Law in Contemporary Society
Here is the article that Eben was talking about the other day in class regarding the rating agencies' conflict of interest with their clients as a culpably contributing factor to billions of dollars in bank write-offs and tens of thousands of jobs lost.

A great quote relevant to our reading of Arthur Leff's Ponzi scheme is reproduced below. What do you think of the conclusion at the end of the paragraph?

"The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. “People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not."

-- JesseCreed - 27 Apr 2008

My little scheme for the rating agency works as follows: 1. create at least 5 rating agencies with roughly equal manpower 2. assigned randomly all proposals for rating to these five agencies 3. after a few years, the ones whose performance does not correlated with the market performance will gets smaller number of commissions and those whose prediction fits the market performance gets larger number of commissions. 4. when one rating agency is twice of the smallest agency, the larger one will be broken up into two agencies and each smaller children agency will get equal share of the original work assignment. 5. hopefully an equilibrium will be reached after a few iterations.

-- XinpingZhu - 09 Feb 2009



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r4 - 07 Jan 2010 - 22:19:05 - IanSullivan
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