I don't think too many people would argue that the current system of ratings agencies is anything other than deeply flawed. The out-and-out fuckery (for want of a better word) that took place leading up to the financial crisis would have been enough to drive any other industry to extinction, yet the ratings system persists largely untouched today. The following video describes a new model for sovereign ratings, a model that is transparent, doesn't involve conflicts of interest, and most of all is free for anyone to use. In an industry begging for disruption, do you guys think a model like this could work? Think about it: if you removed all the conflicts of interest (most notably clients paying for their own ratings) and published for free the ratings of all countries, wouldn't the sovereign debt market run more efficiently?
Mod note: Best of Eddie, this was originally posted on 3/12/14.
Interesting video and like her motives, but she doesn't really provide any evidence on how their models would rate countries. Its hard to believe when she says our "quality" of ratings would be better because everyone can see the criteria. Sounds like she wants their process to remove any human input and subjectivity, when you're sometimes going to need that when all the indicators for a country are shittin' in the dumps.
Okay, this sounds great. Who doesn't like the idea of free credit ratings information that is even better than what we have now? So in other words she is suggesting that we need one very large, centralized ratings agency that is going to give everything it does away for free and work off of an endowment... which is provided by whom? I'm going to rant, probably incoherently, below but frankly Eddie sovereign debt markets aren't efficient because of central banks and government budgetary policies. Ratings agencies may help contribute to the madness, but at this point how many people run eagerly to their inbox's looking for sovereign downgrades and upgrades? If you buy ANYTHING based on ratings alone of other people you are an idiot and deserve to be blown up. Period.
Ratings agencies are a cog in the machine, but at the end of the day they are irrelevant. You can downgrade someone to hell and back but when a central bank steps in and props the institution up who cares? You have downgraded toxic mortgages it turns into a come one, come all buffet of liquidity and support. I don't mean this to be cynical or un-supportive of a new way of viewing credit but to some extent I think that this reeks of high idealism that isn't founded in reality. So an open source, global ratings agency downgrades the United States tomorrow... who cares? Honestly, who gives a shit? When credit markets seize up again we will simply keep doing what we are doing now and remit the heightened 'interest' payments back to the treasury and debase ourselves. I'm not arguing that it is a good thing obviously but I mean why do I need one more rating agency to tell me that long term we are fucked if we don't change something.
Agree. The extent to which this rating agency would be successful would solely depend on the amount of trust placed in it by investors. If you have millions or billions of dollars at stake, will you trust the rating methodology of a bunch of people at a non-profit over your own models? I don't think so. This happens today, as we have often seen ratings change but prices/rates not, or sometimes even move in the opposite direction. I agree that huge conflicts of interest exist, but investors know that and act accordingly. More transparency benefits everyone, but only as much as people put faith in the the methodology.
Rating agency changes make great headlines, but don't determine interest rates. Sure, strong correlation exists between ratings and interest ratings, but that just shows that the agencies aren't completely idiotic. It does not prove causation.
One counterargument to my points would be that many investors have policies that limit their investments based on the rating agencies. Even if they don't have written policies, there may be unwritten policies, as losing money on a AAA investment would be more defensible than losing money by making risky BBB investments. I can't even speculate as to the impact of this, but to the extent that these types of policies and protocols affect interest rates on sovereign debt, one could argue the rating agencies do matter.
I'm getting sick of these "TED" talks. The whole idea is a scam. Often just a bunch of theorists all getting together in one place and having a massive circle jerk.
Tyler Durden: Where'd you go, psycho boy?
Narrator: I felt like destroying something beautiful.
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I'm a fan of TED talks. They get you thinking. The people are usually pretty bright but this time.....I don't think she understands how these markets work in the first place.
Especially with gov't bonds....the brightest minds on earth are involved in a 24/7 white hot debate about every facet of society. The decisions that governments make are political and not financial in nature, I'm not sure how anyone can quantify that. And while the current system does have an implicit level of groupthink, a central agency guarantees that no one will second guess anyone. This will inevitably produce a catastrophic system failure if any measure of faith is put into such an agency. Also: transparency doesn't mean much when the decision making is controlled by one group/person. If there's a central agency, it has to be interactive. The way to make it interactive is the profit motive, and such a forum already exists.....actual bond markets! So, this concept negates itself if we follow the logic out to its natural conclusion.
Logic. I studies it. Yousa smart, you "gets it" too.
Moving along.
