Financial Reform Killing Off Bonds By Both Requiring Ratings & Making It Impossible To Rate Bonds

from the hey-isn't-there-a-first-amendment-somewhere? dept

Ah, the unintended consequences of bad legislation. It's no surprise that many people have pinned a lot of the blame on the financial crisis on the ratings agencies (mainly Moody's and S&P). After all, they were the ones who went out there and said that collections of slices of dices of the worst mortgages around should be rated as top notch, sure-fire, investments. And there were clear conflicts of interest in how the ratings agencies did their ratings. But, in the end, the ratings agencies were really just giving an opinion -- and opinions are (last we checked) supposed to be protected by the First Amendment.

The real problem came from the government writing those agencies' ratings into the law. Basically, the government, in a really short-sighted attempt to avoid financial problems, required certain institutions had to maintain a percentage of "highly rated" or "investment quality" bonds, in order to engage in certain activities. Suddenly, these "opinions" weren't just opinions, but had important legal consequences. If a ratings agency downgraded an investment, it could legally force some holders of those bonds to have to sell them to maintain its investment ratios. With that, those ratings also took on the sheen of something objective and factual, rather than a random opinion put forth by a bunch of guys (mostly guys) who might not know what's really going on, and who have some serious conflicts of interest.

However, with the new financial reform bill in place, apparently one provision is that rating agencies can be liable for getting the rating wrong. Planet Money explains the unintended consequences this creates:

Under the new law, ratings agencies can be sued for making bad ratings decisions, if the ratings are included in formal documents that companies file with the SEC when they issue bonds.

That's making the agencies nervous. As a result, they're telling the issuers not to include their ratings in the formal documents filed with the SEC, according to the WSJ.

That's a particular problem for asset-backed securites -- bonds made up of bundles of consumer loans such as mortgages and auto loans. Federal law requires those bonds to include ratings in their formal documentation.

Because of that, the issuance of asset-backed securities has vanished. So, basically, the government requires these ratings be used on these types of financial instruments, but makes the ratings agencies liable if they make a bad guess in doing their ratings. You can understand the reasoning, but no ratings agency can be perfect. It's really making a guess, and eventually you're going to make a bad guess.

I really wonder if the part of the law making ratings agencies liable would stand up to a First Amendment challenge. But, in the meantime, asset-backed securities are on hold. Now, some may argue that this is a good thing, because "asset-backed securities" were part of the problem in the financial crisis. But that's definitely throwing out a very large baby with a little bit of bathwater. Yes, there were massive problems from asset-backed securities, but that doesn't mean the concept of asset-backed securities themselves are bad. In fact, they can be quite useful.

Filed Under: financial crisis, unintended consequences

Swedish Police Say Anti-Piracy Law Has Harmed Ability To Catch Criminals

from the consequences dept

We've pointed out many times in the past the "unintended" consequences of certain activities, and it looks like the entertainment industry's worldwide effort to push for more and more industry-favorable copyright laws is causing serious problems elsewhere. Apparently, Anders Ahlqvist, who runs the Swedish IT crime unit is noting that the response to the IPRED law in Sweden (pushed by the entertainment industry to crack down on unauthorized file sharing) means that it's now more difficult for him to do his job. Part of the issue, of course, is that various ISPs responded to the law by seeking to protect their users' privacy by deleting log files. Of course, that probably means it's only a matter of time before the industry pushes for new data retention laws, despite evidence that more data retention can actually make life trickier for law enforcement as well. Still, at some point people need to recognize that the entertainment industry's single-minded focus on "stomping out file sharing" rather than adding value through new business models has some serious costs elsewhere.

