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This model sounds a lot like the Moody's/S&P ratings-agency game. The failure of the ratings system is one of the critical components identified as causing the
by jobposter1234 12y ago
This model sounds a lot like the Moody's/S&P ratings-agency game. The failure of the ratings system is one of the critical components identified as causing the 2008 financial crisis.
I strongly dislike the mis-alignment of incentives, where the ratings / approval group is paid by the company seeking approval. It has proven disastrous in high-money systems, and I wouldn't trust it for pharma, which has shown similar ethical outlooks as finance (that is to say, little matters except profits).
- jgmmo 12y agoThe financial ratings agencies have government monopolies essentially, they have special status (NSRSO's). Not easy to compete with government monopolies. If more agencies could be ratings agencies maybe some would have thrown the bullshit flag in time to prevent what happen. Not to beat a dead horse, but if you remember the mortgage crisis was due the government incentivizing subprime lending and having fed rate too low for too long; creating a bubble in housing. The ratings agencies themselves were accomplices, but not the sole problem by any stretch.
- happyscrappy 12y agoYes but an even larger problem was commoditizing mortgage bundles to such an extent that even an honest rating company would not be able to figure the risk.
- jgmmo 12y agoThat's what I don't understand. If the auditor couldn't understand the investment then they should absolutely not give it a stamp of approval. When in doubt, throw it out.
- alexqgb 12y agoYou really have no idea what went on, do you? Spend some time googling stories about people who operated by the book at the ratings agencies. Their careers...did not go well.
- jobposter1234 12y agoAgreed, they should throw it out, but they're also throwing out a paycheck. FWIW, I was just parroting Nate Silver's section on the financial crisis. He identifies the ratings agencies as one of the several groups responsible for the downfall. In S&N, Silver discusses how the ratings agencies gave their ratings software to the banks, so the banks could "dry-run" their tranches to get the best ratings available. They were more than just complicit -- they actively enabled the financial groups to game the ratings.
- snowwrestler 12y agoIf you don't understand it, why are you advocating for the same model in drug regulation?
- jobposter1234 12y agoHow would competition prevent ratings agencies from poorly aligned incentives? The "fitness function" of how good an agency is will be determined by the customer, who only wants to receive the highest ratings. AFAIK, to rate a company/tranch/etc., the ratings agencies need access to internal company information. There's no room for an outsider ratings group to call bullshit -- people are only going to listen to the agency given internal info, the one hired by the company getting the rating. More competition wouldn't make the outside groups any more relevant, and without revenue, they would likely quickly dry up.