60th Session of Philosophical Foundations of Law and Finance--Examining Nuclear Financial Structures -- Covered Bonds and Business Plans

Dear All,

We have arrived at another anniversary of the Philosophical Foundations of Law and Finance. This 60th session will bring us to examine the new risk symmetries of the post-credit crisis world.  First up will be a reading of Marco D'ercole's LLM Corporate Finance Law Dissertation on "Covered Bonds in Europe." This paper won the Watheqaa Prize for the best dissertation in 2010.  It is a remarkable piece of sophisticated legal analysis of an important segment of the asset-backed markets. Bravo Marco!  

We will also begin to investigate and philosophize on a rather prevalent but critical document in the legal and financial system, which for some reason "social scientists" of the grande ecole type have completely ignored--i.e. the innocent seed of "capitalism" called the business plan.  Nobody theorizes about the philosophical foundations of "business plans" because, I suspect, social scientists are no good at writing them and because a serious business plan is not merely an ETHYMEME in the Aristotelian sense of a persuasive argument as a short-form syllogism but it is also a positive link to the great market cycles and the individuated whims of discretionary spend-investment of a ruthless global tribe sharing common valuation models and measurement.  In other words, the creation of business plans allows one to enter the vestibule of "capitalism" which is a highly accelerated and dangerous field of material creativity.  Another way to view business plans is that they are the artefacts of market nuclei--if they are successful, they create both the leisurely wealth ("otium cum dignitatis") and the pollutive systemic limits of "our world."  As Van Nordstrom said, "the essential engine of global pollution is man's inherent creativity in the Noos-sphere." The catalyst in the Noos-sphere is the business plan.

An hour on covered bonds and an hour on business plan to sharpen the mind.

At about 8’o clock we will head towards the Italian restaurant called Zizzi, at Wigmore Street where we have made a preliminary reservation for a big table. Pls RSPV if you would like to join us at this restaurant so that we make the necessary arrangements to accommodate everyone.

Regards, 

Rezi and Joe  

60th Session of Philosophical Foundations of Law and Finance--Examining Nuclear Financial Structures -- Covered Bonds and Business Plans

Use of Credit Ratings in Financial Regulation

Last month the Joint Forum of the Basel Committee on Bank Supervision released the results of the survey on the use of credit ratings by its member authorities in the banking, securities, and insurance sectors. The survey answered the call of the G7’s “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience” to review whether the current regulations and/or supervisory policies unintentionally give credit ratings an official seal of approval that discourages investors from performing their own due diligence. The survey’s questionnaire was designed to elicit information regarding member authorities’ use of credit ratings in legislation, regulations, and supervisory policies. The goal of the survey was not only to collect information on internal references to “credit ratings,” “credit rating agencies,” or any references to specific credit rating agencies, but also to assess whether the use of credit ratings has had an effect of implying an endorsement of such ratings and rating agencies or discouraging investors from performing their own due diligence. The Joint Forum collected 17 surveys from member authorities, representing 26 separate agencies from 12 different countries, as well as five responses describing international frameworks.

Both in the U.S. and in Europe, credit ratings are generally used for five key purposes: (1) determining capital requirements; (2) identifying or classifying assets, usually in the context of eligible investments or permissible asset concentrations; (3) providing a credible evaluation of the credit risk associated with assets purchased as part of a securitization offering or a covered bond offering; (4) determining disclosure requirements; and (5) determining prospectus eligibility.

The first regulatory reference to the ratings in the U.S. is found in 1931 in the Office of the Comptroller of the Currency (OCC) and Federal Reserve examination rules, and was mainly based on distinction between investment grade securities, generally rated BBB/Baa and above, and securities of below-investment grade quality. Over time, regulators in the U.S. and globally have incorporated credit ratings into laws and regulations to set capital requirements for regulated entities, provide a disclosure framework, and restrict investments. Recognizing possible unintended consequences of the regulatory use of ratings, in the summer of 2008 the SEC in three separate releases proposed and sought public comments to amendments to most of the SEC’s rules that rely on security ratings with alternative requirements.

Sixty three comments were submitted in response to the SEC's call. The analysis of the responses highlights a high level of dependency of all market constituents on the CRA ratings as a common measure of creditworthiness, especially in the world of less transparent structured credit securities. The behavior of market constituents, including investors, issuers, and regulated entities has been affected by such dependence. The SEC proposal came about to address the perceived failure of the CRA to accurately indicate riskiness of structured credit securities. Still, the feedback to the SEC proposals to eliminate references to credit ratings assigned by CRAs in its rule indicates that the market participants are not ready to accept responsibilities for an independent credit risk assessment. We infer that investors, fiduciaries, and regulated entities are looking to regulators to offer a common measure of risk, accurate and free of conflict of interests. At the very minimum, the market participants expect the SEC and European regulators to assume a more important role in controlling the integrity of the credit rating process.

Please, see the fuller version of the analysis here. The paper can be downloaded from SSRN.

Use of Credit Ratings in Financial Regulation

Philosophical Foundations of Law and Finance - 21sth Weekly Meeting

At the 21st meeting of the Philosophical Foundations of Law and Finance (Friday 26th June, from 6.00-8.00pm, in room 501, 309 Regent St) we shall read Aristotle discussing rhetoric and persuasion.

Joe will also present a framework for a corporate-centric finance view of epistemology-ontology. He will show how Aristotle's method could be applied to the knowledge of the world through the lens of finance; and use, yet again, concepts of risk symmetries for the clarification and understanding of the implications of stem cell technology on humanity (see Clive Cookson, "An Industry to Grow", FT, 25 June 2009 at http://www.ft.com/cms/s/0/2fe059ae-60ed-11de-aa12-00144feabdc0.html). As Edmond Curtin says, "this is about harvesting humans and individual sovereignty". We can also imagine what "stem cell financial derivatives" might be. We need to get ahead of the curve on this because the curve is going to be a tsunami.

We shall seek more bubbles and rations at Vapiano thereafter

See you tomorrow

Joe and Laura

Philosophical Foundations of Law and Finance - 21sth Weekly Meeting