The Past Speaks

Lawrence J. White on the History of the Bond Rating Agencies

12 08 2011

Lawrence J. White, a professor at NYU’s Stern School of business recently spoke about the history of the bond rating agencies on the NPR radio show Planet Money.

He notes that there was a major change in the bond rating industry in the late 1960s. Up to that point, the rating agencies were paid by investors, who had a strong interest in getting accurate information. Under this system, the rating agencies did a pretty good job of separating good from bad investments.

In the late 1960s, the rating agencies switched to charging the people who were issuing bonds, which created all sorts of conflicts of interest. According to Professor White, this change was driven by technology.

White blames the shift on the invention of “the high-speed photocopy machine.” The ratings agencies were afraid, he says, that investors would just pass around rating information for free. So they had to start making their money from the company side.

Shoot the Messenger

12 08 2011

Standard & Poor’s downgrade of the U.S. government’s credit rating has created a furious political reaction in Washington along with demands that the firm be punished for its “unpatriotic” actions.

“Democrats and Republicans in Congress are gearing up to put it under investigative scrutiny and do more to restrict the influence of S&P and its peers in financial markets.” Read more here. As I have mentioned in a previous blog post, S&P’s offices in Milan have also been subject to harassment by Italian police.

The ratings issued by these agencies may be unreliable, but I am very uncomfortable with restricting their freedom of speech.

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Tags: Standard & Poor's, United States loses prized AAA credit rating from S&P
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Laugh for the Day

11 08 2011

Check out “An Open Letter to David Cameron’s Parents” by blogger/comedian Nathaniel Tapley. I like the bit that points out that while Cameron engaged in a minor bit of rioting himself as a young man, he escaped punishment by the Oxford police. Tapley reminds us that many of the politicians who are criticizing the rioters are themselves guilty of all sorts of ethical transgressions.

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Tags: #ukriots, An Open Letter to David Cameron's Parents, David Cameron
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Galaxy Tab 10.1, or When Patent Lawyers Attack Progress

11 08 2011

Some people argue that patents for inventors slow rather than encourage technological innovation. I’m inclined to agree with this view, but I recognize that there are some really smart people on both sides of this raging debate. For more about “patent trolls”, see here.

Yesterday, a court in Germany decided to throw some more fuel on the fire when it issued an injunction banning sales of Samsung’s Galaxy tablet because it is too similar to Apple’s tablet. The problem is that both devices have a rectangular screen surrounded by a black frame.

Apparently, Apple’s lawyers have somehow been able to copyright the square. The FT has more details:

Apple’s success in delaying the sale in Europe of Samsung Electronic’s Galaxy Tab, the top competitor to its iPad, buttresses its position as the dominant tablet supplier worldwide, while shining a spotlight on the chaotic nature of intellectual property rights enforcement.

The Silicon Valley powerhouse on Tuesday won a preliminary injunction from a Dusseldorf court, barring Samsung’s sale of its Galaxy Tab 10.1 in every European Union member nation but the Netherlands.

The Guardian reports:

European customs officers have been ordered to seize shipments of Samsung‘s Galaxy Tab computers after Apple won a preliminary injunction against the Korean electronics giant in an acrimonious patent dispute.

Personally, I’m planning to get a trademark over the circle. That way I can sue all of the manufacturers of wheels. In fact, if I got a court order shutting down the world’s car industry, I could become an environmental hero.

Frigging absurd.

Patent Trolls Are a Big Problem

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Tags: Apple Vs. Samsung, Galaxy Tab 10.1, innovation, intellectual property, Intellectual Property Rights
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New Book on the Aborigines’ Protection Society

10 08 2011

The Aborigines’ Protection Society: Humanitarian Imperialism in Australia, New Zealand, Fiji, Canada, South Africa, and the Congo, 1837-1909 by James Heartfield

For more than seventy years, a select group of the great and the good fought for the natives of the British Empire. Anti-Slavery campaigner Thomas Fowell Buxton, medical pioneer Thomas Hodgkin, London Mayor Robert Fowler, the ‘Zulu’ Harriette Colenso, Joseph Chamberlain and Lord Shaftesbury were just some of the men and women who campaigned on behalf of the Aborigines’ Protection Society. The Society shaped the British Empire, and fought against the tide of white supremacy to defend the interests of aboriginal peoples everywhere. Active on four continents, the Aborigines’ Protection Society brought the Zulu King Cetshwayo to meet Queen Victoria, and Maori rebels to the Lord Mayor’s banqueting hall. The Society’s supporters were denounced by senior British Army officers and white settlers as Zulu-lovers, ‘so-called friends of the Aborigines’, and even traitors. The book tells the story of the three-cornered fight among the Colonial Office, the settlers and the natives that shaped the Empire and the pivotal role that the Society played, persuading the authorities to limit settlers’ claims in the name of native interests. Against expectations, the policy of native protection turns out to be one of the most important reasons for the growth of Imperial rule. James Heartfield’s comparative study of native protection policies in Southern Africa, the Congo, New Zealand, Fiji, Australia, and Canada – and how those with the best of intentions ended up championing colonisation. Pointing to the wreckage of humanitarian imperialism today, Heartfield sets out to understand its roots in the beliefs and practices of its nineteenth-century equivalents.

