Philip Gvinter

Who Should Have Skin in the Game?

Yup totally agree. This is why I said that the rating agency should be paid with a piece of the security rated rather than cash. This would quickly re-align their interest and encourage them to do due diligence on the securities they rate.


On Jun 22 09:57 PM Kid Dynamite wrote:

> philip - in my opinion, if we're going to fault anyone, it's the
> ratings agencies, who were guilty of gross negligence - not the "middle
> men" - the securitizers who brought together lenders and borrowers
> who were each driven by greed.
>
> i was comparing the realtor to the wall street firm selling the securitized
> product...
>
> i think we are basically agreeing with each other

Who Should Have Skin in the Game?

Well I think that there is a big difference between a realtor and the rating agencies. The rating agencies are more akin to an appraiser. The appraiser provides a document showing the current value in the area and area trends. He has a duty to perform the work honestly and to do due diligence on his sources. In the case of the appraiser that just means to cite where he got his data. In the case of the rating agencies there was no due diligence. Blaming the realtor is like blaming the trading desk. I don't believe in that but I do believe in holding the rating agencies to a slightly higher set of standards. They should have been required to review the underwriting standards for the pools of loans. They in fact did do this they admitted that they had erred in their ratings after the portfolios began to deteriorate.


On Jun 22 02:00 PM Kid Dynamite wrote:

> blaming the middle man would be like blaming your realtor when you
> buy a house that goes down in value... i just don't think like that.
>
>
> the problem is that the people buying all these toxic assets let
> their own greed cloud their due diligence... buyers (of assets,
> MBS, etc) need to be responsible for their decisions!
>
> more on this here:
>
> fridayinvegas.blogspot...

Who Should Have Skin in the Game?

I have to agree with Ned and Biomedlives. The very concept of a middle man with no skin in the game is a part of the problem here. This would not apply to banks and lenders who got caught holding the bag on several months of inventory of in some off balance sheet SIVs but would totally apply to GS, MS and originators like AHM and New Century. When one feels that he is in a position of limitless profit and zero risk than one is encouraged to do unethical things. We cannot allow this to continue. The very existence of such middle men is what breaks markets. Furthermore the difference between underwriting an IPO and selling MBS is that the underwriting of the IPO carries certain representations and levels of due diligence which are outsourced to the rating agencies or simply not performed in the MBS creation process.

The best idea I saw here was to compensate the rating agencies by paying their fees with par value sections of the debt securities that they rate rather than with cash. I get the feeling that a much higher level of due diligence on the part of the rating agencies would immediately become the norm.