5. Selling off-market derivatives to national governments to help them lie about the magnitude of their fiscal problems.
Re: 3., what kind of silly crap are you thinking of? Credit default swaps? Jackalope farms?
I might add stuff like the rent-generating system for IPOs, but maybe that's too small-time for this list.
Re: 4., I have to think that in the end the problem with rating agencies is that they appear to be in the business of providing a service to the buy-side, but they get paid by the sell-side. I don't really understand why anyone ever thought that would work.
Re: 4., I have to think that in the end the problem with rating agencies is that they appear to be in the business of providing a service to the buy-side, but they get paid by the sell-side. I don't really understand why anyone ever thought that would work.
Kind of like the way that in real estate, the buyer's realtor gets paid a % of the sale price, even though they're supposed to be helping you get as low a price as possible. It sort of works because the buyer's realtor is also trying to build goodwill and get the buyer's business when he becomes a seller.
Those are definitely some perverse incentives, but the rating agencies are even more flagrantly goofy. At least with the realtor the party receiving the service is also the one paying for the service. Imagine if in every home sale the inspector were chosen by, and paid by, the seller. They claim to be working on behalf of the buyer, but their inspection reports don't report any major problems, until one day you come home from work and find that your living room has fallen into your basement, followed a few days later by a note from the inspector alerting you that some new data suggests that your house may have certain structural weaknesses.
And then the government anoints the two or three biggest inspectors with official status, writing their names into regulations for home purchases involving FHA loans.
3 for me is really about the perversion/subversion that occurs in the IB/investor relationship. Many, many fund managers see the perks (trips, connections, job opportunities) that they get from being lapdogs of the sell side as worth selling their actual employers/customers/investors down the river. The IBs know that $10k of boondoggling is worth $250k of fees to them, and the investors go along with it
( ... )
It seems to me that 1. and 2. are also reasons to hate the federal and relevant local governments. I think it's this kind of collusion between industry and government that's meant by the term "crony capitalism".
3. and 4. seem to me cases of caveat emptor.
With respect to 4. in particular, it's my understanding that for overseas sovereign investors, it was not so much the ratings agencies that garnered their trust, as personal assurances from Hank Paulson. Investors are supposed to do their own due diligence and the system only works if they lose their money when they make the wrong bets.
Comments 6
Re: 3., what kind of silly crap are you thinking of? Credit default swaps? Jackalope farms?
I might add stuff like the rent-generating system for IPOs, but maybe that's too small-time for this list.
Re: 4., I have to think that in the end the problem with rating agencies is that they appear to be in the business of providing a service to the buy-side, but they get paid by the sell-side. I don't really understand why anyone ever thought that would work.
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Kind of like the way that in real estate, the buyer's realtor gets paid a % of the sale price, even though they're supposed to be helping you get as low a price as possible. It sort of works because the buyer's realtor is also trying to build goodwill and get the buyer's business when he becomes a seller.
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And then the government anoints the two or three biggest inspectors with official status, writing their names into regulations for home purchases involving FHA loans.
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3. and 4. seem to me cases of caveat emptor.
With respect to 4. in particular, it's my understanding that for overseas sovereign investors, it was not so much the ratings agencies that garnered their trust, as personal assurances from Hank Paulson. Investors are supposed to do their own due diligence and the system only works if they lose their money when they make the wrong bets.
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