The Rachel Maddow Show | February 05, 2013
>>> in march 2007 , some of the fine folks at morgan stanley were brainstorming via e-mail about what they wanted to call a new product they were working on. it was an investment package essentially that they would eventually go on to sell to a chinese bank. here are some of the potential product names that were suggested in this brainstorming session by a particular morgan stanley vice president. flutter fish 2007 , or mike tyson 's punchout 2007 , or he also suggested nuclear holocaust 2007 . now, you don't think that will sell it? what about subprime meltdown 2007 , or perhaps best of all, the right to the point suggestion of poop bag 2011 . only the morgan stanley guy did not suggest the word poop before bag, but suggested the other four-letter word that means the same thing but starts with the letter s. the reason they insisted on giving their products such derogatory names, is because they knew it was poop bag . they would go on to sell it for a price that would indicate it is not worth thes. this is why our financial system collapsed. wall street was selling things for prices that did not reflect the value of those things at all. but here is the thing. that was not supposed to be allowed to happen. you're not supposed to be able to sell financial products for way, way, way, way, way, way more than they're actually worth. somebody is supposed to be in charge of making sure that the value of investments is at least reasonably related to the price that is put on them. in fact, not just someone, there is a whole industry there is a whole part of the financial sector whose job it is to do that. they rate financial products . they give them ratings to help guide consumers as to what they are worth. they issue ratings. they are the ratings agencies . and they are central to the reason wall street cratered. the american economy didn't crater like it had been hit by an asteroid because people were investing in companies that didn't pan out. it wasn't that kind of a collapse. it wasn't that there was a war somewhere and suddenly nobody could get any oil or something. that was not why we had a financial collapse. we had a financial collapse because of fake erie. we had a financial collapse because people were buying and selling things at prices that were totally, totally fake. and the people who were selling them knew it. it was a con game that everybody was in on. and when everybody finally had to acknowledge that the actual value of these things that they had been trading at these inflated prices was not the value they had been trading them at, everybody finely had to admit what the real value was of these things they had been buying and selling. everything collapsed. so even if you don't understand the overall dynamics of the housing market and all the different ways things are traded and how people in lower manhattan make money off of it, this is the one thing all of cuss grasp about what went wrong when our economy was destroyed in a way that we have still not recovered from. that's one thing about the meltdown that everybody gets, right? which makes this headline today both a wow moment and a duh moment. u.s. sues s&p over pre-crisis mortgage rating. the government alleging that standard & poor 's rating agency knowingly inflated its ratings on risky mortgage investments, giving high marks to mortgage-backed securities because it wanted to earn more business from the banks that issued these poop bag investments. oh, poop bag isn't in the quote. sorry. i added that. so that's a duh, right? these guys clearly should be busted. these were the guys in charge of the ratings. these were the guys who were supposed to be labeling the poop bag financials as such. eventually that system of selling worthless junk for tons of money stopped working and the economy fell apart. so duh, yeah, these guys should be in the dock, big-time. but also not just duh, but wow. look at the date here. it's today? these guys aren't in jail or something already? nobody has sued them before now? we still have not handled that problem? should we be encouraged by the fact that they seem to be trouble now or should we be very, very worried that it took this long? joining news is former new york governor and new york attorney general eliot spitzer . he earned the nickname the sheriff of wall street while he was in office. governor, it's great to have you here.
>> thank you for inviting me back.
>> have a layman's understanding of the meltdown. you have a much more advanced understanding. did i explain any of that wrong? and what is the significance of the ratings agency getting in trouble now?
>> you got it exactly right. let me be very clear about something. the rating agencies and everybody on wall street will say over and over again we were wrong, but being wrong isn't a crime. they're right. being wrong isn't a crime. lying is the crime.
>> what happened here, and you got it exactly right in your introduction, the investment banks , the rating agencies , all of the links in the chain that marketed this junk, all the debt that saddled and then destroyed our economy was marketed by people who knew they were selling us poop, to use the polite word you just used.
>> and they thought it was hilarious. that's why they were joking the terms.
>> give them credit for the good sense of humor. you read the e-mails. they made up new lyric tots the song " burning down the house ." they're clever, but malicious and dangerous. listen to this one excerpt from page 46 of the complaint today. they said they could have released a revised better system of the rating system if we didn't have to massage the all day prime numbers to preserve market share . what does that mean? they wanted market share and profits over integrity. it's the same story we saw for over a decade on wall street where integrity was thrown overboard to preserve profits. they lied.
>> the idea that there were people on wall street , that the ratings agencies would play the role of cop, of keeping everybody is honest is how they deflected any idea that there should be government regulation .
>> this was the old line self-regulation. we have a mechanism in place to make sure we will not defraud you the public and the marketplace. of course, self-regulation is one of the great oxymorons of all time. but just so it's clear, the rating agencies are insurance that is paid for by the investment banks . so the investment banks can pretend that what they're marketing is good. they're paying the rating agencies a small fee. so the rating agencies will put the stamp of approval on the debt. the rating agencies which wanted to get that fee which in aggregate was a lot of money, sold the credibility of the market for that profit.
>> and that's what this very thorough very good complaint lays bare.
>> fraud upon fraud upon fraud.
>> i feel as somebody who is not very well versed in this subject, somebody who has never been well versed and just covered it as news, this is with one thing i got very early on was wrong with the system. why did it take so long?
>> it shouldn't have taken so long. on the day they announced this case, i have been pretty harsh on eric holder of the justice department for not doing much more. on the day they final lly make a case, don't want to come down on them again. it should have been years ago. this is indicative of something that has been going on for way too long. and until we get over the presumption. you said something that is revealing. you said look, i didn't really understand it. you got it enough. you understood -- first of all, we all know you're rachel maddow . you got it all together. but put that aside, you understood the essence of this. they were lying. that's all you need to know . they were lying about the quality of what they were marketing to the public. and at the end of the day , we the taxpayers had to pick up the tab.
>> and is lying the thing that you need to prove in order to get a conviction here? he says it's unfounded and they're going to win the case.
>> floyd abrams was saying it was a first amendment right. show them that they knew what they were saying was not the case is what makes it a fraud as opposed to simply being wrong. being wrong isn't a crime. we're all wrong all the time. lying intentionally in the marketplace is what transforms into an actionable offense.
>> i knew you would help me understand this better. eliot spitzer , former governor of new york , former attorney general of norm o new york . always great to have you. will you come back again soon?
>> all right. coming up, john mccain specifically loses a round big time . but they're refusing to admit it. i'm here to tell them they lost.