Rating Agencies Considered Harmful | 91 comments (91 topical, editorial, 0 hidden)

Re: Sounds easy ... (none / 0)

Rating agencies are just the banker's attempt to solve the inescapable principal-agent problem given conditions of imperfect information (read: incentive to lie, even to yourself) by trying to establish an institutional wall between lenders and risk analysts by outsourcing to a pooled resource. It makes a lot of sense and is an improvement over what existed before, but it's a problem that has no permanent institutional solution.

This is a great insight, thank you.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 26th, 2010 at 12:28:39 PM EST
[ Parent ]

Re: Sounds easy ... (none / 0)

I don't get it. Why can't the lender and the risk analyst be the same person/institution?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Apr 26th, 2010 at 01:06:07 PM EST
[ Parent ]

Re: Sounds easy ... (4.00 / 3)

Becuase they can short and/or insure their own loans if the insurance and/or short is in danger of becoming more profitable than the potential loan loss.

And without proper regulation and oversight they might be encouraged to do so.

Hypothetically.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 26th, 2010 at 02:51:38 PM EST
[ Parent ]

Re: Sounds easy ... (none / 1)

Hypothetically? Hasn't the Great Vampire Squid already done just that?

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 26th, 2010 at 02:57:05 PM EST
[ Parent ]

Re: Sounds easy ... (none / 0)

I was being ironic. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 26th, 2010 at 03:18:29 PM EST
[ Parent ]

Re: Sounds easy ... (none / 1)

So, uh, can't we just ban that?

And how in gods name can they short a non-securitised loan they have issued themselves?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Apr 26th, 2010 at 04:04:01 PM EST
[ Parent ]

Re: Sounds easy ... (4.00 / 2)

One way is to swap the interest and principle payments for the loan bank A made for the interest and principle payments of a different loan that bank B made. And banning that, or regulating it very severely rather, is precisely what is being proposed in the US banking reform legislation in Sen. Blanche Lincoln's version. The banking industry is resisting it full bore, however, since that kind of insurance trading is how so many US banks posted their most profitable years on record last year, during the worst banking crisis in 70 years.

by santiago on Mon Apr 26th, 2010 at 04:32:05 PM EST
[ Parent ]

Re: Sounds easy ... (4.00 / 2)

Becuase they can short and/or insure their own loans if the insurance and/or short is in danger of becoming more profitable than the potential loan loss.

This, however, requires that the sucker who is on the other end of the deal hasn't done his risk analysis properly.

Which really speaks more to the need for keeping widows and orphans out of the capital markets than to any need to rein in the capital markets' tendencies to separate suckers from their money. Because the former is possible - the latter may very well not be.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 26th, 2010 at 05:19:37 PM EST
[ Parent ]

Re: Sounds easy ... (none / 1)

For the same reason your accountant and your auditor cannot be the same person.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 26th, 2010 at 02:55:13 PM EST
[ Parent ]

Rating Agencies Considered Harmful | 91 comments (91 topical, 0 editorial, 0 hidden)

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