Kahn v. Zasloff Smackdown

…which Matt will win because he will channel his Inner Tarantino and slice my head in half.

But before then, let me express some skepticism that Matt’s rational actor utility-maximizer will come through for us.

1)  Strictly speaking, it seems to me that the competitive market theory does not imply that firms will always maximize profits: it says that firms that do not maxmize profits will disappear.

2)  This in turn presumes that a market is close to perfect competition, allowing better competitors to weed out the weaker ones.  This is nowhere close to the case with the ratings agency business, which seems to me to be quite close to a classic oligopoly.

3)  Because the ratings markets diverge from perfect competition, personal, political, sociological factors become considerably more important.  (In fact, one can argue that if one is trying to model the behavior of an individual firm, these factors are always important: it’s just whether there is enough competition for the smart ones to weed out the dumb ones.  See #2).

4)  Note that Matt’s discussion contains an important caveat, which Matt will include because he’s intellectually honest, but most of his Chicago friends will not.  Matt says that this all depends upon whether enough accurate information exists to do an accurate forecast.  Fair enough, but we have no information — as in none — as to whether it is true.  The US government has never defaulted.  It is hard (although not impossible) to rate the probability of an event with an n of 0.  Mark’s skeptical take on Matt’s post seems apposite here: given that there is no evidence that S & P can actually do this, it is simpler to assume that they are doing it to please their right-wing customers.

5)  Matt says,  “In my preferred world,  rating agencies would be randomly assigned to the party that they will rate.  This would negate conflict of interest issues that clearly arose and helped to cause “junk” to receive a AAA rating.”  That is my preferred world as well.  But you know what?  It is also Senator Franken’s preferred world, and the ratings agencies spent millions lobbying to kill it, and in any event achieved enough to delay it for a couple of years and perhaps get a future GOP administration to kill it outright.  To me, that doesn’t look like someone trying to provide credible information: it looks like someone doing everything it can to avoid being held accountable for its information.

Author: Jonathan Zasloff

Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic - Land Use, the Environment and Local Government. He grew up and still lives in the San Fernando Valley, about which he remains immensely proud (to the mystification of his friends and colleagues). After graduating from Yale Law School, and while clerking for a federal appeals court judge in Boston, he decided to return to Los Angeles shortly after the January 1994 Northridge earthquake, reasoning that he would gladly risk tremors in order to avoid the average New England wind chill temperature of negative 55 degrees. Professor Zasloff has a keen interest in world politics; he holds a PhD in the history of American foreign policy from Harvard and an M.Phil. in International Relations from Cambridge University. Much of his recent work concerns the influence of lawyers and legalism in US external relations, and has published articles on these subjects in the New York University Law Review and the Yale Law Journal. More generally, his recent interests focus on the response of public institutions to social problems, and the role of ideology in framing policy responses. Professor Zasloff has long been active in state and local politics and policy. He recently co-authored an article discussing the relationship of Proposition 13 (California's landmark tax limitation initiative) and school finance reform, and served for several years as a senior policy advisor to the Speaker of California Assembly. His practice background reflects these interests: for two years, he represented welfare recipients attempting to obtain child care benefits and microbusinesses in low income areas. He then practiced for two more years at one of Los Angeles' leading public interest environmental and land use firms, challenging poorly planned development and working to expand the network of the city's urban park system. He currently serves as a member of the boards of the Santa Monica Mountains Conservancy (a state agency charged with purchasing and protecting open space), the Los Angeles Center for Law and Justice (the leading legal service firm for low-income clients in east Los Angeles), and Friends of Israel's Environment. Professor Zasloff's other major activity consists in explaining the Triangle Offense to his very patient wife, Kathy.

20 thoughts on “Kahn v. Zasloff Smackdown”

  1. In my opinion– which is not that of an economist or sociologist of any stripe– the starting point in dealing with these phenomena is not with this or that kind of market postulate. It’s with a question something like, “given current conditions as a starting point, what moves are going to make the most money for those who really understand how this business operates.” Permissible new moves include getting regulators and political actors to change the parameters within which the business operates. Apologies, but other approaches strike me as pretty much bootless.

