that your agenda is so important the world will not survive without it and therefore you can lie, cheat, steal, destroy whoever you have to to get your agenda done because your opponents are evil, and in fighting evil, anything goes. There are no rules when you’re in a fight with the devil.”

*Yes, I understand that he thinks he’s not talking about himself.

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