This is the Kator Daily Podcast for Thursday, November 20th, 2008. I'm Caleb Brown.

The subprime crisis and the resulting financial crisis begs the question, whose fault is it?

Can rules in financial markets effectively deal with human nature anyway.

Bert Eley has been sounding the alarm for years about risks posed by Freddie Mac and Fannie Mae.

He is currently president of Eelie and Company.

It was among the speakers at the Cato Institute's monetary conference held yesterday.

Properly understood what should be the role of rating houses in trying to help investors price assets and why has that system broken down?

The problem with the rating agencies today is that because of the First Amendment

protections they enjoy,

specifically where they are paid by the issue or the security,

they're too easily seduced into providing good ratings, ratings that have turned out to be

excessively high, unacessively complicated securities that no one really

understands how they'll perform.

And so my thesis is if the rain agencies could be sued for negligence in situations where they've

been paid by the issuer that they would go broke very fast or what would happen is that they would pull back

and simply just not rate complex securities securitizations because they just wouldn't want to take the risk of doing

so they couldn't be paid enough fee to take the risk to do so and I think that would do a lot

to help clean up if you will the securitization marketplace.

In Anna Schwartz's paper, she talked about some of the lessons of the subprime crisis and one of the

things that she mentioned was we should not be

seduced by financial innovations that have not been tested. Well, how do we get

financial innovations that are tested? A lot of financial innovations that are tested.

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