Friday, February 08, 2013

Wall Street and Washington

Here are two quotes I have used in teaching.  Ben Bernanke (March, 2006): “Again, I think we are unlikely to see growth being derailed by the housing market.” Paul Samuelson and William Nordhaus (1989): "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive." More here. There is also Stiglitz on Fannie Mae. Cue the appropriate Goldwinism.

Yet the Department of Justice is now suing Standard & Poor's for its pre-recession ratings of subprime mortgage securities.  You would think that the decision to take the advice of experts and consultants is inherently risky and a matter of choice -- with plenty of chance for error by the advisor as well as the advisee.  You would be wrong.  This WSJ editorial reminds readers that ratings by sanctioned ratings agencies (including S&P) was a matter of federal (SEC) policy.

There will be emails from S&P staffers ca 2007 revealing that final bond ratings were not as authoritative as their accompanying statements. Adults should know this. The poor performance of actively managed funds is well established. Go your own way.  Or make the choice to buy advice. As long as you have a choice.  Even Dodd-Frank recognized the problem. From the WSJ editorial:
And to this day, more than two years after the Dodd-Frank law ordered their repeal, SEC rules still force institutions to follow the advice of these government-anointed credit raters. Therefore the more appropriate defendant for Monday's lawsuit would be the SEC. But as a modest first step before suing a company for $5 billion, shouldn't the government at least stop mandating its products?
Trading on "inside information" is illegal.  Buying and selling on the advice of "experts" is very risky.  But things can go awry when you-know-who mandates where you go for advice.


Here is the NY Times Gretchen Morgenson's "On the Waiting List at the Debt-Rating Club"