PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. On Thursday in New York City, within a few blocks of Wall Street, President Obama called for serious financial reform. Here’s a little bit of what he had to say.
PRES. BARACK OBAMA: In the end, our system only works, our markets are only free, when there are basic safeguards that prevent abuse, that check excesses, that ensure that it is more profitable to play by the rules than to game the system.
JAY: Now joining us from our studio in downtown Washington at the McClatchy offices is Kevin Hall. He’s the national economics reporter for McClatchy. Thanks for joining us, Kevin.
KEVIN HALL, NATIONAL ECONOMICS CORRESPONDENT, MCCLATCHY: Thanks, Paul.
JAY: So President Obama says you have to find a balance between gaming the system and playing by the rules. But one of the biggest gaming of the systems that helped lead to the crash was the role of the rating agencies that were giving AAA ratings to things, to properties, financial products that everybody thinks they should have known were junk. There’s going to be a committee hearing on Friday. Tell us what you think we’re going to find out there.
HALL: Yeah, the Senate permanent committee on investigations and investigative panel has released a bunch of information in advance of this hearing, and tomorrow we’ll have much more voluminous information available. But they’ve already released emails that show—what appear to show Standard & Poor’s and Moody’s Investors Service both basically rolling over on behalf of Wall Street, giving in to pressure for favorable ratings, in exchange for fees that often exceeded $1 million per rating. These were for the so-called mortgage-backed securities and collateralized debt obligations, the complex deals in which pools of mortgages are bundled together and sold to investors in slices and dices.
JAY: Now, my understanding is there’s going to be evidence that the rating agencies, at least by 2007, already knew that a lot of this stuff was going to crash but continued to give AAA ratings anyway. Isn’t this a fraud?
HALL: Well, that’s for the authorities to determine, but clearly the documents that Senator Carl Levin of Michigan will be releasing tomorrow show pretty clearly that both agencies, particularly Standard & Poor’s, a lot of the internal e-mails showed the degree to which they understood this market was going to tank and were trying to plan for it. One of the e-mails talks about a meeting planned with Terry McGraw, the CEO of McGraw-Hill Companies, the big publishing giant which owns S&P, to explain to him how the deals went down, where the problem was, and how they planned to deal with it when the downgrades come. Most Americans are probably unaware of the fact that in June and July of 2007, after several, probably four, years of these inflated ratings and huge volumes of dollars changing hands in exchange for these deals, in June and July ’07 the rating agencies suddenly downgraded en masse all these deals, and that pretty much was game over for the housing boom and started this—it was the early warning to this financial crisis that we’re living through now.
JAY: The question, though, so far has been that the rating agencies, if I understand it correctly, have been kind of protected from giving opinions that might be a total crock from civil suit, because they’re just giving an opinion—it’s freedom of speech. But even President Obama said freedom doesn’t mean license to take whatever you want, and freedom of speech doesn’t mean you can participate in a conspiracy to defraud people. So, you know, one can talk about new regulations and new rules, but we’ve only seen one charge against anything, anyone serious. That was the recent charges against Goldman Sachs. Even there it looks like some lower guy on the rung is going to get it, if anyone does. What is the thinking? And what do you expect to come in terms of the criminal responsibility of the rating agencies?
HALL: Well, couple of points. One, Goldman Sachs was charged. There was civil case brought against it. We don’t know whether or not the Department of Justice will pursue a criminal case.
JAY: That SEC charges is a civil case, not a criminal.
HALL: Right, and the only federal charges, criminal charges that have been filed to date were filed against two Bear Stearns hedge fund managers, if you remember. A jury acquitted them. And the evidence in that case was email evidence that showed pretty clearly that they thought they were saying things like the market was toast [inaudible] a lot of the stuff that we’re hearing in these emails that are being released by Senator Levin. So whether you—you know, one of the unsettling parts of that dismissal of that case, of the jury declaring them innocent, it certainly sent a sign to prosecutors that, boy, juries aren’t going to go just on emails alone. As to what might happen down the road with the rating agencies, the legislation that’s being contemplated in Congress right now would change a lot of things about how they operate and how they’re regulated by the SEC. The SEC doesn’t regulate like a bank regulator does with safety and soundness, but instead with an eye towards investor protection. And in 2006, when they got new powers, the SEC got new powers, they were were not, still, allowed to look at the methodology that ratings agencies used. The legislation pending now will allow them to do that, will have a lot more scrutiny from regulators on whether or not this methodology is sound. And the evidence that Senator Levin will be unveiling tomorrow shows pretty clearly that they didn’t think their own methodology was sound and had all kinds of internal dissent. And, of course, you know, there was a lot of pressure, especially at Moody’s from top management, to make the deal—don’t lose market share. And as part of that, basically, you know, the deals were squished and malleable until they could get it under the radar enough to get the deal done and get all those fees.
JAY: Right, but the new legislation makes it easier for civil suits against the rating agencies. But you have to be a pretty big fish to afford to sue a rating agency. In terms of the protection of ordinary investors in this field, you really need the government to step in with criminal charges if it’s a criminal fraud. Just making it easier to sue isn’t [inaudible]
HALL: And that may happen. We don’t know yet that it hasn’t happened or won’t. They’re being looked at on a lot of different fronts. And Jerry Brown announced, the attorney general of California, a former governor and man who’s running for governor in California, announced on Monday a court action designed to pry loose information from Moody’s that he says they’re not providing in one of his subpoenas. You’ve got the Financial Inquiry Crisis Commission also issuing a subpoena this week against Moody’s for lack of information sharing. So there are things moving on a lot of fronts. I wouldn’t discount the fact that there won’t be criminal action just yet. I think there’s plenty of room for that, and a lot of this work that’s going on right now could eventually lead to that. But I think there’s also an important thing to keep in mind is the power of a class-action suit. And Moody’s is already subject to a class-action suit. It’s been dismissed by some—in some suits it’s been dismissed because of its First Amendment rights as a free speech—it is simply giving an opinion on whether something might default or not. But I think a lot of this evidence that’s coming out would show, would stand out to prosecutors and perhaps a jury, that maybe there’s more to this than meets the eye in terms of knowingly giving false ratings. And so I think we just have to see. It’s too early to tell.
JAY: Okay, thanks for joining us, Kevin.
HALL: Thanks for having me.
JAY: And thank you for joining us on The Real News Network, coming to you again from the McClatchy offices in Washington.
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