financial collapse Rule: Ask The Question

Financial Prosecutions: S&P AAA Ratings Lawsuit

Ever since the financial collapse four years ago, the news has sporadically covered the question of why there have been no major prosecutions.  The coverage and the legal system itself have seemed to repeatedly hit a wall over the problem of ‘how provable’ the financial infractions are.

One contributor to the financial meltdown, the AAA ratings that Standard and Poors gave to high risk debt instruments known as CDO’s (collateralized debt obligations), is about to serve as the first big legal test for the ratings agencies and their role in the debacle.

The Justice Department brought a civil suit against S&P, and is considering one against Moodys, for giving the highest rating possible- AAA, to CDO’s that were based on toxic mortgage backed securities (MBS’s).  Investors, including federally insured financial institutions, relied on the ratings and lost billions of dollars when the CDO’s went south, triggering a chain reaction of losses bringing down the financial system and the economy with it.

The lawsuit for fraud includes incriminating emails from S&P managers and analysts that indicate they knew how risky the securities were, yet gave them the top rating anyway, at least in part because they didn’t want to loose income and market share for their agency.

A few choice quotes from those emails: “Let’s hope we are all wealthy and retired by the time this house of card falters.”  “We rate every deal. It could be structured by cows and we would rate it.”

Yet, even with a mountain of emails and testimony, many still think it will be difficult to prove.  Check out this incredible CNBC discussion on the slippery slope of legal intent and proving fraud.   (If no video below, click here.)


Sound familiar? There’s always some glitch, loophole or technicality of the law that allows these transgressions to slip through.  But that’s only part of this quagmire.

It turns out that cases like this rely in part on regulatory agencies, who, if they don’t do their job to begin with (which many think they didn’t), will not have the documentation needed for prosecutions. This NYT piece addresses that and much more in one of the most comprehensive and readable articles I’ve seen.

And then there’s is the conflict of interest issue- the ratings agencies get paid for their ratings!  Sen. Al Franken has renewed his commitment to fixing that after his proposed amendment to the Wall Street Reform bill stalled two years ago.

But back to the S&P fraud suit.  Let’s connect the dots:

The emails show that, internally, the risks were known.
Those risks were communicated up the chain of management.
Top AAA ratings were given anyway.
The securities collapsed.

All this tunnelling in on ‘legal intent’ and the narrow focus on fraud seems to me (not that I have any legal expertise) to be a case of not seeing the forest for the trees.

So to the media I say–

Ask the Question: Why can’t the ratings agencies be sued for financial negligence instead of fraud?

And while we’re at it, tackle these questions too:

Why is so little being done to address the conflict of interest problem in ratings agencies?
Why have no officials in the regulatory agencies been fired?

If you don’t ask, we’ll never advance the dialog beyond this chronic ‘can fraud be proved?’ limbo we’re in.

Finally, check out The Daily Shows take on CNBC’s response to the Franken amendment in this former [intlink id=”110″ type=”page” anchor=”VoW_Asst_DailyShow”]Video of the Week[/intlink].

Rule: Ask The Question taxes

Vote on Ask The Question: Taxing $250k+ Earners

Ok, I didn’t plan it this way, but I’m punting on my first ‘Ask The Question’ poll that I want you to vote on.  (Your Input at right.) Though I intended for these polls to reflect the publics preferences amongst three options, I added ‘All the above’ as a fourth.  I know, defeats the purpose, right?

In this case, I’m going to keep it since I believe the answers to all the questions will yield a much clearer picture of what the benefits and costs are of raising taxes for $250k+ earners vs. not.

Some broad brush strokes.  We have two ‘opposite’ problems in our economy: an increasing deficit/debt, and slow growth with high unemployment.  They are ‘opposite’, because the solution to one, exacerbates the other.  If we cut spending, it will help the deficit, but cause a recession, slowing growth and employment.  If we increase targeted spending (jobs bill), the opposite occurs.  Similarly, if we lower taxes, it stimulates the economy, but increases the deficit.  Doing the opposite, flips the result.

However, these economic controls can be fine tuned, so the question is- is there a policy combination that tackles both problems while maximizing the overall upside and minimizing the downside?

My first ‘Ask the Question’ poll deals with the tax part, leaving spending for later.

As regards the first poll option- the % of $250k earners that are actually ‘job creators’- the few answers I got in the news in over a years time, ranged from less than 1%, to 3%.  Whatever the exact figure, it’s pretty low if that’s the range.  But why haven’t we nailed this down, and what else is relevant regarding this issue?  To hedge my bets, I threw in the second part of the question- how many jobs are we talking about?  The best article I read, by Gail Collins, sheds a lot more light on this question, but is still frustratingly imprecise in some areas.