That said, this is interesting because I see how several facets of what she's saying can be integrated into the existing system. Using something along the lines of the "Chatham House Rule" would definitely be an upgrade to ratings agency efficacy. The thing to remember with TED talks is that they are a thought forum, nothing less and nothing more. Whereas the bulk of institutions encourage conformity, there's an deliberate effort to create new thought, push the envelope of thought, discover new thought, and seek the truth. Of course they're not perfect, but I commend their general mission.
Thanks for the vid, and sorry for the long post
That would actually be really interesting, to have a week where the financial media throws out quotes on economic issues but isn't allowed to say whom delivered it. Disassociate the ideas from the authority a single person has. "I'm shorting x because it is a pyramid scheme" has a lot less weight anonymously than with Einhorn or Ackman saying it.
Yes, definitely. Looking at the pure thought will be advantage as well. Think how many times someone that you don't like says something true and you're like "IDGAF I don't like them" ....or when someone you really admire gets something REALLY REALLY wrong. This negates that. There's advantages to both anonymous and open delivery, I just guessing that creating a more multidimensional approach would be really useful.
Wow. I never thought I'd see the day where vitriol would be directed at ten minute free clips of developing thought. Sure some stuff is fluff, but....verbal diarrhea? Really? Summaries of edgy research and bodies of thought I'd never even heard of...what's not to like? Serious question.
You're entitled to feel how you want about it, I've just never enountered anyone that thought they were a total waste.
I don't have any issue with the topics or materials. But the live TED talks cost money to actually go to. The fact that anyone who speaks at a talk is given a platform of 100% credibility which is a joke. But my biggest issue is that the majority of these events have zero dissenting view. Everyone there is in lockstep in their views on the subject and it amounts to nothing more than a theoretical circle jerk. If they opened it up to actual debates and had views from all points I would give the environment more attention.
Agreed. Ted talks are harmless. Like anything you read/hear on the internet, it's simply a source of ideas and information and up to the consumer of this information to interpret. That said, I do agree that there should be a dissenting view. It does serve as a platform of 100% credibility when it absolutely should not. A Q&A spin would be nice. Or perhaps (when appropriate), having two speakers with differing viewpoints speak.
A former chairman of a central bank strongly advised me to steer away from trading and instead pursue a career in credit rating. Go figure - Completely agree with the video.
I'd like to see them open up to Q&A after their presentation. Its like going to see a book signing by a politician or a presentation by a trade group: you see the show and then get to go into more detail on the things that really interest you. Perhaps someone should give a TED talk on how TED should be changed. I'm not a fan of debate forums within science and thought leadership though. It usually just devolved into people trying to dominate the conversation for their own ettification, and anything useful is lost in the rhetorical battle. Open forums like this are way more effective in cross examining something. That's just my opinion.
TED talks are like a dive bar: they have their shortcomings and they have their upsides. I just take it for what it is: a source of ideas.
Again, I guess there's bound to be folks that aren't a fan. LOL I just youtube their stuff, I don't care about their topics enough to pay admission.
No one gives a shit about ratings when trading sovereign debt. Look at Iceland vs Ireland 5y CDS if you don't believe me.
I watched about half that video. That woman is a naive retard.
Ratings matter and people care about ratings when trading sovereign debt. To state otherwise is naive and silly.
That said, the presenter of the talk is a little cavalier with her facts. Firstly, there is increasing competition within the industry, with all sorts of entrants (occasionally, not very serious ones) offering their services. Secondly, there is an increasing effort by a variety of large institutions to rely on "internal" ratings. Thirdly, "sovereign ratings", much like "risk free rates", might with time end up being an obsolete concept that belongs to the bygone era.
That said, in the grand scheme of things, there isn't that much wrong with sovereign ratings as they are done now. Yes, the system isn't perfect, but does perfection exist in something as fraught with principal/agent issues as finance? So Ms Heuser is barking up the wrong tree, IMHO. I am surprised Bertelsmann Foundation can't find better uses for its time than working to fix something that isn't really that broke.
Uh i state otherwise. you sell on a downgrade, buy on an upgrade, agree. but that's like saying bond auctions affect interest rates. over time, cds is going to go where it's going to go, regardless of what s&p thinks about the economy.
ratings agencies are pure 'cover your ass' for real money. gun to their head, no one believes them.
No, it's not at all like bond auctions affecting interest rates and it's not really a function of selling on a downgrade/buying on an upgrade. As a reasonably simple example, consider the fact that most bond indices have ratings thresholds. If a sovereign falls below the threshold, it is no longer part of an index, which has all sorts of implications. In general, I agree that the relationship between ratings and sovereign yields is complicated and ratings often badly lag the market or occasionally are completely irrelevant. However, like I said, it's not right to generalize and say that there isn't a relationship.
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