1
00:00:00,040 --> 00:00:03,440
Speaker 1: Government commission that reviewed the two thousand eight mortgage securities

2
00:00:03,480 --> 00:00:06,760
Speaker 1: crisis said that the crisis quote could not have happened

3
00:00:06,800 --> 00:00:10,360
Speaker 1: without the rating agencies, including Moodies and Standard and Poors.

4
00:00:11,200 --> 00:00:14,080
Speaker 1: The government accused the rating agencies of inflating the ratings

5
00:00:14,080 --> 00:00:18,040
Speaker 1: on mortgage securities to get business from the banks preparing them.

6
00:00:18,120 --> 00:00:21,600
Speaker 1: And now, in the Obama administration's final days, Moodies has

7
00:00:21,600 --> 00:00:24,200
Speaker 1: agreed to a settlement with the federal government and twenty

8
00:00:24,200 --> 00:00:27,480
Speaker 1: one states that will require to pay almost eight hundred

9
00:00:27,560 --> 00:00:31,280
Speaker 1: sixty four million dollars to settle the claims. Here to

10
00:00:31,320 --> 00:00:34,239
Speaker 1: talk to us about that settlement is Bob Hockett, who

11
00:00:34,280 --> 00:00:36,920
Speaker 1: stayed with us since the last segment of the Cornell

12
00:00:37,040 --> 00:00:41,280
Speaker 1: Law School. Bob, why don't you start by describing for

13
00:00:41,360 --> 00:00:44,640
Speaker 1: us quickly what the what it is that Moody's and

14
00:00:44,680 --> 00:00:48,640
Speaker 1: other rating agencies were alleged to have done here. Okay,

15
00:00:48,680 --> 00:00:50,720
Speaker 1: so there's actually a nice link here actually with the

16
00:00:50,800 --> 00:00:52,240
Speaker 1: with the case. We were just talking to you about

17
00:00:52,240 --> 00:00:55,880
Speaker 1: the Supreme Court decision on the antitrust liability for library manipulation.

18
00:00:56,240 --> 00:00:58,560
Speaker 1: So essentially what you got here the same rome a situation.

19
00:00:58,640 --> 00:01:01,080
Speaker 1: You've got an institution in the firm that has sort

20
00:01:01,080 --> 00:01:04,399
Speaker 1: of two roles. One role is to provide an objective

21
00:01:04,520 --> 00:01:07,959
Speaker 1: benchmark of some sort that is used by other market

22
00:01:08,000 --> 00:01:11,880
Speaker 1: participants in making the decisions that they do. The other role, however,

23
00:01:11,959 --> 00:01:14,280
Speaker 1: that it plays, is it is itself a profit seeking

24
00:01:14,319 --> 00:01:17,959
Speaker 1: institution that does engages in trading and provides various services

25
00:01:18,000 --> 00:01:20,880
Speaker 1: and the like um and what's typically had what happens,

26
00:01:20,959 --> 00:01:23,520
Speaker 1: or what's typically accused is um the you know that

27
00:01:23,640 --> 00:01:27,520
Speaker 1: the profit making side of the institution is accused of

28
00:01:27,520 --> 00:01:31,080
Speaker 1: playing a role in the determination of the objective benchmark

29
00:01:31,120 --> 00:01:33,199
Speaker 1: in the matter that is designed to sort of suit

30
00:01:33,240 --> 00:01:36,400
Speaker 1: itself rather than to suit the markets. The claim about

31
00:01:37,120 --> 00:01:39,520
Speaker 1: Moodies and Standard and Poors that we've heard since the

32
00:01:39,560 --> 00:01:44,200
Speaker 1: crisis is that in order to receive more payments from

33
00:01:44,319 --> 00:01:49,480
Speaker 1: various issuers of mortgage backed securities for the ratings of

34
00:01:49,520 --> 00:01:51,880
Speaker 1: those securities that everybody in the market needs in order

35
00:01:51,920 --> 00:01:55,200
Speaker 1: to decide whether to buy them, that they basically made

36
00:01:55,200 --> 00:01:58,200
Speaker 1: it easy. They went easy on the particular securities in

37
00:01:58,280 --> 00:02:01,840
Speaker 1: question and gave them higher ratings than they actually deserved

38
00:02:02,520 --> 00:02:05,240
Speaker 1: in order to keep generating that business that was coming

39
00:02:05,240 --> 00:02:08,760
Speaker 1: in right from the various banks that were issuing the securities,