    It is very much a parallel with the gop/rovian approach to almost anything that’s been institutionalized: how can we disguise ourselves with the forms of institutionalized behaviors, while under that cover we subvert and destroy the purposes of those behaviors for our own ends? Thus we get parodies of academia in bought-and-paid-for think tanks, gamed measures of achievement in schools, procedures rigged to produce desired statistical information, parody “news” media that put on the old stance of detachment and neutrality while blatantly and avowedly taking a partisan stance. Etc. Including Lee Atwater and his ilk. Under cover of a claim to express and embody the surface features of institutionalized patterns, their content can be completely subverted and destroyed. It’s quite effective. And I think it’s what’s happened in the world of finance too. It’s a kind of ironic subversion, but the game is about grabbing money and assets in what we call the real world.

  2. You’re both missing the big picture. Now that corporations have all the rights of citizens, McGraw-Hill (owner of S & P) is clearly running for president. Whether as a Republican or a Blue Dog, I couldn’t say. But throwing out some red meat rhetoric with no actual data makes it clear that they are transitioning out of ratings.

  3. Now that people who get together in corporations don’t lose all their civil liberties, the administration won’t be able to ban books during the 2012 campaign, as they’d asserted to the Supreme court they were legally entitled to. I have trouble seeing that as a bad thing.

  4. The US government has never defaulted. It is hard (although not impossible) to rate the probability of an event with an n of 0.

    Right–but that’s the problem with rating the innovative securities, too. A mortgage CDO structured like the ones that defaulted en masse would not have defaulted in any historical scenario since the broad introduction of the amortizing mortgage.

  5. There’s an even more important caveat in this: rating agencies don’t have to be right, they have to be seen at some point in the future to have been right. Absent some very strict coupling of compensation to good predictions (e.g. not being allowed to buy default swaps against your own positions) you can manage that by being right (about things people care about and actually remember) or by rewriting history. When you predict bad things that don’t happen, of course, it’s particularly attractive to do a rewrite in which the bad thing would have happened but for your warning. So what are the odds that any of the millions of people who have heard about the S&P potential downgrade are going to go back in 1-5 years and see if it was right? Negligible. S&P got itself on a bunch of front pages at essentially zero cost.

    There’s also another thing to be considered: as long as people are desperately seeking stability by buying treasuries at ridiculously low interest rates, S&P’s corporate clients are potentially (because most of them are sitting on piles of cash and not looking to borrow) paying higher rates for money that they would be, and getting lower returns. This does not make S&P’s corporate clients terribly happy. So it’s a win-win situation.

  6. Right–but that’s the problem with rating the innovative securities, too. A mortgage CDO structured like the ones that defaulted en masse would not have defaulted in any historical scenario since the broad introduction of the amortizing mortgage.

    Completely false. the mortgage CDOs were bound to default if housing prices so much as returned to their historical norms. Historically, even with amortizing mortgages, housing prices increase at about the rate of inflation in the long run. Mortgages made without meaningful underwriting, in the hopes that appreciation at a significantly higher rate than the rate of inflation would allow a ponzi-payoff forever, and packaged into securities were always bound to be an investment that would go belly up. The housing bubble was absurdly easy to diagnose, and that it would result in a broad based housing price crash was obvious to anyone paying even a little bit of attention. Giving those CDOs a triple-A rating can only be termed a complete and deliberate fraud.

  7. Brett Bellmore says:

    “Now that people who get together in corporations don’t lose all their civil liberties, the administration won’t be able to ban books during the 2012 campaign, as they’d asserted to the Supreme court they were legally entitled to. I have trouble seeing that as a bad thing.”

    As usual, Brett lies. The question isn’t of people’s civil rights, but of the rights of artificial people.

  8. Jonathan: “Fair enough, but we have no information — as in none — as to whether it is true. The US government has never defaulted. It is hard (although not impossible) to rate the probability of an event with an n of 0. ”

    Meanwhile, we *do* have information on the reliability of the rating agencies on large matters, and it’s poor, at best.

    Second, let’s say that the US defaults on it’s debt, either in toto or in substantial part. Now, what investment would survive, let alone flourish, in the world of the Great Depression II? The downgrade given by S&P doesn’t make sense, even if S&P was counterfactually assumed to be honest.

    Third, Matthew has a history here, and it’s not so good that any competent person should fear his analyses.

