The Centre for Economic Policy Research proposes that "risk" be "shared" when a company sells securitized financial instruments. The basic idea is that if the seller makes an error in evaluating the risk involved, the purchaser isn't the only one to suffer.
On first glance, I can argue that they're proposing disaggregation of ownership. Instead of an absolute sale, with ownership as a monolithic block, the ownership will be parceled out among various buyers. (Of course, this is the entire idea behind securitized mortgages in the first place, and explains why the revolution swept the financial industry.) When I first read this article, I couldn't decide if the ideas it describes were very good or absolutely terrible. After some consideration, I've decided that the ideas are possibly correct but the proposal for how to execute them in practice is absolutely terrible.
At present, there's nothing (aside from government regulations, perhaps) that restricts the buyer and seller from sharing ownership of the security, or at least sharing risk; they can write the contract however they please. They haven't done so in the past, because ownership of these types of objects seems to work better when ownership is absolute. Caveat emptor isn't just an empty phrase; my ability to sell an object as a complete object, without reference to any prior ownership, is one of the foundations of modern capitalism and carries with it the obligation on the buyer to perform due diligence.
This proposal strikes me as remarkably superficial and not fully thought out. Who will enforce the amount of risk that must be shared? The government, of course; this will inevitably impose a huge financial burden on sellers and buyers as well as provide a playground for post-hoc lawsuits. Other problems abound; for example, If company A sells a security to company B, and then company B sells it to company C, who is responsible for explaining the risk to company C?
Finally, the real question is whether or not this law would possibly have made any difference to the current "crisis" and whether it would actually avert a future crisis. The sellers, buyers, and everyone in between made mistakes in judgment about the risks involved; they're all paying the price; what difference would this proposal make?
Topics: · business · finance · government
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