October 05, 2008
Have You Seen?
Posted by David Zaring

Darian Ibrahim says:

The instruments of financial innovation that have recently dominated Wall Street -- mortgage-backed securities, credit default swaps, and other "derivatives" -- are exceedingly complex (resulting in overreliance on credit rating agencies), do not create new value (but merely repackage existing value to capture larger gains for the financial product's buyer or seller), and are often built on flawed financial models.

Which puts him in the Frank Partnoy camp, I think.  Maybe many financiers will tell you now that they did not, in fact, really understand the riskiness of what they were buying.  But then why'd they buy it?  If they also bought the reputations of their counterparties and credit raters, then that starts to resimplify everything back to trust, confidence, and so on.

But I'll leave that to the financial experts.  On the regulatory front, Frank Pasquale thinks it's all about deregulatory fundamentalism.  I've sometimes thought that deregulation was partly inspired by the supervisors throwing up their hands.  How were they supposed to model capital adequacy as fast as Citibank did, with its proprietary software and so on?  Which brings complexity back to the fore, I suppose. 

If you'd like a more artistic approach to corporate oversight, check out how Delaware VC Leo Strine writes his opinions.  Inspiration seems to play a role.  HT: David Hoffman.

Corporate Law | Bookmark

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Comments (2)

1. Posted by Darian Ibrahim on October 6, 2008 @ 8:02 | Permalink

"If they didn't understand, why'd they buy?" (paraphrasing)

Good question. Not very law and econ of me to suggest they weren't rational actors. But maybe they weren't.

Or, sticking with law and econ, it's the agency costs story: money now, risks -- understood or not -- only come home to roost later. Or, as you suggest, the bonding/reputation story. Maybe all of the above.


2. Posted by David Zaring on October 6, 2008 @ 9:21 | Permalink

The narrative that these cold hard capitalists are actually flighty herdy sorts is quite compelling. Completely different than the self-image over there though.

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