  9. @ calling all toasters: “Now that corporations have all the rights of citizens . . . ”

    A minor correction: Now that corporations have all the former rights of citizens

  10. Ok, I should have been clearer: if house values returned to historical norms, and people responded, rationally, by defaulting, then yes, the CDO’s would have crashed. However, if house price changes followed historical norms, the CDO’s would have been fine, and everyone from the FHA on up was assuming that they would do so. It didn’t even need underwriting; just the GSA’s requiring a down payment would have been all it took took keep the market steady (at the cost of decreasing growth in homeownership.)

  11. “As usual, Brett lies. The question isn’t of people’s civil rights, but of the rights of artificial people.”

    Read the CU decision lately? The question was whether the government could run roughshod over 1st amendment rights as long as there was a corporation involved somewhere. There’s a reason the ACLU was on MY side in Citizens United, and it’s not because of solicitude towards the theory that corporations are people.

  12. This is from the SCOTUS which felt that possibility of later regret was a reason to uphold restrictions on abortion. Don’t pretend that they made the CU decision for the sake of the First Amendment.

  13. Yeah, strange how enumerated rights get more respect than controversial unenumerated rights which were formerly crimes, isn’t it…

    If you’re going all ‘realist’ on me, don’t pretend that McCain/Feingold was adopted out of a concern about political corruption. It was all about advantaging incumbents, and forcing annoying interest groups like the NRA to STFU. Politicians are pissed that the Court didn’t let them impose a regime of political censorship.

    And you can tell a lot about ‘liberals’ real attitude towards freedom of speech, by the fact that the ACLU suffered such a backlash for winning this basic 1st amendment case that they seriously considered giving up defending freedom of speech as too expensive to continue.

  14. Careful, Brett, you go around disparaging unenumerated rights, you’re going to compromise your integrity as a Tenther. Especially when you engage in well-poisoning like “used to be crimes.” And especially when just recently you argued for an unenumerated right to secession that was sufficiently sacrosanct to mitigate against charges of treason.

    You also need to stop lying about liberal reaction to CU, since you damned well that every liberal you know believes that the Court should have ruled in favor of CU on the issue that was before the Court at the time. Which had nothing to do with corporations making direct donations to candidates.

  15. Well, then, you should be very happy, because they didn’t rule on corporations making direct donations to candidates. Here, let me quote the relevant paragraph from the ruling:

    “The judgment of the District Court is reversed with respect to the constitutionality of 2 U. S. C. §441b’s restrictions on <corporate independent expenditures. The judgment is affirmed with respect to BCRA’s disclaimer and disclosure requirements. The case is remanded for further proceedings consistent with this opinion.”

    What part of “independent” expenditures didn’t you understand? Or maybe you simply haven’t read the actual decision, and have been reacting based on the hysterical complaints from frustrated political censors, who are pissed off that they can’t order people to SHUT UP! during campaigns?

    Oh, and unenumerated rights are the NINTH amendment. And I will proudly say that I’m a Firster, a Seconder, a Thirder, a Fourther, an Fifther, A Sixther, a Seventher, an Eighther, a Ninther, AND a Tenther. Shouldn’t everybody be?

  16. .Well, then, you should be very happy, because they didn’t rule on corporations making direct donations to candidate

    Fine, I should have said, “They made it possible for corporations to spend money directly from the company treasury on politics, something that was previously forbidden,” which is why things like this happened.

  17. So, let’s be clear about this: Having established that you were criticizing the CU decision based on an inaccurate understanding of the decision’s core holding, you want to move on to criticizing the decision based on an inaccurate understanding of the law prior to that decision?

    I think maybe you ought to spend some time doing research, before you dig this hole any deeper.

  18. OK, Brett. Meanwhile, you can continue pretending that “Target Corporation” not having certain rights means that the members of its board of directors don’t individually retain those rights, and then imagine that you’ve made a point about something. But then stand up and claim that you support all rights, except when you don’t.

  19. And while we’re at it, we’ll pretend that the administration didn’t assert it had the authority to ban books, and that there’s some legally relevant difference between the NYT editorializing in favor of a candidate, and Westinghouse renting space in the NYT to editorialize in favor of a candidate.

    Face it, you’re serving as a useful idiot for people who want to censor political speech, they’re exploiting your dislike of corporations to get you to support legal changes which would render vulnerable every publisher and broadcaster in the nation. You’d think the FACT (Based community, yeah, right…) that your own side, what’s that word, “lied” to you about the holding in CU, would clue you in a bit.

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