IS DESIGNING ASSETS TO FAIL LIKE DESIGNING A CAR TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”.  This speech is an excerpt from the SEC website:
September 19, 2011
Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure.
In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2
The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts.
In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”

Designing things to fail and/or wear out has long been a prominent tool for insuring future sustainability of profits.  Afterall, it is far easier to rip-off old customers with products they must buy over and over again then it is to spend money on marketing to find new customers.