(Commenting here so that both H and K are notified)
Sounds like a good book! I can believe that Tett will explain things lucidly.
(J. P Morgan) did not accurately portray the risks involved in the creation and selling of MBS's
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets.
Regarding your questions.
1) Yeah, why are buyers of debts not creating new ratings agencies? Cheap things like cameras have independent reviews, and we are supposed to go by these vendor supported rating agencies to vouch for years of cash flow? I think I'm missing something. There's normally tons of money for intermediaries who connect buyers and sellers (Google, for example). So why are S&P, PwC etc not equally awesome?
[Aside: As I was typing this, I hopped over to S&P to see who pays them. I don't know the answer yet, But from their home page is linked a new white paper on Ratings Firms' Business Models: link ]
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor.
3 & 4. I think financial markets suffer booms and busts because fiat money is fundamentally impossible to price. You need to empower banks to call each other's bluff when they start making bad loans. For that, bank notes must be distinct from currency. That way a competing bank could have called Citi's bluff on the first hint of suspicion. Currently it took the collapse of Lehman to grind Libor to a halt.
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets. No, it's not as simple as that. JPM had tried to create mortgage backed securities, and found that it was too risky, thanks to the lack of data available to model the default risk of the instrument. They could've been a bit more open about the modeling constraints. Btw, I don't believe the contracts are out in the open for all to see. The Fed and the SEC had no idea about the contracts being created. And, no, it wasn't due to their innate governmental incompetence :)
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor. True, but then again, the market was so complex, you had contracts being re-pooled, sliced-and-diced, sold on, and then re-pooled again to pile up a mountain of debt. In those circumstances, I don't think the sellers themselves knew what they were peddling. Caveat Emptor is fine, but if the attitude is "I have to dance, as long as the music plays", then people need to be regulated, not for their sake, but because the wider economy is directly affected by their shenanigans. I don't like the government's hand trying to be a facsimile to Adam Smith's invisible one, but irresponsibility begets a heavy punishment.
3 & 4. I think ... it took the collapse of Lehman to grind Libor to a halt. I'm not sure of the implications of fiat money on credit, though presumably the notes of a tainted bank would buy less, in the currency in question. However, there are substitutes for that - the credit ratings of bank debt. Unfortunately, in a system where the ratings agencies rule the roost, that isn't much of a measure.
Sounds like a good book! I can believe that Tett will explain things lucidly.
(J. P Morgan) did not accurately portray the risks involved in the creation and selling of MBS's
I don't buy that. Any drawn up contract is out there for all counterparties to see. J P Morgan can't claim any exclusive insight into the nature of financial markets.
Regarding your questions.
1) Yeah, why are buyers of debts not creating new ratings agencies? Cheap things like cameras have independent reviews, and we are supposed to go by these vendor supported rating agencies to vouch for years of cash flow? I think I'm missing something. There's normally tons of money for intermediaries who connect buyers and sellers (Google, for example). So why are S&P, PwC etc not equally awesome?
[Aside: As I was typing this, I hopped over to S&P to see who pays them. I don't know the answer yet, But from their home page is linked a new white paper on Ratings Firms' Business Models: link ]
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor.
3 & 4. I think financial markets suffer booms and busts because fiat money is fundamentally impossible to price. You need to empower banks to call each other's bluff when they start making bad loans. For that, bank notes must be distinct from currency. That way a competing bank could have called Citi's bluff on the first hint of suspicion. Currently it took the collapse of Lehman to grind Libor to a halt.
Btw, I've long heard good reviews of this other book called A demon of our own design.
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No, it's not as simple as that. JPM had tried to create mortgage backed securities, and found that it was too risky, thanks to the lack of data available to model the default risk of the instrument. They could've been a bit more open about the modeling constraints. Btw, I don't believe the contracts are out in the open for all to see. The Fed and the SEC had no idea about the contracts being created. And, no, it wasn't due to their innate governmental incompetence :)
2. I thought the raison d'etre of OTC derivatives is that they don't go through that SEC backed clearinghouse? I like caveat emptor.
True, but then again, the market was so complex, you had contracts being re-pooled, sliced-and-diced, sold on, and then re-pooled again to pile up a mountain of debt. In those circumstances, I don't think the sellers themselves knew what they were peddling. Caveat Emptor is fine, but if the attitude is "I have to dance, as long as the music plays", then people need to be regulated, not for their sake, but because the wider economy is directly affected by their shenanigans. I don't like the government's hand trying to be a facsimile to Adam Smith's invisible one, but irresponsibility begets a heavy punishment.
3 & 4. I think ... it took the collapse of Lehman to grind Libor to a halt.
I'm not sure of the implications of fiat money on credit, though presumably the notes of a tainted bank would buy less, in the currency in question. However, there are substitutes for that - the credit ratings of bank debt. Unfortunately, in a system where the ratings agencies rule the roost, that isn't much of a measure.
Reply
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