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Publishing Patterns in Canadian Historiography

10 08 2011

Toronto-based historian Christopher Moore recently posted the titles of some books in the current catalogue of University of Toronto Press.

He wrote:

University of Toronto Press has a long and diverse list that seems to undermine the theory that Canadianists do not write about pre-twentieth century topics. Titles forthcoming, and in some cases already published, include:

Jan Noel, The First French Canadian Women, examining the first couple of generations of daughters of the founding population of New France.
Elections in Oxford County 1838-75 by George Emery, a micro-analysis of politics in one Ontario county in the era of “open” (ie, no secret ballot) voting and democratic reform.
Carmela Patrias, Jobs and Justice: Fighting Discrimination in Wartime Canada, 1939-45
The Colonization of Mi’kmaw Memory and History 1794-1928 by William C. Wicken
Jerry Bannister’s The Loyal Atlantic: Remaking the British Atlantic in the Revolutionary Era

In a recent book review I referred to the scarcity of new research on pre-1900 Canadian history. Moore quoted my remarks on his blog on 22 July.

Canada has a large and well-funded historical profession and there are many scholars who work on the Canadian past, particularly periods after 1914 and, especially, 1945. The gender, aboriginal, military, and environmental histories of 20th-century Canada are the subject of intensive research. Very few historians of Canada, however, now work on 19th-century topics or in political history. There are approximately ten specialists in 19th-century Canadian history and only one or two of them can really be described as political historians. Even allowing for Canada’s smallish population, which is now half that of the United Kingdom and a tenth that of the United States, the volume of current research on 19th-century Canada is shockingly low.

I said this in the course of praising two new books on 19th century Canadian political history (biographies of Macdonald and Thomas D’Arcy McGee). The words that Moore quotes were preceded by a sentence that he decided not to reproduce: The publication of these two books is a sign of a possible revival in 19th-century Canadian political history.

I stand by my earlier comments. Very few Canadian historians work on pre-1900 topics nowadays. I wish that I were wrong about this, but sadly this isn’t the case. I hope, however, that there might be a revival in the near future.

I’m pleased to see that UTP has published a few works on pre-1900 Canadian history. That’s great. I’m also glad that Moore has publicized George Emery’s new study of electoral politics in Oxford County. Emery was one of my best mentors in grad school. But as Emery often told the students in his quantitative methods class, “the plural of anecdote is not data.” I haven’t had the chance to do a comprehensive bibliometric study and create some bar charts, but I’m pretty certain that we would find that focus of the Canadian historical profession has shifted in recent decades to the 20^th century in a pretty major way. I’m not the only person to point this out. Allan Greer, a specialist in the history of New France who recently retired from U of T, has said that same thing in print. Other historians have observed the same trend in casual conversations. Greer, I should point out, was replaced by a historian who specializes in Quebec in the 1960s. Emery is a professor emeritus. I could go on.

I repeat that the historians who work on 20th century Canada include some really great scholars. I have nothing against 20th century history and can well see why people regard it is relevant and exciting. But the older periods also deserve attention.

The really striking thing about the decision of the vast majority of Canadian historians to ignore the 19^th century is that there are large communities of scholars working on the histories of the United States and Britain in this period. 2009 saw the publication of a large number of works on Abraham Lincoln. Sure these works varied in quality—some of them were clearly rushed into print to take advantage of the bicentennial of his birth—but even the sheer volume of publications on Lincoln in normal years shows that 19^th century American history is alive and well. Granted, the population of the US is ten times that of Canada, but even so, the per capita output of works on 19^th century US history is far greater. That’s why you have specialized journals such as American Nineteenth Century History, the Journal of the Early Republic, and the Journal of the Gilded Age and the Progressive Era, not to mention all the publications related to the Civil War.

