Comments on: Risk Rating Reluctance

By: Kenneth Switala

Kenneth Switala — Sat, 06 Feb 2010 18:51:16 +0000

There appears to have been some type of market risk reform for the housing market in the United States, called the Home Valuation Code of Conduct. There is no blindness at all to preventing risk fraud in small doses, but not enough political will to turn something like it into law on a larger scale. Also, The congressional bill HR 3044 seeks to impose a moratorium on this agreement.

By: James K

James K — Thu, 04 Feb 2010 05:29:25 +0000

OK, that starts to shade into evil.

By: TGGP

TGGP — Thu, 04 Feb 2010 03:35:41 +0000

Has the stock market actually “predicted nine out of the last five recessions”? Scott Sumner usually says 1987 is the one time the stock market crashed but we didn’t get a recession.

By: Robert Bloomfield

Robert Bloomfield — Wed, 03 Feb 2010 23:38:41 +0000

So far, I haven’t seen anyone in the comment thread mention one of the most important details of ratings: credit rating agencies are not covered by Regulation Fair Disclosure (FD), so they can get information about debt securities that are not public knowledge (and that firms wouldn’t disclose publicly due to concerns about revealing proprietary information). There may be reasons to question whether the ratings agencies used their additional information effectively, but a prediction market would not be a solution, at least given the existence of Reg FD.

By: Robin Hanson

Robin Hanson — Wed, 03 Feb 2010 23:33:25 +0000

It is not that the Reserve and other regulators opposed the proposal quietly behind the scenes to get Congress not to pass it. It is that Congress passed a rule and then they refused to enforce it.

By: agnostic

agnostic — Wed, 03 Feb 2010 19:52:09 +0000

Grade-inflated securities allow managers to take in more if what those managers are allowed to hold by government regulation must clear some grade threshold.

Imagine a world where everything is rated B, but regulation requires that you only hold A-rated stuff. Your volume of assets managed is 0. Now demand and get grade-inflation by one letter, so that everything is rated A. Now you’re free to take in whatever you want.

By: y81

y81 — Wed, 03 Feb 2010 18:29:30 +0000

Regarding the relative accuracy of bond prices and credit ratings, bond prices are certainly swifter in their responsiveness to news (e.g., news of higher-than-expected levels of subprime mortgage defaults). On the other hand, the bond market is like the stock market, which has correctly predicted nine of the last five recessions. So if you look at, for example, LIBOR (not strictly a bond price, but it’s the same idea) or AAA CMBS yields, the volatility over the past 18 months doesn’t necessarily seem that meaningful.

It’s a little like asking whether Intrade is more reliable than an average of polls. Normally, they track so closely that there’s not much to choose. Intrade obviously moves more when there’s breaking news.

By: Eliezer Yudkowsky

Eliezer Yudkowsky — Wed, 03 Feb 2010 18:28:10 +0000

Er, buy high.

By: Eliezer Yudkowsky

Eliezer Yudkowsky — Wed, 03 Feb 2010 18:27:47 +0000

If you buy low and then refuse to sell, speculators can’t create a liquid market. So – though I suppose this is also obvious – you’d have to allow naked shorting of the market.

By: TGGP

TGGP — Wed, 03 Feb 2010 18:07:08 +0000

Eliezer, Phil Gramm was an economist before he went into politics, so that could help explain how the idea got as far as it did.

David Smith/y81, perhaps the young workers were math whizzes from Bombay. But what about management? Might the bosses have had chummy connections with those of the firms they were rating?