Late But Essential Review

http://www.tbray.org/ongoing/When/201x/2010/08/28/The-Big-Short

by duke_sam • 16 years ago

27 19 16 years ago

Estragon• 16 years ago

  Finance should be regulated into utility status all over the civilized
  world, and if the community of hard-core financial engineers really
  wants to go on being a collective pathogen, they’ll be forced to
  acknowledge that what they do just isn’t civilized behavior, and do it
  somewhere else. We’ll be way better off without them among us.

As George Soros describes in the historical section of The New Paradigm for Financial Markets, this was exactly the attitude which evolved from the wreckage of the Great Depression, but starting as early as the 60s the financial world steadily chipped away at the constraints which had been imposed. (Soros himself was one of the pioneers in the dilution of these constraints.)

wmf• 16 years ago

20-30 years of sanity might be better than none.

guelo• 16 years ago

Unfortunately the recently passed financial regulation, while containing some good provisions, doesn't do enough to put the genie back in the bottle.

werrett• 16 years ago

Was the genie ever in the bottle?

That's not a rhetoric question. I generally wonder whether Finance has been consider to be anything other than self-serving.

nl7• 16 years ago

I generally wonder whether Finance has been consider to be anything other than self-serving

No it hasn't. But there have been times (eg, post WW2 to Regan-era) and places where regulation has shaped the market in such a way that financial players interests were more aligned with society as a whole.

nl7• 16 years ago

Of all the failures that led to the big meltdown, the most aggravating is the failure of the bond-rating agencies. These people took good money for pasting AAA credit ratings on piles of the most implausible shit imaginable, and what’s irritating isn’t that they did it, it’s that apparently they didn’t break any laws and thus there’s little prospect of the long prison terms that anything smelling of natural justice would require.

If anyone is looking for a YC application idea, there's one right there. To be more explicit:

Ratings agencies currently are paid by investment companies to rate the risk associated with the products they are bringing to market (ie, the fox is paying the farmer to tell the chickens how safe the hen house is ).

The financial incentives for ratings agencies are aligned with the sellers, not the buyers. That creates a huge risk for the buyers, because they can't (or shouldn't) trust the ratings.

There's an opportunity there to create a company that does ratings but takes money from the buyers, not the sellers.

(Note that entrenched players will go to huge lengths to tell you how hard this is, and how smart all the "financial engineers" are. From my very basic investigations, I'm not at all convinced that it's as hard as they try and make it seem.)

anamax7• 16 years ago

You're forgetting that many institutions can only accept/rely on ratings from regulator-approved companies.

For example, the SEC has granted a ratings monopoly to three companies.

The idea is that ratings are too important to be left to some unapproved company. If anyone could issue ratings, folks might be led to make bad investments....

This is one example of how regulation is systemic risk.

nl7• 16 years ago

It might be possible to market directly to consumers in the retail market.

I assume you'd need a licence to give financial advice, but that should be easier to get than the rating agency license (I assume).

This is one example of how regulation is systemic risk. Well it sounds more like bad regulation to me.

RockyMcNuts• 16 years ago

The events described in the Big Short are a national disgrace.

Wall Street was engaged in a fraudulent conspiracy in which the buyer, the seller, the guaranty company, and the rating agency would willingly suspend disbelief so the buyer could get a 'AAA' security that miraculously paid a few hundred basis points over AAA corporates and count as AAA toward risk-based capital regulations, everyone got fees, and those 'lucky' subprime borrowers could suddenly access unlimited amounts of credit without adequate income or collateral.

Then when this created a giant bubble (along with other factors like deregulation, lax application of the regulatory powers that existed, a shockingly long period of lax monetary policy, and human greed) and it all blew up with catastrophic consequences, the banks got a giant bailout, went back to business as usual, and (so far) fended off meaningful reform. They said, who could have known, when the book shows many people did in fact clearly analyze the situation and foresee catastrophe.

That being said - there are countries that have highly state-controlled finance sectors. A notable feature is that they don't have vibrant startup and VC sectors. The only reason capital is available in large sums to start up companies like Google and Facebook is because of the possibility of rich IPO exits. Interestingly, some of those countries with regulated and state-owned banks, where the startup scene is nonexistent and the same 50 companies have dominated the economy forever, did not escape reckless behavior and large losses in the banking sector.

This is still America, last I checked, and people should be free to take big risks and come up with innovative financial structures. But consumer regulation must prevent toxic consumer products like the certain subprime products that were misleadingly marketed. Banks, which are systemically important, enjoy special privileges that make them a lot of money, and receive implicit and explicit government guarantees, cannot become giant extremely leveraged hedge funds.

So, you need to make a distinction between a highly regulated utility financial sector; and a speculative sector which can keep taking the risks and innovating in ways that create value, without the rest of us being on the hook to bail them out when things don't work out.

Late But Essential Review

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