“But It Was Too Complicated” Is NEVER An Excuse

A commenter on my recent post about the role of the ratings agencies in the financial crisis came close to (if not outright) suggesting that the buyers of crappy complex financial products had no choice but to rely on the ratings agencies because the products were too complex for them to understand.   I want to be clear that this “the product was too hard for me to understand, so I relied on someone else to understand it” excuse is utter and complete horseshit, and any fiduciary who employs such an excuse should be arrested for gross negligence.

Sonic Charmer at Rhymes With Cars and Girls offered up his own view of this concept, as he replied to a recent post from Barry Ritholtz.  Barry writes:

“I do not want to excuse the bad purchase decisions made by the buyers of this junk — they clearly violated one of the first rules of investments: Know what you own. However, the complexity of these products required they use third party analysts and agencies to facilitate the purchase decision. That is why the bad purchases is merely lousy investing but the payola-like ratings are actual fraud.”

Sonic Charmer responds, boldface mine:

‘Required’? I cannot agree. FACT: No financial actor, anywhere, was ‘required’ to buy, consider buying, or even look at any of these structured securities in the first place. You can’t, logically, be ‘required to use third party analysts and agencies’ to analyze something you are not even buying or going to buy. (Yachts are probably complex purchases, but I’m not ‘required to use third parties’ to analyze them, since I ain’t buying one anytime soon.)

What he must mean (if it makes any sense at all) is that, given that someone had chosen to play in this space (why is this a given exactly?), then they were ‘required’ to rely on third parties (e.g. ratings). That is also FALSE.

Seriously, if you’re too lazy or unable to read (or, perhaps more commonly, at least get a trusted subordinate to read) the Prospectus, Portfolio Management Agreement, Credit Support Annex, Total Return Swap Agreement, Collateral Management Agreement, Initial Portfolio Annex, etc., etc., etc. and whatever other docs these deals depended on, and translate the information there into a reasonable sense of its value and risks, you shouldn’t be even thinking about putting down tens of millions on it. I know these docs are painful and boring to read –  believe me. But come ON. That’s the job!

At best, I would say that feel free to use third parties (including rating agencies) – but then that’s a conscious decision on your part (your time being oh so way too valuable, etc. so you outsource) that you need to own, so don’t come around whining afterwards that those third parties messed up. They messed up, sure, but you messed up too, and worse. That’s because, in this hypothetical, you’re the one who’s supposed to be the big fancy smartypants money manager, not some schlub at S&P.

 

Ditto that.

As I’ve written before:  It’s YOUR responsibility to understand the products you are investing in.   This goes for retail investors, and it goes double/triple/quadruple for professionals acting as fiduciaries.

KD:  Trading Rule #3: Understand the Product You Are Trading

Ritholtz:  Why The Ratings Agencies Deserve the Death Penalty

RWCG:  Yes, Let’s (Really)Kill The NRSRO’s

KD:  About The Role of the Ratings Agencies in the Financial Crisis

-KD

disclosure: no positions in $MHP or $MCO

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