So outdated, antiquated and not worth a pot.
I get this is where you spent much of your career life and that you’ve done and seen good in the sector. But it’s also full of theives, cheats and inadequate persons and needs a good closet cleaning.
For the record, I’ll talk just as frankly about my industry; also full of unsavory sorts and minimally talented.
Frankly that is slightly overstated. For the record the part of my career spent on this subject was a largely futile process to bring one rating agency ( won't say which one) into the present day. The processes and overall system were designed to meet the needs of nearly a century ago and have been resistant to change. Part for he reason si that the regulatory process for most institutional investors is itself antiquated and resistant to change. In my effort to explain all this and state the relevant implications I do NOT attempt to defend the system as is. Anybody who lived through Penn Central, Enron, LTCM, AIG, the mortgage industry meltdown and subsequent near-failure of hundreds of the world's major banks cannot in good conscience suggest that the risk management systems anywhere in finance are even remotely adequate.
So please do not ever suggest that I have "seen good in the sector". Understanding it and it's market consequences is not in any way analogous to a defense. Please, please understand that.
Two specific statistical concepts explain why nearly all the financial industry is so inadequate in managing risk. Those are 'multi collinearity' and 'boundary conditions'. Those two concepts are commonly ignored in financial industry analytics, including by Nobel Prize winners with disastrous consequences.
Finally, the method of compensation for rating agencies itself guarantees poor results since it is issuer-based. Will prolific issuers have better ratings than do infrequent ones? Is Ford paying more than Tesla?
So once again please do not ever suggest I defend the system. On three separate occasions I worked with regulators to try to establish better control. I was paid, but nothing was done. Why? Just check who has been US Secretary of the Treasury when these various disasters have happened. [self regulation does not work]. Then check which industries make the most political contributions and to whom. After that examine the exact wording of financial services legislation; much of that is nearly identical to lobbyist submissions.
That said, the market reactions to all this are also driven in large part by market-makers. I have made numerous posts about the consequences of that. So has
@AudubonB and others. The industry itself is built explicitly to reward market-makers for volatility. Many people here think about FUD. That is futile. Remember that the changes to the SEC and other 'enforcement' entities were largely dismantled during the last few years eliminating nearly all the protections that once existed, specifically including the 'uptick rule', 'naked shorts' and several related rules. There are indeed some rules, but market makers can easily avoid almost all of them, and SEC enforcement has tended to ignore the most influential players (that is my opinion, some might dispute it's accuracy). The SEC budget has slightly risen in the last five years so there is a prima facie suggestion that there are adequate resources, itself disingenuous in my personal opinion.
If I responded too verbosely I apologize. I do not take kindly suggestions that I might have been superficial and biased in favor of those who paid me. No doubt, that is a 'rating agency style defense", so I say it before you can.
~~~And within the "Of Merit" thread this post now sits. Thank you for the contribution.~~~
www.theregister.com
(March 16th)
