Research Colloquium on ‘Crowd Dynamics and Financial Markets’

Research Colloquium on ‘Crowd Dynamics and Financial Markets’

11 November, 3–5 pm, Porcelænshaven 18B, Room 3.135

Martha Poon, London School of Economics and Political Science: ‘Standard and Poor: Trials and tribulations of the AAA rating’

Credit rating is an old American institution that has faced heavy criticism in recent years. The complaint is that these companies have failed to provide accurate assessments to investors because of a conflict of interest in their basic business model: the agencies are paid by the issuers of debt who need to get their securities graded. US lawmakers have made bold attempts to hold the agencies responsible for the oversized demands for structured finance instruments that led to the collapse of capital markets. But reining in these companies in is not as simple as it seems.  In order to demonstrate the complexity of the rating process, this paper reviews the Congressional investigation into the rating industry. It will examine contradictory regulatory initiatives that have been put on the table, as well the pending fraud suit launched by the Department of Justice against S&P. What this mass of government documentation tells us is that it is impossible to remove ratings from the markets without also sacrificing market function. The technical question is why?  Like a company that owns the telephone cables running under the ocean, or a firm that operates a trans-continental rail line, rating agencies coordinate movement even when they do not control the contents of the transmission. Ratings are the channel through which the markets communicate even when agencies refuse to guard the message. This means that public debate has mistakenly diagnosed a problem of knowledge (truth), when it should be discussing how to regulate the effects of common infrastructure (action).

Martha Poon is a research fellow at LSE’s Centre for the Analysis of Risk and Regulation where she is working on a book manuscript entitled What Lenders See.  Her research explores how Science and Technology Studies can contribute to a history of capital markets. Before moving to London, Martha spent time in residence at the Centre for the Sociology of Innovation (ENSMP, Paris), The Centre on Organizational Innovation (Columbia University) and the Institute for Public Knowledge (NYU).  She is a graduate of the Science Studies Program at University of California San Diego.

The research colloquium is organized under the auspices of the Sapere Aude research project on ‘Crowd Dynamics in Financial Markets’. For further information, please contact Professor Christian Borch (cbo.lpf@cbs.dk) or visit http://info.cbs.dk/crowds.