PBS Newshour 11/18/2010
Excerpts from transcript
JOE NOCERA, co-author, "All the Devils Are Here": I certainly would put the rating agencies right at the top of my list of bad guys, or my list of devils.
A place like Moody's took a culture that had a reputation for some integrity, and completely corrupted it in a drive for market share and profits.
PAUL SOLMAN (Newshour): So, biggest culprit, ratings agencies; you agree?
BETHANY MCLEAN, co-author, "All the Devils Are Here": I do agree. If they hadn't taken subprime mortgages and rated enormous quantities of them AAA, meaning they gave those bonds the same credit rating as the U.S. government debt has, this -- this whole thing couldn't have happened, because debt that is rated AAA is precisely the debt that is snapped up by the largest quantity of buyers all around the world, buyers who are not capable of doing the detailed work to analyze these bonds by themselves.
And yet there is still this myth that these buyers are supposed to be sophisticated buyers, and they're supposed to understand what they're getting into. And the cornerstone of this myth, the thing that makes it all work, is the rating agencies, because the investment banks say, well, we sold AAA securities.
PAUL SOLMAN: But don't you cut ratings agencies any slack? I mean, the incentives are all there for the ratings agencies to do what they did, no?
JOE NOCERA: I don't cut them any slack at all. They are supposed to be protecting investors. That's what their job is. They're not supposed to be in cahoots with the Wall Street firms that are ginning up these securities.
And yet that's what they did. They used to rate normal, old- fashioned corporate bonds. And then -- then this new form of finance arose called structured finance. And that's all these, you know, mortgage-backed securities bundled into CDOs, so on and so forth, all this complicated stuff.
It became a growth area, a profit area that far outstripped the old fuddy-duddy business of rating government bonds. So, the rating agencies raced, jumped on it. And it just flew. And then the top executives really started to drive the place around the profitability of structured finance. And that's really what happened, more than any other single thing.
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PAUL SOLMAN: OK, Republicans or Democrats, who is more responsible?
(LAUGHTER)
BETHANY MCLEAN: Both.
JOE NOCERA: Both. Republicans want to blame Fannie and Freddie and the government, because they have a hard time accepting the notion that the market failed. Democrats want to blame it on the marketplace, on Wall Street and subprime companies, because they have a hard time accepting that the government didn't do its job. The fact is, neither party did their job.
BETHANY MCLEAN: And, after the crisis, it has become very popular for Republicans to say, well, the Democrats caused this with their focus on homeownership, on putting people in homes who couldn't afford those homes.
But one of the really interesting things, if you go back to the 1990s to the birth of subprime lending, it was never about homeownership.
PAUL SOLMAN: What do you mean it wasn't about homeownership?
BETHANY MCLEAN: It was never about homeownership, because subprime lending grew out of cash-out refinancings, meaning the ability of somebody to go to a bank, refinance their mortgage, and take cash out of their house in order to live on that cash.
And that enabled consumer spending through the 1990s and through the early part of -- of this decade. Most of the business of the major subprime lenders, from Countrywide, to Ameriquest, to New Century, was cash-out refinancing. It wasn't the first-time purchase of homes by homebuyers. And this was celebrated by Republicans, as well as Democrats.
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PAUL SOLMAN: Some people have argued that this wasn't not quite a plot or a conspiracy, but a means by which Americans who had companies with stuff to sell could get money into the hands of people whose incomes were stagnant, so they could buy this stuff, that is, lend them the money.
BETHANY MCLEAN: I do not think that was ever an explicit plot. In other words, I don't think any group of people ever sat in a dark room and said, here's what we are going to do, and it's eventually going to bring the financial system down, but we are going to keep this party going while we can.
But I absolutely think that was an implicit plot. In other words, in order to keep the U.S. economy going, you had to keep consumer spending strong. In order to keep consumer spending strong, you had to have consumers whose income otherwise wasn't keeping up have a ready source of cash.
Bold-blue emphasis mine
What this is, a perfect example of greed run amok.
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