Consider also Britain, which has a population roughly twice that of Canada and similar systems for making primary sources available to historians. Several books a year dealing with Benjamin Disraeli are published, some by historians, others by literary scholars more interested in his novels. Queen’s University in Kingston, Ontario has several scholars who work full-time on Disraeli but none who work on Sir John A. Macdonald, who lived in Kingston. I’m not saying this to disparage the Disraeli Project, far from it, but simply to suggest that we should also have research into Macdonald. Consider also the number of book on Gladstone, whose life span roughly overlapped with that of Macdonald. Here are some of the recent books on Gladstone.

Daly, Mary E., and K. Theodore Hoppen. Gladstone: Ireland and Beyond. Dublin: Four Courts Press, 2011.

St. John, Ian. Gladstone and the Logic of Victorian Politics. London [u.a.]: Anthem Press, 2010.

Boyce, David George, and Alan O’Day. Gladstone and Ireland: Politics, Religion and Nationality in the Victorian Age. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2010.

Windscheffel, Ruth Clayton. Reading Gladstone. New York: Palgrave Macmillan, 2008.

Shannon, Richard. Gladstone: God and Politics. London: Hambledon & Continuum, 2007.

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Dan Gardner on Predictions

9 08 2011

I mentioned Dan Gardner’s book Future Babble, which exposes the prediction industry for being full of nonsense. I did so in a recent blog post on the S&P US debt rating downgrade.

Gardner was recently a participant in an online roundtable on expert predictions. Check out his piece, which was co-authored by Phillip Tetlock, and the response essays.

In my view, this is the key sentence of Gardner’s piece.

Despite massive investments of money, effort, and ingenuity, our ability to predict human affairs is impressive only in its mediocrity. With metronomic regularity, what is expected does not come to pass, while what isn’t, does.

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Tags: Dan Gardner, Future Babble, United States loses prized AAA credit rating from S&P
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Before you study the analyst’s report, study the analyst

8 08 2011

Yesterday I posted some questions about Nikola Swann, the S&P analyst who downgraded the US debt. I complained that we know almost nothing about Swann or the other individuals responsible for the downgrade. A helpful reader has provided some information that remedies the situation.

Nikola Swann is a Director, having joined the Toronto office in 2002. Nikola is primary analyst for the United States of America, Canada and Bermuda, as well as several public sector entities, including the International Bank for Reconstruction and Development, the International Finance Corporation, and la Caisse de dépôt et placement du Québec.

Prior to joining Standard & Poor’s, Nikola worked as an Economist in the Canadian Federal Government’s Department of Finance. Previously, he worked in the Monetary and Financial Analysis Department of the Bank of Canada.

So it appears that Swann was working in the Canadian government in the 1990s, when Finance Minister Paul Martin was battling to eliminate Canada’s the large fiscal deficit. Martin famously said that he would eliminate the deficit “come hell or high water” and would use any means necessary. Martin managed to eliminate the deficit by a mixture of spending cuts and revenue increases. I’ve put the cover of Martin’s memoir below.

As the chart below shows, the Canadian deficit was mostly eliminated by spending cuts, but there were some tax increases that were part of the mix as well.

This background is critical to understanding why Swann’s report is critical of right-wing US politicians who think that deficit elimination can be achieved solely by cutting spending. The Tea Party movement is adamantly opposed to any tax increases whatsoever, even those that fall on just on the very wealthiest Americans (some of whom run the Tea Party movement).

It is possible to attribute Swann’s belief that deficit reduction take both tax increases and spending cuts to simple common sense. However, I also think that we need to take an individual’s personal and political background into account when evaluating their reasons for arriving at a particular position. In this case, we would look at Swann’s first-hand experience in a government that succeeded in balancing its books through a mixture of tax increases and spending cuts. Moreover, Swann’s perspective can be seen as reflecting the Canadian habit of seeking compromises or balanced approaches to problem, a habit of thought that informs Canadian thinking about the social contract. Most Canadians would shy away from a approach to deficit reduction that relied exclusively on either spending cuts or increased taxes on the rich. Canadians tend to gravitate towards the via media, the middle of the road. As I’ve argued before, the Canadian belief in compromise is something that we inherited from the United Kingdom. (See shameless self-promotion publication reference below).

My point is this: before you study the analyst’s report, study the analyst.

Many historians train their students using document analysis assignments. The students are given a particular document, say a papal bull or one of Napoleon’s decrees, and are then told to write an essay that discusses the document’s creator, the author’s context, and their motives for writing x, y, or z. It’s a great exercise as it imparts a habit of thought that the students can apply in their future careers, which will likely be in a field outside of history, such as business or politics or journalism.