40
00:02:08,800 --> 00:02:11,840
Speaker 1: the various institutions that were issuing the securities. So that's

41
00:02:11,919 --> 00:02:14,960
Speaker 1: the basic accusation. It's a sort of fox guarding the

42
00:02:15,000 --> 00:02:19,720
Speaker 1: hen house sort of accusation. Bob Moody's says it stands

43
00:02:19,760 --> 00:02:22,760
Speaker 1: behind the integrity of its ratings and noted the settlement

44
00:02:22,840 --> 00:02:26,000
Speaker 1: cut contains no finding of a violation of law or

45
00:02:26,040 --> 00:02:29,400
Speaker 1: admission of liability. So it's just saying we're paying the

46
00:02:29,440 --> 00:02:33,640
Speaker 1: money and we weren't wrong. M It kind of be

47
00:02:33,680 --> 00:02:35,519
Speaker 1: is Yeah, I mean, this is boiler play. This always

48
00:02:35,600 --> 00:02:37,960
Speaker 1: happens in the case of a settlement. Always. What happens

49
00:02:38,160 --> 00:02:41,120
Speaker 1: is that a particular institution worries that it actually is

50
00:02:41,240 --> 00:02:44,000
Speaker 1: vulnerable if the suit goes forward. It worries that it

51
00:02:44,120 --> 00:02:46,720
Speaker 1: might lose. Um. It worries that it might in fact

52
00:02:46,760 --> 00:02:49,240
Speaker 1: even be found guilty of having committed a crime and

53
00:02:49,240 --> 00:02:51,720
Speaker 1: sort of get the suit out of its hair. Uh.

54
00:02:51,800 --> 00:02:53,840
Speaker 1: It goes in and says, okay, look, we'll pay the fine.

55
00:02:53,880 --> 00:02:55,720
Speaker 1: We'll pay you a big chunk of money somewhere around

56
00:02:55,720 --> 00:02:58,480
Speaker 1: a billion dollars a little a little below um. And

57
00:02:58,520 --> 00:03:01,240
Speaker 1: what we'll also say is we don't admit to wrong doing. UM.

58
00:03:01,280 --> 00:03:06,720
Speaker 1: The prosecutor for its sake doesn't admit that that that

59
00:03:06,720 --> 00:03:10,200
Speaker 1: that the that the charged party is innocent. It simply says, okay,

60
00:03:10,200 --> 00:03:12,239
Speaker 1: we're just gonna brack at that question. We're gonna leave

61
00:03:12,280 --> 00:03:14,440
Speaker 1: the question of guilt or innocence off to one side

62
00:03:14,800 --> 00:03:17,359
Speaker 1: and just settle listening and get it out of the way. Um.

63
00:03:17,400 --> 00:03:20,040
Speaker 1: That's again quite that sort of standard operating procedure for

64
00:03:20,120 --> 00:03:23,040
Speaker 1: these sorts of settlements. So a lot of people thought,

65
00:03:23,200 --> 00:03:25,280
Speaker 1: Bob that it would be harder for the government to

66
00:03:25,320 --> 00:03:28,120
Speaker 1: get Moodies to settle because unlike S and P, there

67
00:03:28,240 --> 00:03:32,400
Speaker 1: wasn't a real paper trail of emails showing how that

68
00:03:32,480 --> 00:03:35,480
Speaker 1: they were culpable. Here. Is it a surprise that they

69
00:03:35,640 --> 00:03:39,520
Speaker 1: agreed to this settlement. I don't think it's really that surprising.

70
00:03:39,520 --> 00:03:42,240
Speaker 1: I mean, particularly note that this element was for a

71
00:03:42,280 --> 00:03:45,760
Speaker 1: considerably lower sum than the earlier settlement. Right, the D

72
00:03:45,840 --> 00:03:48,560
Speaker 1: SMP settlement was about one point four billion, as I recall,

73
00:03:49,000 --> 00:03:51,080
Speaker 1: this one was a bit under one billion, eight hundred

74
00:03:51,120 --> 00:03:54,600
Speaker 1: seventy some odd U a million UM. And that itself,

75
00:03:54,600 --> 00:03:59,480
Speaker 1: that difference itself is perhaps partly reflected a provisory reflective

76
00:03:59,640 --> 00:04:02,120
Speaker 1: of the Act that the government recognized that its case

77
00:04:02,160 --> 00:04:03,600
Speaker 1: would be a little bit harder to prove here. On

78
00:04:03,600 --> 00:04:04,960
Speaker 1: the other time, the fact that it's close to a

79
00:04:04,960 --> 00:04:07,920
Speaker 1: billion dollars to suggest that the government was not lacking

80
00:04:07,960 --> 00:04:11,000
Speaker 1: in confidence, and it also suggests, of course that Moody's

81
00:04:11,080 --> 00:04:14,119
Speaker 1: was not lacking in concern. Bob, what do you think

82
00:04:14,120 --> 00:04:18,000
Speaker 1: the impact of these these settlements will be? In this sense?