Filed Under: anti-piracy, encryption, log files, sweden, unintended consequences

Momentary Financial Crisis... And A Lesson In Unintended Consequences

from the watch-the-automated-trades-go-wheeeeeeeeee dept

As you may have heard, yesterday was a fun day when it came to the stock market, with something causing the Dow to go into freefall for a bit, before it then bounced back up. Initially, some thought that it was a full-on financial crisis, and then there were rumors of a "fat finger" trade, as has been seen in the past. Then there was the inevitable claims of high frequency trading systems having something to do with the mess. People are still figuring out all the details, but Bloomberg has a pretty good explanation of how things snowballed, and it appears to be a case of seriously unintended consequences. Planet Money has the shorter version of how a system designed to prevent the market going into freefall, may have actually aided the market going into freefall.

Basically, there's a system for the NY Stock Exchange and the NASDAQ, called the Liquidity Replenishment Point (LRP), which is designed to stop electronic trading on stocks in freefall. The idea, of course, is to prevent the algorithms from going nuts. But, the LRP only works on those two exchanges, and we're in a world now where there are a bunch of other, electronic exchanges, that now handle an increasing percentage of stock trades -- and electronic trading on those exchanges is not stopped when the LRP is triggered. So, now things actually get worse, because orders that used to be spread more widely concentrate on these other exchanges by automatically jumping from the NYSE and NASDAQ to those alternative routes, and it can swamp those systems, which have a lot less money available. As Bloomberg explains:

While the system is designed to restore order on the Big Board, trading is so fast during times of panic that orders routed past the exchange may swamp other venues and exhaust buy orders, said Angel at Georgetown.

That's when prices may plummet as orders execute against so-called stub quotes from market makers. Brokers can set the quotes as low as a penny a share because they're never expected to be used.

And, speaking of unintended consequences, in talking about this very thing, Felix Salmon points to a blog post by Kid Dynamite explaining why the plan to cancel many of the errant trades is monumentally stupid and likely to create more unintended consequences in forgiving people for doing stupid things, and taking away incentives for others to step in and fix things:

if buyers who step in later see their trades canceled, it removes all incentive for them to step in - and then you don't get the bounce back that we saw! Think about how much havoc it causes a trader who astutely bought cheap stock, then sold it out at a profit. He's now short! Or, he spent the entire day wondering if his order would be canceled, in a state of limbo. What's the alternative - that traders should just assume that the orders will get canceled, and NOT buy stock? Guess what - if no one buys, the stock stays cheap! SOMEONE has to buy, and that someone shouldn't be penalized in favor of remedying the ignorance of the seller who screwed up.

Ah, setting off more unintended consequences in response to other unintended consequences. Sometimes you just have to let those who made a mistake take responsibility for their mistakes.

Filed Under: financial crisis, unintended consequences

A Look At Twelve Years Of Dangerous Unintended Consequences From The DMCA

from the stifling-free-speech-in-the-name-of-hollywood dept

The DMCA has been in place for a dozen years now, and the harm done by its provisions has become quite clear. The framers of the DMCA did not take into account the unintended consequences of the law -- and even one of the main authors of the law, Bruce Lehman, now admits it was a mistake (though, as far as we know, he still hasn't apologized to James Boyle, who accurately predicted many of unintended consequences of the DMCA, only to have Lehman threaten to "rip his throat out" and to get Boyle denied tenure). So, twelve years in, the EFF has put out a document highlighting all of the dangerous unintended consequences of the DMCA:

• The DMCA Chills Free Expression and Scientific Research.
  Experience with section 1201 demonstrates that it is being used to stifle free speech and scientific research. The lawsuit against 2600 magazine, threats against Princeton Professor Edward Felten's team of researchers, and prosecution of Russian programmer Dmitry Sklyarov have chilled the legitimate activities of journalists, publishers, scientists, students, programmers, and members of the public.
• The DMCA Jeopardizes Fair Use.
  By banning all acts of circumvention, and all technologies and tools that can be used for circumvention, the DMCA grants to copyright owners the power to unilaterally eliminate the public's fair use rights. Already, the movie industry's use of encryption on DVDs has curtailed consumers' ability to make legitimate, personal-use copies of movies they have purchased.
• The DMCA Impedes Competition and Innovation.
  Rather than focusing on pirates, some have wielded the DMCA to hinder legitimate competitors. For example, the DMCA has been used to block aftermarket competition in laser printer toner cartridges, garage door openers, and computer maintenance services. Similarly, Apple has used the DMCA to tie its iPhone and iPod devices to Apple's own software and services.
• The DMCA Interferes with Computer Intrusion Laws.
  Further, the DMCA has been misused as a general-purpose prohibition on computer network access, a task for which it was not designed and to which it is ill-suited. For example, a disgruntled employer used the DMCA against a former contractor for simply connecting to the company's computer system through a virtual private network ("VPN").

