October 08, 2009

Risk avoidance is an extremely risky business

Sir surprised I read Mr. Stuart M Turnbull´s and Mr. Lee M. Wakeman’s whishing that “the rating agencies published and kept current, term structures of survival probabilities [so that] investors would be able to compare directly the risk of default for various maturities across corporate and municipal bond markets”, “Investors value accuracy ahead of stability” October 8.

Since presumably the whole market, and not only these two gentlemen would have access to this information, have they not given a thought to what this would do to the risk-weighted returns they would receive? I will tell them. They would be condemned to absolute mediocre return rates, as the intermediaries will previously have sucked out any arbitrage profits there are… that is until the day the credit ratings get it wrong again, as they, being humanly fallible are doomed to, and that day they lose it all unless, they are again bailed out by their grandchildren picking up the tax tab.

Yes, the investor values accuracy and stability, but they also value the possibility of some special returns, just for them. If these two gentlemen believe there is even a remote possibility of regulating a financial market so that it will be just and fait to everyone, when all the rest is not just and fair, then they clearly belong among all the other naïve and gullible financial regulators out there.