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I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this.

Amassing information costs time and money. By default, all participants operate with imperfect information, and having all participants amass perfect or near-perfect information in parallel would be hugely, ridiculously inefficient.

So you have to have a dedicated information-gatherer.

The dedicated information-gatherer has to be a neutral third party (because knowledge is power, and the role of refereeing based on that knowledge is power, and nobody within shouting distance of sanity wants to surrender that power to the other side of the table in a serious business negotiation).

The neutral third party has to put its ass on the line. Otherwise, it can just pull magic ponies out of thin air (see, e.g., Standard and Poor's, Moody's and their friends).

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

This is a point that your scheme will have to address: How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 3rd, 2010 at 05:26:53 PM EST
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