Clearly, it's long been time to rethink the entire premise of the DMCA, but it seems like there's little appetite for Congress to actually do this. Hell, the EFF put out a similar document two years ago, highlighting the unintended consequences and calling for a rethink.

And what's happening instead? Via ACTA, the US isn't just doubling down on the worst of the DMCA, it's trying to spread it around the world and to make sure that the US cannot fix the problems of the DMCA by creating an agreement that will allow DMCA defenders to say that we can't fix the DMCA or we'll violate our "international obligations."

Filed Under: copyright, dmca, unintended consequences

Yes, Three Strikes Laws Have Unintended Consequences That Even Music Industry Execs Hate

from the surprise,-surprise dept

As noted earlier, I'm at the Midem music industry conference this week in Cannes, in the south of France. France, of course, has been at the forefront of many of the debates over copyright issues, with its Sarkozy-backed push to be one of the first countries to implement a "three accusations and you're off the internet" policy (despite Sarkozy's political party's own long history of infringing). There really hasn't been that much discussion this year about the whole three strikes thing (last year, it was one of the main topics), which seems a bit odd. However, I did randomly see a twitter message from the guy who runs a travel rental business here in Cannes, Lao Watson-Smith, pointing out that all these music industry execs are complaining about all their accommodations having locked down WiFi (even when it's offered free), and noting that the only reason why these connections need to all be locked down is because of the three strikes laws that they pushed through. And, indeed, it is rather annoying. My hotel has "free wifi" (which seems to go down regularly) but you still need a user name and password, and once you log in with one device it will not let you log in with any other device. You must use that one device exclusively. When the official WiFi went dead, I went in search of other networks, including one called "Free WiFi," but when I accessed that, it still asked me for my username and password (which I obviously don't have). It certainly is somewhat amusing to find out that the music industry execs are annoyed by the consequences of the law they so desperately claim they need.

Filed Under: france, hadopi, three strikes, unintended consequences, wifi

Just Add Diesel: How Unintended Consequences Rob Taxpayers Blind

from the regulatory-mess dept

One of the reasons we're often skeptical of legislative/regulatory solutions to things is that they almost always have unintended consequences that do a lot more harm than good -- and quite often those unintended consequences are the exact opposite of what the regulation was supposed to do. Tim Lee points us to an excellent, if depressing, example. A few years back, the government passed a bill to encourage "greener" transportation by providing tax credits for the use of alternative fuels -- including for the use of fuel mixtures that combined alternative fuels with gasoline or diesel. As Chris Hayes explains, this resulted in America's paper companies suddenly dumping diesel into their production process solely to qualify for the tax credit.

The end result is staggering. The paper companies are wasting diesel fuel (remember, the whole point of this bill was to decrease the use of such fuels) by adding it to a process even though it's entirely unnecessary, and then claiming the tax credit. And, boy, is it worth it. The top ten paper companies are likely to take in $8 billion dollars from this tax credit. The money coming from this is so valuable that it dwarfs the actual paper business. The industry is making a lot more money throwing diesel fuel away than actually selling paper. And that is a perfect example of why even the best intentioned regulators often end up doing an awful lot of damage.

