There comes a time in the life of every book writer when he or she has to stop procrastinating and write the darn book. For me, that painful moment has arrived; this is going to be my last column for a while. As the clock was winding down to my leave, though, I kept thinking of columns I wanted to write. There are four in particular I wanted to explore more fully, so here they are in abbreviated form.
FIX THE RATING AGENCIES? On Wednesday, the House Financial Services Committee passed a bill to reform the credit rating agencies. It’s a complicated beast: it gives the Securities and Exchange Commission new oversight over the rating agencies; makes it easier to bring lawsuits against them; and tries to minimize the absurd conflicts of interest — starting with the fact that the rating agencies are paid by the issuers of the bonds they are rating.
No one can doubt that the rating agencies need reforming. The degradation of standards at Standard & Poor’s and Moody’s were at the heart of the financial crisis. The rating agencies made huge fees handing out triple A ratings for securities stuffed with subprime mortgages. And they were overwhelmed by the Wall Street firms churning out their toxic products. They became foxes guarding henhouses.
But surely there is a simpler, more elegant solution to the problem: just eliminate the ratings agencies’ special status.
Since 1975, the S.E.C. has designated the big rating agencies Nationally Recognized Statistical Rating Organizations. This status meant that their ratings had a kind of government seal of approval. Indeed, government regulations regarding bonds are built around ratings. Money market funds, for instance, can hold only paper that is highly rated by the rating agencies. Bank capital requirements also revolve around the ratings of their assets. (That is why it was so important to have derivatives rated triple A: the rating made it possible for banks to hold these securities without much capital to back them.)
But why should credit analysts have special government status? It makes no sense. When equity analysts rate a stock, they are voicing an opinion — and everyone knows it. Smart equity investors listen to the good analysts, but they also do their own homework.
The country would be far better off if the same were true for bonds. If the rating agencies didn’t have that special status, credit analysts would be just like their equity brethren, offering opinions that investors could listen to — or not. Ratings downgrades wouldn’t necessarily have the disastrous real-world consequences they so often do now. Bank capital requirements would no longer be connected to the decisions of a rating agency.
Best of all, bond investors would have to do their own homework instead of simply relying on a bond rating. Which, of course, is also why most Wall Street firms are opposed to this idea. Heaven forbid that they would have to do their own internal research. It’s so much easier, when something goes wrong, to just say: “It’s not my fault. It was rated triple A.”
LOTTERIES AND SAVINGS Marc M. Groz, a risk-management expert and the author of “Forbes Guide to the Markets,” is a font of off-beat ideas. He once told me, for example, that he believed the way to deal with systemic risk was to adopt a cap-and-trade approach, where the government would set an all-encompassing risk ceiling, and firms could then buy and sell pieces of that risk, depending on the size of their risk appetites. But the idea that has most caught my fancy has to do with lotteries. Mr. Groz believes that lotteries could — and should — be turned into investment vehicles. He calls his idea “residual value games.”
The concept first came to him in the fall of 2000, when he saw a woman toss away a losing lottery ticket. “My first thought was I wish she hadn’t littered,” he said. “And my second thought was that if the ticket had been worth something, she wouldn’t have thrown it away.”
From there, it was an easy leap — for him, at least — to link lotteries with investing. If a retirement account was part of a lottery ticket, he reasoned, it would retain value whether or not it won any money for the person who bought it. (Of course, that still wouldn’t stop the littering, but never mind.)
As Mr. Groz envisions it, a portion of the money a person spends on a lottery ticket would be held back; that’s the residual value. That percentage would go into a retirement account in the lottery player’s name. The account would be managed by a big money manager like Fidelity, and the purchaser of the lottery tickets wouldn’t have access to the money until he or she had hit retirement age. (Yes, this is technologically feasible; Mr. Groz has the patent to prove it.)
One reason this is so appealing is that it helps the portion of the population — the poor and the lower middle class — who tend to throw money away on lottery tickets, yet have no savings. Another reason is that it makes state-run lotteries a tad less exploitive. States are balancing their budgets on the backs of their poorest citizens, thanks to lotteries. It’s shameful, really. With Mr. Groz’s savings component, at least the ticket buyers would get something good out of it. And of course it would help lift the country’s anemic savings rate.
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