March 17, 2009

March was the first month of the calendar during the French Middle Ages. In modern America, a plump baby next to a wizened old man is a customary symbol of the dawn of a new year. Today's photographs of Bernard Madoff linked those two bits of trivia. Isn't his forced exit from a life of spoils-fed freedom, symbolic of the passing of this era of soaring excesses?

As Diana B. Henriques and Jack Healy's report makes clear (*), Bernard Madoff has publicly confessed to be a crook. He can hardly expect our sympathy for being sent to prison. And yet isn't he entitled to complain at how Justice tilts her scales against him? After all he only dissipated $50 billion. Puny. To date financial writedowns by banks worldwide are measured in trillions. But will a judge ever jail anyone whose colossal incompetence contributed to this crisis? CEO's responsibilities can be too big to break the law.

Indeed by publishing a column (**) Deven Sharma, president of Standard & Poor's, reminds us credit rating agencies recklessly showered their highest notes on what has now been revealed as so many toxic assets. Not that I accuse Deven Sharma, whose tenure started after the incriminating facts. Under his predecessor however, Standard & Poor's issued the best recommendations money could buy while escaping the consequences. These have proven fatal to both the clients who chose to believe and the public who was fooled into believing, such prettified pictures.

Last October Deven Sharma delivered his defense at more length to a US House of Representatives committee (1). I hasten to say I fully agree with two of his points. Per his column, "the credit ratings of certain recent structured securities have not performed well". Perhaps a slight understatement, but let us not quibble. And "policymakers should encourage competition between groups with different business models." Centralizing power in an oligopoly of ten (2), of which three at most have any weight, is certainly not to be recommended when it comes down to recommendation systems.

But in his eagerness to protect his firm from unwelcome regulations, Deven Sharma endorses two serious errors. First as he said more cogently to US Representatives "ratings are not recommendations or commentary on the suitability of a particular investment". While I can guess at what he really means, i.e. Standard & Poor's does not act as a salesman for its clients and the responsibility for each investment decision rests solely with the investor, I accuse him of playing on words. If an expert opinion, carefully documented, is not a recommendation, then what is? Standard & Poor's is a "disinterested recommender", who earns nothing from transactions bearing on what he recommends, but a recommender nonetheless.

Twisting words to suit his purpose is again Deven Sharma's recourse when it comes to defend his business model. He readily acknowledges there is a built-in potential for conflicts of interest when one is paid by who benefits from one's recommendation but contends such conflicts can be "managed". If so, why not eliminate defense lawyers and ask law firms working for the prosecution to take care of any potential conflict of interest. Wouldn't the savings from Deven Sharma's brilliant insight give a welcome boost to economic productivity? The truth of the matter is only an adversarial system can resolve, by bringing them in the open, the conflicts of interest created when recommenders are paid by one party.

There is of course another solution which I mentioned before. Subject each disinterested recommender to regulatory fines proportional to its record of inaccuracy as verified in hindsight. Having to fight for one's very own life would sharpen one's wits. And today Standard & Poor's would justifiably be left a shriveled up, bankrupt company.

Enough for the passing era. Where is the New Age baby? My oh my, he is everywhere in today's newspapers, as befits his engaging plumpness.

Rémy Maucourt tells us the ads have started to look at you in the Paris Métro (***). Stephanie Clifford had already spotted them in New-York City last year. Last week she was busy warning us how, come this summer, cable companies plan to target their ads to their users' profiles. Now she gives us some clues on how much information today's smartphones are gathering on their owners (****). Meanwhile Maija Palmer and Alan Rappeport relay Google's public announcement it is to start doing the same on the web (*****).

Granted, Google has shown a willingness to "offer new ways for users to protect their privacy", as Miguel Helft details (******). Some monarchs too deign to grant certain freedoms to their subjects. The whole point is that, eager to reap the promises of targeted advertising, the companies deploy systems perfectly capable to spy on us as the Stasi never dreamt of doing. As quoted by Maija Palmer and Alan Rappeport, Tim Berners-Lee declares "there will be a huge commercial pressure to use [them] for things it was not originally intended for" and Simon Davies, of Privacy International, warns "the privacy threat from Google is growing by the day". Babies tend to grow up, don't they?.

I once complained such news were buried inside the business pages of newspapers. Today I do not see what more reporters could do to alert the public to the dangers threatening their privacy. Model future economic costs, when the data bubble bursts? Alert both public and regulator that there are practical techniques to prevent this baby to best Madoff when he becomes a full blown bully? Dream on!

Happy New Year indeed!

Philippe Coueignoux

• (*) ........... Madoff Jailed After Pleading Guilty to Fraud, by Diana B. Henriques and Jack Healy (New York Times) - March 12, 2009
• (**) ......... Re-evaluating and rebuilding a more useful ratings system, by Deven Sharma (Financial Times) - March 11, 2009
• (***) ....... Dans le métro parisien, des panneaux publicitaires high tech qui dérangent, by Rémy Maucourt (Le Monde) - March 11, 2009
• (****) ..... Advertisers Get A Trove of Clues In Smartphones, by Stephanie Clifford (New York Times) - March 11, 2009
• (*****) ... Google to match online adverts with web users' viewing habits, by Maija Palmer and Alan Rappeport (Financial Times) - March 11, 2009
• (******) . Google to Offer Ads Based on Interests, With Privacy Rights, by Miguel Helft (New York Times) - March 11, 2009
• (1) see Deven Sharma's testimony care of the Committe on Oversight and Government Reform.
• (2) for more details on the so-called NRSRO's, check Nationally Recognized Statistical Rating Organizations in the Wikipedia