Filed Under: green energy, paper manufacturers, politics, regulations, unintended consequences

New Jersey The Latest To Try To Regulate Social Networks... For The Children

from the please-make-it-stop dept

We've seen a number of attempts by politicians to use the latest "moral panic" around social networks to pass regulations against them. A popular one at the federal level which still (thankfully) has gone nowhere is DOPA, which would require schools and libraries to block social networks. However, state politicians want to get in on the grandstanding as well. Politicians in New Jersey are pushing a law that would require social networks to include a "report abuse" button on web pages and then would make those social networks responsible to investigate each reported "abuse" or face liability.

The unintended consequences of such a law would be awful. Basically, to protect liability, many "social networks" (and the term may be broadly applied to an awful lot of websites out there today) would most likely just shut down the accounts of those accused of "abuse." From a simple liability standpoint that makes sense. Leaving the account up just opens you up to a lawsuit. Furthermore, the button would likely be abused itself. Don't like someone? Click the "report abuse" button! And, no matter what, it makes no sense to put the burden of investigating things on the sites themselves. Hopefully this law goes nowhere, but don't be surprised to see similar proposals pop up elsewhere as well.

Filed Under: children, new jersey, regulations, social networks, unintended consequences

ISPs Fear SAFETY Act Outlaws Email; While RIAA Thrilled They Can Use Retained Log Files For Anti-Piracy

from the not-so-good dept

Last week, in talking about the misleadingly named Internet SAFETY Act, we focused on how it would most likely require home internet users to retain log files of everyone who connected to their network. Now, others are pointing out two equally annoying consequences (intended or not) of the bill's current wording. First off, ISPs are noting that, based on the current wording of the bill, providing email is effectively outlawed, as it says that anyone that "facilitates access to" child pornography can be fined and imprisoned. ISPs note that email is a commonly used tool to access child pornography. And, yes, while it's clearly not what is intended by the law, we've certainly seen prosecutors looking to bring someone down willing to use ridiculous interpretations of a law.

On top of that, people are noticing that this bill, if turned into a law, would also greatly help the RIAA and the MPAA who would gleefully use those log files to go after more file uploaders. In fact, the RIAA and MPAA have been huge supporters of stronger data retention rules for years. Of course, the longer you keep log files, the more likely it is that there will be massive privacy breaches, but it seems clear that the RIAA and MPAA aren't particularly concerned with privacy, if it means their dying business models can be propped up for another few weeks.

Filed Under: data retention, safety act, unintended consequences

Another Accounting Law Designed To Increase Transparency Does The Opposite

from the unintended-consequences dept

With all of the financial mess out there, it's likely that we'll soon see calls for new regulations to help "protect" against fraud. However, before we rush into doing so, it's worth looking at how damaging previous attempts to do the same thing have been. We've already covered the massive amount of damage done by Sarbanes-Oxley, which basically made it extremely difficult for a private company to go public and significantly increased costs for any public company -- all while doing next to nothing to actually cut down on fraud.

And, now, FAS 157 has come into play -- a new rule impacting many venture capitalists, forcing them to figure out what the "fair market value" of their investments are, and provide that number to their investors. This has many different VCs complaining about what a stupid process this is. It raises similar questions as the legal change a few years ago that required companies to put stock option valuations on their books as well. The problem is that these things are impossible to accurately value. Not difficult, but impossible. You're asking people to value a totally illiquid asset as if it were liquid.

Even if the venture capitalists use a rigorous process, the result will be wrong. There's simply no way to accurately value something like a private startup until another transaction happens where the value is actually set. And, that's the way it should be for a private investment (it's also why not everyone is allowed to invest in such endeavors, because it is inherently more risky). But forcing companies to make up bogus (no matter how well meaning) valuations for companies has dangerous unintended consequences. No matter how bogus the numbers are, since they're there, people will use them as if they're real. And that will lead to more bad investing, rather than less. So, once again, we have a law designed to stop bad investing, which will most likely cause the opposite to occur.

Filed Under: accounting, fas 157, regulations, sarbanes oxley, unintended consequences