Sunday, June 5, 2011

Being a Large, Recognized Player Does Not Mean Not Having Unresolvable Conflicts of Interest

A friend of mine [a former investment banker and CDO manager] was explaining to me why it was okay for the ECB to endorse the Market Group's conflict of interest riddled ABS data warehouse.

He observed that five of the six finalists were large, recognized players that, because of unresolvable conflicts of interest with other parts of their business, would stand to benefit from designing, building and operating the ABS data warehouse.  The sixth candidate had the technological brawn to build and operate the data warehouse, but not necessarily the relevant structured finance expertise.

He felt that because of their size, even though the finalists might not currently have an ABS data warehouse, they had the resources to eventually develop one.

Finally, he was of the opinion that the finalists' size offset their conflicts of interest.  He applied the old adage that no one was ever fired for hiring IBM to the technocrats at the ECB.

He added that this type of mind set was a strong indicator that the technocrats were so far divorced from the realities of the capital markets that they had no understanding of subtleties like the restoration of confidence hinges on investors trusting the data and how after being fleeced by Wall Street the investors would set a higher standard for data disclosure prior to returning to the structured finance market.

He framed the issue as the ECB essentially gambling that investors in structured finance securities would return regardless of whether
  • the warehouse was run by large firms with conflicts of interest or a small, conflict of interest free company specializing in this type of data warehouse;
  • they had to pay for once per month data that BNP Paribas viewed as inadequate for use in valuing sub-prime mortgage backed securities or they received for free current data that eliminated Wall Street's informational advantage from owning originating and servicing entities.
When asked what benefits were there to the structured finance market from tilting what would otherwise be a level playing field by using firms with conflicts of interest, he could not come up with any.

When asked if he could think of another example of where investors would be reliant on a financial data vendor with equivalent conflicts of interest, the only one he could come up with was Markit.  He was well aware that the European Union regulators wanted financial information data vendors to be conflict of interest free and that this was clearly an issue for the Market Group ABS data warehouse.

He then went on to observe that two of the finalists, Bloomberg and Thomson/Reuters, were probably supporting the regulators against Markit.  He felt that it was readily apparent that large firms like these firms view conflicts of interest as okay so long as they are the firm that benefits from the conflicts of interest.

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