83
00:04:18,520 --> 00:04:23,240
Speaker 1: Are the incentives that that drove Moody's and SMP to

84
00:04:23,480 --> 00:04:27,680
Speaker 1: overinflate these ratings? Uh? Still there is the potential we

85
00:04:27,760 --> 00:04:31,920
Speaker 1: might go through this again with some other uh situation. Yeah,

86
00:04:31,960 --> 00:04:34,840
Speaker 1: So the incentives are definitely still there and will always

87
00:04:35,080 --> 00:04:38,200
Speaker 1: be there because it's an inherently conflicted role. And what

88
00:04:38,400 --> 00:04:40,560
Speaker 1: that means is that the real impact, in so far

89
00:04:40,560 --> 00:04:41,880
Speaker 1: as there is one, is going to be on the

90
00:04:41,920 --> 00:04:45,200
Speaker 1: institutional arrangements that we permit. In other words, what functions

91
00:04:45,240 --> 00:04:48,560
Speaker 1: do we allow to be combined within a single organization. Um. Now,

92
00:04:48,560 --> 00:04:50,440
Speaker 1: as you know, one of the things that Dodd Frank

93
00:04:50,640 --> 00:04:53,800
Speaker 1: suggested was that we might want to reconsider the model

94
00:04:53,920 --> 00:04:56,640
Speaker 1: of the financing of ratings in the first place, in

95
00:04:56,680 --> 00:04:59,920
Speaker 1: such manner as prohibits those who are seeking the rate

96
00:05:00,320 --> 00:05:04,000
Speaker 1: from paying for the ratings, or in such manner as

97
00:05:04,040 --> 00:05:08,040
Speaker 1: sort of anonymizes those who are seeking the ratings in

98
00:05:08,080 --> 00:05:11,080
Speaker 1: the eyes of those who are providing the ratings, and effectively,

99
00:05:11,080 --> 00:05:12,839
Speaker 1: it's a way of what we're looking at this means

100
00:05:12,839 --> 00:05:16,120
Speaker 1: of preventing a kind of implicit bribery that it is

101
00:05:16,160 --> 00:05:19,240
Speaker 1: thought it was sort of endemic to the system of

102
00:05:19,360 --> 00:05:21,400
Speaker 1: ratings that we had the and and that of fact

103
00:05:21,400 --> 00:05:23,080
Speaker 1: that the fact that we've made that decision more or

104
00:05:23,160 --> 00:05:25,120
Speaker 1: less is going to be viewed as being vindicated by

105
00:05:25,160 --> 00:05:27,279
Speaker 1: the settlements. The other thing I think that's gonna be indicated,

106
00:05:27,640 --> 00:05:29,680
Speaker 1: um is that, as you know, we've also decided after

107
00:05:29,760 --> 00:05:31,599
Speaker 1: Dodd Frank that we're no longer going to have the

108
00:05:31,640 --> 00:05:35,200
Speaker 1: regulators used the ratings themselves as sort of part of

109
00:05:35,200 --> 00:05:37,760
Speaker 1: the regulatory mechanism. We're not going to say, for example,

110
00:05:37,839 --> 00:05:40,840
Speaker 1: that in order to hold these securities, bank has to

111
00:05:40,880 --> 00:05:43,160
Speaker 1: show that they have this such and such a rating

112
00:05:43,200 --> 00:05:45,200
Speaker 1: from such and such an agency. That was a kind

113
00:05:45,200 --> 00:05:48,279
Speaker 1: of regulatory favoring of the rating agencies. And we've since

114
00:05:48,279 --> 00:05:50,480
Speaker 1: decided that that was a bad idea. And I think

115
00:05:50,520 --> 00:05:53,000
Speaker 1: these decisions are these settlements are sort of indicating that

116
00:05:53,040 --> 00:05:56,520
Speaker 1: decision as well. Bob Hocket of Cornell Law School, thank

117
00:05:56,560 --> 00:05:59,039
Speaker 1: you for being with us on Bloomberg Law