It seems to me that in a future history class, students might be asked to do a document analysis of the S&P’s now famous report.

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Andrew Smith, “Canadian Progress and the British Connection: Why Canadian Historians Seeking the Middle Ground Should Give 2½ Cheers for the British Empire” in Contesting Clio’s Craft: New Directions and Debates in Canadian History edited by Christopher Dummitt and Michael Dawson (Washington D.C.: Brookings Institution Press, 2009).

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Tags: bond rating agencies, deficits, Nikola Swann, Paul Martin, Tea Party movement, United States loses prized AAA credit rating from S&P
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S&P Downgrade: the Canadian Connection, or, Who is Nikola Swann?

6 08 2011

As I mentioned yesterday, the S&P has downgraded the debt of the US. This decision was taken under the authority of one David T. Beers, who is Managing Director of Sovereigns & International Public Finance at Standard and Poor`s. Beers was quoted extensively in the media yesterday.

Yesterday I wrote:

Who is David Beers, the individual mentioned above? Is he a US citizen, a Briton, or someone else? If he is American, did he vote for or against Obama on 2008? We do know that he lives in Londonand once attended the LSE, but aside from that the public knows little about him.

Bond rating agencies have great deal of mystique around them because we don’t know much about the handful of individuals who actually make up the ratings. Moreover, the bond rating agencies express their opinions in the form of quantitative scores, which seem very objective and scientific.

I’m not saying that David Beers is any more or less fallible than the next guy, but it is important to keep in mind that he is just one human being. Like all of us, he can be subjective. Can an American really be objective in rating the bonds of his own country?

I`ve done a bit more research. It turns out that Beers is North American, at least judging from his accent. Moreover, according to S&P`s press release, he wasn`t the primary analyst responsible for the downgrade. Apparently, the Primary Credit Analyst is one Nikola G Swann, CFA, FRM, who is based in their Toronto office. Her contact details are (1) 416-507-2582;nikola_swann AT standardandpoors.com. The secondary contacts were: John Chambers, CFA, New York (1) 212-438-7344;john_chambers AT standardandpoors.com, David T Beers, London (44) 20-7176-7101;david_beers AT standardandpoors.com I am posting their details here in case a journalist wants to get in touch with them.

We know even less about Nikola G Swann than we do about David T. Beers. This is a big problem. We know nearly everything about President Obama, Speaker Boehner, and the other major players in the political crisis of the last week. You can read Obama`s birth certificate online and can find out Boehner`s favourite brand of cigarettes. But we know next to nothing about the handful of individuals who rate bonds.

So who is Nikola Swann? Where did he go to university? Did he take any political science or economics classes? If so, what were the names of his professors? Is he a member of a political party? Does he have strong political views? Is he a Canadian or an American who lives in Toronto? If he is Canadian, is it possible that his views on the possibility of a US default are in some way connected to the anti-Americanism that is part of Canadian political culture and which has indeed been part of Canadian politics since, well, the end of the American Revolution? (Some Canadian nationalists would be gleeful at a US default, at least until their mortgage payments went up). Is Swann an American who moved to Canada because he hated Bush? Or is he a fan of Fox News and Ayn Rand? We should have some answers to these questions before we put much stock in his opinions.

There are two things that really annoy me about bond rating agencies. First, their predictions about which investments are safe have been spectacularly wrong in the past. They have a terrible track record, yet people continue to respect their predictions about the future. Parenthetically, I would like to recommend a great book about the charlatans who operate in the prediction business—it’s Dan Gardner’s Future Babble. He says that people who make a living from issuing predictions about the future are right only about half the time, which is no better than flipping a coin. Moreover, their business model is “heads, I win; tails, you forget I ever made a prediction.”

I am very conscious of the mistakes that historians make. We are fallible and often misinterpret events in the past. But at least we are speaking about things have already taken place.

Second, because they are presented as quantitative scores, ratings of sovereigns are often regarded totally objective and almost scientific. They are not. They are likely influenced by the political views and ideological preconceptions of the individuals doing the ratings. Quantification gives a certain false authority to these opinions. Moreover, these individuals that make up the ratings are subject to the same sorts of inducements are anybody else. I’m certain that S&P requires all of their analysts to put their assets into a sort of blind trust, to avoid the possibility of a conflict of interest. (Mr Swann may own US government bonds, but she wouldn’t know that if all of her assetts were in a blind trust). However, an analyst could easily be bribed by the nation-states they evaluate. I’m certainly not saying that this is the case here, but from the standpoint of a government faced with increased borrowing costs from a possible downgrading of the debt, it would certainly be worthwhile to bribe an individual credit analyst or even a company. Even though credit analysts are well paid, the bribe would not have to be large in the grand scheme of things.

