Risk — Reward — Accountability

{link » Greenspan Concedes to ‘Flaw’ in His Market Ideology }

“If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,” Greenspan said. “Forecasting never gets to the point where it is 100 percent accurate.”

“As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,” Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.

I'm not an economist by any means, but it seems to me one could easily devise an appropriate formula for determining what a "meaningful part" of the securities they issue should be retained by all securitizers. For starters the appropriate government oversight agency could compute annually what percent of the time securitizers have been wrong in their forecasting in the past. The corresponding fraction (i.e., % ÷ 100) would then be the "meaningful part" of the securities they issue that they would be required to retain in the current year. That way, if they were never wrong, they wouldn't have to retain any of the securities they issued (the following year); correspondingly, if they were wrong 100% of the time, they would have to retain all those securities, thereby assuming all the risk of their own inaccuracies. This would also add incentive to issue more securities with a low risk track record, and fewer with a poor record.