Thursday, January 31, 2008

Who's to Blame - CNBC edition

This evening CNBC broadcast a discussion, moderated by Maria Bartiromo, between CNBC's Charlie Gasparino and David Ruder (former SEC Chairman and the William W. Gurley Memorial Professor of Law Emeritus at Northwestern).

Mr. Gasparino was arrogant, belligerent, and rude. He appeared to have come to his, rather simplistic, conclusion; and simply wanted to use Professor Ruder as a piƱata as he castigated the Securities Exchange Commission.

Mr. Gasparino, rather than discussing his thoughts with Professor Ruder, chose to prove who could display the worst manners and speak loudest. That was a good strategy if his goal was to win, because his position was idiotic (at least he never managed to make a valid point to explain how his position made practical sense).

Mr. Gasparino, like most of his colleagues, was educated as a journalist. His knowledge of the securities industry is, primarily, second-hand as he has written about the markets for a number of publications. I don’t know why CNBC gives its "bully pulpit” for a reporter, like Mr. Gasparino, to present his opinion as fact. While he may be an expert at obtaining and reporting facts, his ability to analyze and present coherent arguments relating to economic/business issues is minimal (if it exists at all). Somehow, the FT manages to present reporters that can analyze and argue.

Apparently the old maxim of “those who can do and those who don’t teach" (no offense meant to Professor Ruder, he has done both so he is a "doer") has to be extended for Mr. Gasparino to include: “and those who can’t teach, report.”

Mr. Gasparino's position, as I understand it, is that the SEC should have stepped in to regulate the ratings agencies (S&P, Moody's, Fitch, etc.); thus preventing the agencies from issuing AAA opinions on CDO and other derivative products that later defaulted (how they would have been able to identify the problems given the opaque nature of what the agencies do is, to me, unclear). While he seems to recognize that Congress never gave the SEC that authority, he believes (or "a lot of people on 'The Street'" believe - unnamed sources, priceless) using that as an excuse for the lack of action is a "cop out."

He states that, given the New York City crisis in the '70s, the "dot coms," Enron, and Worldcom, the SEC should have known to go after the ratings agencies. He believed that the SEC should have found a way to "use a back door" to regulate the ratings agencies.

He seems to believe that, had the SEC kicked and screamed to expand its duties, Congress would have given in. His lack of insight into politics is unbelievable!

While there are many holes in Mr. Gasparino’s arguments, the most obvious to me is how do you pay for it?!

Where would the money come from to expand the size of the SEC to take on more responsibility?

Congress does not have much of a record for creating safeguards prior to a crisis (and it's hard to blame the SEC for not uncovering the frauds at Enron and Worldcom). Giving an agency new authority without prompting is, I believe, unusual. Raising an agency's budget to exercise that authority (and any consequent increase in taxes) would not be popular. Even after SarBox, I don't believe that the leaders of the SEC believe they have sufficient funding and resources for their existing responsibilities.

The SEC, itself, was created as a result of the 1929 crash. People of that period could have pointed to the 1907 crisis (much discussed recently in relation to the current crisis) when asking why did it take so long. Of course, the Federal Reserve System was established after the 1907 crash (in 1907, J.P. Morgan led the rescue).

It’s always annoying when critics come out of the woodwork to ask why the government didn’t step up to protect the “little guy” – whoever that is. It is usually the same people who, in more normal times, get angry over having the government looking over their shoulders.

I believe that Mr. Gasparino would be more comfortable in Beijing. The Chinese markets are regulated to a degree where the penalty for corruption, when prosecuted, is death. The Chinese markets, at their present stage, don't have dangerous derivative products (or the benefits that they provide in transferring risk). He wouldn't like it there for long though; China's leaders appear to be intent on integrating free financial markets into their system.

The complexity of our markets has increased beyond what was contemplated in the past. Over time, different regulatory authorities have been created for specific purposes (like the CFTC and the SEC); and there are now products that are regulated by nobody, or by more than one regulator. We need to overhaul our market regulatory system so that we maintain our position as the world’s preeminent country for financial markets (assuming London hasn’t overtaken us already).

In my opinion, we need regulation; but we still need investors to take personal responsibility for their actions.

My question for Mr. Gasparino is, given that he has had a "bully pulpit," why didn't HE get on a soapbox to address the issue.

The ratings agencies were known, by all of the institutions that are involved, to have some level of conflict (although there is some expectation that the agencies would lose their influence because of the "reputation risk" if they were found to be prostituting themselves). The investors in the securities under discussion (Collateralized Debt Obligations, Collateralized Loan Obligations, Asset Backed Commercial Paper, etc.) were sophisticated investment firms. Those firms are motivated by profit (as are their employees). They chose to accept both the ratings and the risk (in anticipation of rewards).

My conclusion, at least for now, is that bubbles are a necessary evil of our free market economy. I cannot see any way that risk can be eliminated, nor do I believe that it should be.

There are all sorts of arguments for how we can modify our regulatory system to address the weaknesses exposed by the recent/current crisis. Ascribing blame, except for criminal acts, is a waste of time and, generally, results in witch hunts (anyone remember Joe McCarthy?).

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Anonymous said...

David Ruder was the best Chairman the SEC ever had. It's too bad Mr. Gasparino's mother didn't teach that young man a few manners.

Of course Mr. Ruder's right and Charlie's wrong, not to mention very rude.

Anonymous said...

David Ruder was the best Chairman the SEC ever had. Gasparino, as per usual, is wrong.

I wish his mother had taught him some manners.

Anonymous said...

Gasparino is a rumor monger who can't start a sentence without saying, "My sources tell me,,," He is a low class boor who shouts down everyone he is on the air with - friend or foe. He is a self-important blowhard without any redeming qualities.