December 12, 2009
Skin in the Game
This essay is in reply to a Motley Fool article where Bob Pozen, chairman of MFS Investment Management, suggests three steps to re-ignite securitization:
- Make sure everyone has skin in the game.
- Continue using off-balance-sheet entities for the purpose of securitization, but instill safeguards and transparency, and
- Reform credit-rating agencies
While I agree with the first two ideas, more regulations are not the solution to making rating agencies more honest. They need to have skin in the game, like all the other players. Here is how I would do it.
- I would have 25% of the rating fees retained by the trust that manages the securitization.
- The retained fees would earn the same interest as the top tranche.
- The retained rating fees would be paid out to the rating agency when the bottom most trache is paid off. Otherwise the retained fees and the accrued interest would default to the creditors.
This is a really simple solution to the conflict of interest that rating agencies have.
How Can We Revive the Securitization Market?