Home > Articles > Business & Management > Finance & Investing

  • Print
  • + Share This
This chapter is from the book

Regulatory Failure

All this should have set off alarms among the nation’s financial watchdogs. Some regulators were clearly uncomfortable, particularly those at the Federal Deposit Insurance Corporation. 3 But few took action to rein in the runaway lending.

The silence was most deafening at the principal regulator of the financial system, the Federal Reserve. Fed officials believed in letting the market police itself; investors would make sure the bonds they bought were sound, or at least priced appropriately. If some homeowners were liable to default, their loans would carry higher interest rates, compensating investors for the added risk. The Fed, beginning with Chairman Greenspan, was philosophically predisposed to believe that markets worked efficiently if left alone; there was no need for heavy-handed oversight.

After the crisis, some argued that regulators lacked the legal authority to intervene more aggressively in the mortgage market; this is untrue. Congress had given the Fed authority to act against unfair or deceptive mortgage lending as far back as the early 1990s. 4 But regulators did not begin to use this power until late 2006, too late to stop the housing bubble from imperiling the economy. 5

Regulators were hampered to some extent by the complexity of their own system—an alphabet soup of agencies with partial and overlapping responsibilities. In addition to the Fed and FDIC, these included the OCC, the OTS, and the NCUA. The Federal Trade Commission, Securities and Exchange Commission, and FHFA also had a say. 6 With so many voices, it was hard to reach consensus on any action that would cut across all financial institutions. Many financial institutions, and arguably the ones that did the most egregious lending, were the most lightly regulated. These were finance companies with names like New Century Financial, Ameriquest, and Novastar.

That the credit rating agencies weren’t on high alert over mortgage-backed securities was also in a sense a regulatory failure. The agencies had significant power over bond markets because of capital and liquidity standards that required banks to use ratings in their risk management. Wall Street banks needed ratings to sell any bonds, and particularly mortgage-backed securities. Few investors were equipped to evaluate these extraordinarily complex debt instruments; gathering the data needed to understand their component parts and untangle their structures would have been an overwhelming task.

The agencies issued tens of thousands of ratings on mortgage-related securities during the housing boom, and in hindsight it’s clear that many of those ratings were too positive. In many cases, agencies began downgrading their opinions not long after they were issued; it had quickly become clear that the securities were much riskier than their original ratings implied.

Several types of errors skewed the agencies’ opinions, starting with the quality of the underlying data they were given to evaluate. Rating agencies typically assume the information they receive from issuers is correct, and historically it mostly has been. So when the agencies received data from mortgage lenders—about homebuyers’ debt levels, income, purchase prices, and so on—the agencies took it as true. The agencies made no secret of this; they didn’t consider it their responsibility to verify such data, and thus couldn’t tell when homebuyers were stretching the facts or lying outright. As a result, ratings on mortgage securities worth trillions of dollars were based on falsified data.

The rating agencies missed the mark badly enough on many mortgage securities to stoke some long-smoldering criticism of their basic business model. For years critics had said the agencies were subject to a conflict of interest, because they are paid by people who issue bonds (as opposed to the investors who buy them). The agencies thus allegedly have an incentive to produce favorable opinions, regardless of their accuracy. The higher the rating, the higher the price issuers can obtain for their securities. Some critics charged that bond issuers routinely shop for good ratings, steering business to the agency offering the sunniest opinion.

There is little evidence for this. Ratings are based on statistical models, which constrains analysts’ ability to rate bonds for spurious reasons. Still, because issuers pay the agencies to rate their securities, there is at least an appearance of a conflict.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020