On the second question, lots of figures are being given by the news media, and for varying ‘tax increase thresholds’- from $250k to $1M. The current threshold offer from President Obama is now $400k.  All good data and much needed.  But some make the case for raising taxes on lower income levels as well.  For President Clintons’ opinion, see  Part 2 (4:15 minutes in) of [intlink id=”110″ type=”page” anchor=”VoW_FiscCliff_GrndCan”]this previous Video of the Week[/intlink].

Addressing the third, in David Leonhardt’s article “Do Tax Cuts Lead to Economic Growth?”, the answer suggests there is a tenuous link at best, with several Republican advisors weighing in.  I hedged my bets on this one too- adding the ‘multiplier effect’* part of the question.  If there’s additional ‘bang for the buck’ to be had going into the future with one policy vs. another, don’t we want to know about it?


* The multiplier effect occurs when one person’s spending becomes someone else’s income, and some of the second person’s income is subsequently spent, becoming the income of a third person, and so on, leading to economic growth.

Rule: Ask The Question Rule: Cite The Basis

Welcome to Advance The Dialog

There is an exchange that takes place between the news media, our political officials, and the public that is often referred to as the national conversation, or dialog.  Advance The Dialog gives the public a structured mechanism to enter into that conversation in a more meaningful way, to voice their thoughts on what is important to them, and to gain leverage in the discussion.

I first got the idea for ATD when, after years of watching the steady deterioration of news coverage, it reached a point of such stark arrest that it became easy to imagine a simple set of rules that, if applied, would fix the problem.  It initially surfaced in my mind in 2010 when healthcare and the Affordable Care Act were being discussed and debated in the news.  It seemed for months the discussion was frozen in a stalemate between the two opposing camps that went something like this:

Anti:  “The Affordable Care Act will explode the deficit if it is passed!”
Pro:   “The cost of healthcare will grow exponentially if ACA is not passed!”

Where, I thought, are the numbers, metrics and estimates of costs involved?  With an aging population, rising deficits and debts, and a healthcare system that falls woefully short, the need for more information seemed obvious if we were to solve these problems.  Some basic projections, please!  Eventually they came, were much debated and frequently revised.  Healthcare, like many other issues, is not simple and it takes time to cull and evaluate data- acceptable, if not entirely satisfactory, reasons for delay.

But the case for rules really gelled for me in 2011.  As the economy continued to lumber along and the expiration date for the Bush tax cuts loomed, the debate over letting the cuts lapse heated up with specific contention centered on high income earners- $250k and above.  Again, there was the predictable party standoff, only this time it went on for over a year:

Anti:  “$250k earner’s own businesses and higher taxes will hurt job creation!”
Pro:   “$250k earner’s should pay their fair share and it will help reduce the deficit!”

Week after week, then month after month, I watched in disbelief as this story continued to be ‘covered’ with absolutely nothing new added to the discussion.  I didn’t monitor my news consumption (see Mission Statement for news intake), but somewhere around the fifth or sixth month I started keeping informal track of how many news segments, over how many months, this story played out.  And more importantly, in how many of those segments was the only question I had ever had on this topic, asked:

How many of those $250k+ earners are actually job creators?

The unofficial result, my best conservative guesstimate is-  in roughly 60 segments over approximately 11 months, only 3 times did I see the question raised or addressed in the news.  In other words, only 5% of the time did the news media advance their coverage on this story in even the most basic way, and over almost a years time!  That is pitifully low. Hence, the formulation of my rule:  Ask the Question.

Similarly, I wondered (also illustrated in above examples), how many times have we seen the media allow conflicting assertions by two parties, on a single point, to extend for prolonged periods of time, without examining the foundations of those assertions?  Talk is cheap and repeating a claim over and over becomes accepted as truth over time. A simple validity check, something to hold people- legislators, experts- accountable for the claims they make, was in order. Thus the rule:  Cite the Basis.

Yes, the problems are big and messy, data is hard to come by, and meaningful studies take time.  But if even just these two rules were followed with regularity by the media, we could increase our understanding of the issues by so much more, and at a vastly accelerated pace!  And it is imperative that we do, because we are facing very big issues. More importantly, it is our right.

So please, join me in this quest.  Vote on the issues or questions you want covered. Enter your own suggestions for them.  Call out the media when they break The Rules. Comment on my blogs, or simply contact me with your thoughts.  I need your help.

It’s your Democracy!