Similarly, the credit analysts and their families could be subject to a campaign of harassment by state officials such as the police or the FBI. There is such a thing as shooting the messenger. Indeed, the Milan offices of two of the major credit rating agencies are currently being ~~harassed~~ prosecuted by the notoriously corrupt government of Silvio Berlusconi, which is upset over their downgrade of Italy’s public debts.

Moreover, even the best intentioned, disinterested, and best informed credit analyst is, at the end of the day, a biological creature like all human beings.

Earlier this year, Shai Danziger of Israel’s Ben-Gurion University published a study of the decisions made by the parole board in Israel. Danziger was able to get data on 1,000 cases of prisoners who applied to the eight-man board. Thanks to some very accurate minutes, he was able to determine the precise time of day the deliberations on each case took place. He found an interesting pattern. Immediately after breakfast, the judges on the parole board were quite lenient and granted around two-thirds of the applications before them. In the late morning, the success rate of the parole applications fell, eventually reaching zero. Immediate after lunch, however, the success rate rose, only to fall again over the course of the afternoon.

All of this raises the question: what did Mr Swann have for breakfast on the day she decided to downgrade the US credit rating? Given that the neither of the other major rating agencies, Moodyès and Fitch, have followed the lead of S&P in downgrading the US debt, this may be the right question to ask.

P.S. Update: it appears that Nikola Swann is, in fact, a man. My apologies to all concerned.

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Tags: Nikola G Swann, United States loses prized AAA credit rating from S&P
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United States loses prized AAA credit rating from S&P

6 08 2011

The US has lost its triple-A credit rating from S&P, one of the ten or so firms that rate the credit-worthiness of nation-states. See here.

“We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn’t where we believe it should be, it’s our duty to make that call,” David Beers, head of sovereign ratings at S&P, told Reuters.

The theme running throughout S&P’s analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.

The agency said that policymaking and political institutions had weakened in the past few months “to a degree more than we envisioned.” This has major implications for the nation’s budget and debt problems.

I`ve blogged about the companies that rate bonds before. I`ve questioned the credibility of their ratings as predictive devices and have suggested that the only reason people pay any attention to these ratings is that there are US laws that force them to do so.

I intend to write a longer post about this in the near future. Right now, I would like to share a few quick thoughts or questions.

1) Will other ratings agencies follow the lead of S&P?

2) How will China react to his downgrade? What does this mean for Niall Ferguson’s concept of “Chimerica”?

3) Will the US government try to punish or at least spy on the personnel of S&P? I can imagine some sort of informal punishment being meted out for this. The Berlusconi government in Italy has used the police for the harrass the employees of S&P and Moody`s in Milan. The apparent goal here was to intimidate the firms into keeping Italy`s rating high.

4) Who is David Beers, the individual mentioned above? Is he a US citizen, a Briton, or someone else? If he is American, did he vote for or against Obama on 2008? We do know that he lives in London and once attended the LSE, but aside from that the public knows little about him.

P.S.

Jack Goldstone of George Mason University recently posted an intriguing comparison of French public finances on the eve of the 1789 Revolution and American public finances today. What they have in common in the unwillingness of the top 1% of the population to make sacrifices. He points out some other interesting parallels as well.

When the world’s greatest power financed an overseas war with borrowed money, then turned to its elites to approve tax increases that would fall mainly on the rich, they responded with a resounding “NO!” The debt was not a reasonable result of government needs, the elites cried. It was the result of waste and misguided government expenditures. There was no way that the elites would consent to any increase in taxes without constitutional change; anything else would be a grievous assault on basic liberties.

That was in the summer of 1788. The place was Paris, and after France’s successful intervention in the US Revolutionary War against Britain, it had debts to pay that required a boost in income. Although France was by a goodly margin the largest and richest country in Europe, and the most powerful military force in the world, its tax system was a twisted mess of special exemptions and loopholes. Different regions of France paid different rates of taxes, and most elites were exempt from the basic tax of the country – the taille,
a land tax – on most of their income. The elites did have to pay an income tax of 5% — the vingtiéme – but that was due to expire, and the country could not pay its bills unless the tax was made permanent, and other taxes were made more consistent or increased.

To accomplish this, the French monarchy convened an Assembly of Notables, opened its books, and claimed that tax increases were essential to restore the finances of the nation, and prevent the country from being overwhelmed with debts.

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