Partnoy on the Market Crisis, Credit Rating Agencies, and The Match King

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7 Responses

  1. Ferris says:

    Prof. Partnoy’s suggestion that liability under the securities laws be extended to rating agencies is interesting, but one wonders how disinterested it is given his extensive work as an expert witness for securities plaintiffs’ lawyers.

  2. Frank says:

    I’m an admirer of Partnoy’s work—thanks for the post. But I also think that we need to ask more fundamental questions about the role of ratings agencies and the biases they generate. Consider this argument from John Quiggin:

    “State and municipal governments are beginning to rebel against the system of discrimination under which municipal bonds get rated around six grades lower than corporate bonds of comparable quality. That’s the estimate of the agencies themselves – the reality is far worse. As the NYTimes notes, “since 1970, A-rated municipal bonds have defaulted far less frequently than corporate bonds with top triple-A ratings.”

    ***

    “What could replace reliance on ratings agencies? For those who want a reasonably secure guarantee against default, the best advice at present would be to restrict investments to those with an explicit guarantee from a developed-country national or state government. An obvious implication is that states would need to guarantee, or borrow on behalf of, municipalities and agencies. This is already done on a substantial scale for example by Queensland Treasury Corporation.”

    http://johnquiggin.com/index.php/archives/2008/03/08/after-the-ratings-agencies/

    What is so sad about our current system is that, far from being a Hayekian dream, we have central planning by a small group of bankers enabled by hacks like the CRAs. And the more we “deregulate,” the more powerful that group is likely to become.

  3. Russ Frandsen says:

    Kaimi, As predictable, the government regulations mandating the role of the credit rating agencies removed the agencies from the discipline of the markets,and a huge crisis developed. Yet, the true market was signaling far in advance the great problems. Follow the trading prices of the underlying securities and the market clearly foresaw the risk and priced them appropriately. Without the distortions of the government mandates, the market would have provided the appropriate information to avoid the systemic risk that actually ocurred.

  4. Kaimi, As predictable, the government regulations mandating the role of the credit rating agencies removed the agencies from the discipline of the markets,and a huge crisis developed. Yet, the true market was signaling far in advance the great problems. Follow the trading prices of the underlying securities and the market clearly foresaw the risk and priced them appropriately. Without the distortions of the government mandates, the market would have provided the appropriate information to avoid the systemic risk that actually ocurred.

  5. Tim H says:

    I might have to give the book a read. looks like good stuff