November 24, 2009
Pozen Response on Robert Pozen's "Too Big to Save? How to Fix the U.S. Financial System"
Posted by J.W. Verret

Robert Pozen is currently chairman of MFS Investment Management and is also a senior lecturer at Harvard Business School. Pozen was President and Vice Chairman of Fidelity Investments until 2001. He served as a Democratic appointee to President Bush's bi-partisan Commission to Strengthen Social Security. Pozen then served as Secretary of Economic Affairs in 2003 under Governor Mitt Romney. In 2007, Pozen served as chairman of the SEC's Committee to Improve Financial Reporting. Working closely with both private and public sector experts, the committee made several actionable recommendations to improve the U.S. financial reporting system, many of which have been implemented.

Robert Pozen's Response Follows:

Let me begin by thanking Jay and Satya for their thoughtful reviews of my book.   I also want to thank Gordon Smith for facilitating these online book reviews.  They are a great tool for learning and discussion.

I appreciate that both reviews focus on the distinguishing characteristic of my book -- that I bite the bullet and make specific recommendations about how to deal with each aspect of the financial crisis.  As Satya says, many other books "devolve into mealy-mouthed platitudes and vagaries."

Given the number of recommendations in the book, I was glad to see that the reviewers agreed with many but not all of my suggestions.  I think Jay is right to point out that there is no easy solution to the problems of credit rating agencies.  I am skeptical that reputation effects will mitigate forum shopping -- issuers kept going to the Big Three credit rating agencies even after most of their ratings blew up.   But my preferred solution -- that investors hire and pay for the credit rating agencies -- is not workable because the big investors look down upon the rating analysts and will not pay.   My final proposal is definitely a compromise -- interpose a third party to select the credit agency and then let the issuer pay the bill.

Satya is correct in pointing out that I am deeply a pragmatist in my approach to reform.   That probably comes from actually getting legislation passed while at the SEC and later at Fidelity.   But I do believe as a matter of principle that loan securitization is very useful to both banks and investors so it is worthwhile to reform the securitization process.   By selling loans to be securitized, banks can significantly increase their loan volume -- which is desperately needed to revive the US economy. They can also buy more diversified portfolios of securitized loans than they could possible originate. Similarly, investors can achieve more diversified portfolios of mortgage-related instruments.  In addition, by choosing a particular tranche issued by a pool of securitized mortgages, investors can target the risk-return relationship they desire.

I liked that both reviewers warmed to my concerns about increasing FDIC limits for deposit insurance despite the fact that 98% of depositors are already covered by the $100,000 limit.  This increase is getting lots of political support with little analysis.  I was not surprised to be taken to task for my partial support of the Consumer Financial Products Commission ( CFPC ), since my position is ambivalent.  I tried to support the CFPC to the extent it was focused on products issued mainly by nonbanking firms to low-income clients like subprime mortgages and payday loans.   However, I took a pretty strong line against the expansion of the CFPC into standard bank deposits and insurance annuities, which are already well regulated.  I also argued against letting states add their rules to national regulations on credit cards.

Finally, I did take a flyer with the parable at the beginning -- trying to attract the non-expert by a novelistic tale.   Furthermore, I tried to make the book accessible to the nonexpert by including diagrams and chapter summaries as well as a glossary.   But it is challenging to write hard-nosed analysis and specific recommendations in a riveting style, so I am not planning to be invited on the Oprah Winfrey show.

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