John Coffee

  • Aired:  08/10/11
  •  | Views: 57,223

Law professor John Coffee explains why major credit rating agencies inflated their ratings and how they contributed to America's financial collapse. (7:06)

>> Jon: WELCOME BACK.

MY GUEST TONIGHT, HE IS THE

PROFESSOR OF LAW AT COLUMBIA

UNIVERSITY AS WELL AS THE CENTER

OF CORPORATE GOVERNANCE.

PLEASE WELCOME TO THE PROGRAM

JOHN COFFEE.

HAVE A SEAT.

[APPLAUSE]

THANK YOU FOR JOINING US.

>> MY PLEASURE.

>> YOU ARE THE HEAD OF THE

CENTER FOR CORPORATE GOVERNANCE.

I DON'T KNOW WHY YOU WOULD

INTERFERE WITH THE FREE MARKET

LIKE THAT, SIR.

THAT DOESN'T SEEM... IT'S A

SOCIALIST OPERATION YOU'RE

RUNNING OVER THERE.

>> THAT'S BEEN SAID.

>> Jon: HAS IT REALLY BEEN

SAID IN

>> YEAH.

>> Jon: OH, MAN.

THE RATINGS AGENCY STANDARD &

POOR'S, THEY COME OUT ON FRIDAY

AND THEY SAY THEY'RE GOING TO

DOWNGRADE US.

IS THAT THE SITUATION?

OR THEY CAME OUT... WHEN DID

THEY COME OUT AND SAY THEY'RE

GOING TO DOWNGRADE US.

>> IT CAME OUT AFTER SOME

NEGOTIATION WITH THE TREASURY.

SO EVERYONE IN WASHINGTON KNEW

IT WAS COMING, AND THEY STAYED

WITH THEIR POSITION, AND IT CAME

OUT FRIDAY AND THEN THE MARKET

RESPONDED ON MONDAY.

>> Jon: IS STANDARD & POOR'S,

THEY HAD A VERY POOR TRACK

RECORD IN TERMS OF THE FINANCIAL

MELTDOWN.

THEY HAD BEEN GRANTING TRIPLE-A

STATUS TO A TREMENDOUS AMOUNT OF

CORPORATE BONDS, YES?

>> ALL OF THEM, STANDARD &

POOR'S, MOODY'S, THE BIG THREE

SYSTEMATICALLY INFLATED THEIR

RATINGS AND PROBABLY WERE THE

GROUP MOST RESPONSIBLE FOR THE

FINANCIAL COLLAPSE IN 2008.

IT WOULDN'T HAVE HAPPENED

WITHOUT THEM.

>> Jon: WELL, THAT'S EXCITING

TO HEAR.

[LAUGHTER]

NOW, SO THEY HAD BEEN LET'S SAY

AN EASY GRADER.

YOU'RE A PROFESSOR.

LET'S SAY YOU'RE KNOWN AS AN

EASY PROFESSOR.

YOU TAKE MY CLASS, YOU GET AN A.

SO I SIGN UP FOR YOUR CLASS.

AND I COME IN AND YOU GO, D.

DOESN'T THAT MEAN THAT I AM EVEN

WORSE THAN A.I.G. AND THESE

OTHER DERIVATIVE PLACES THAT GOT

THE TRIPLE-As?

>> YOU NOTICE THE DIFFERENCE.

STANDARD & POOR'S WAS PAID BY

THE PEOPLE THEY WERE RATING IN

ALL OF THOSE OTHER CASES.

BUT WHEN WE TURN TO A COUNTRY OR

SOVEREIGN DEBT, THEY ARE NOT

PAID FOR THE RATING, AND NOW

THEY BECOME STRANGELY ENOUGH

INDEPENDENT.

>> Jon: LET ME SAY THIS: I

THINK I CAN FIX THIS PROBLEM.

[LAUGHTER]

>> YES.

>> Jon: ARE YOU FOLLOWING ME

WITH WHERE WE'RE GOING HERE?

HOW MUCH DO THEY WANT?

LET'S PAY THEM AND WE'RE DONE.

WE'LL BE DONE WITH THE WHOLE

THING.

[APPLAUSE]

>> A COUPLE YEARS AGO, THAT DID

HAPPEN.

THAT'S HOW ALL THOSE TRIPLE-As

CAME FROM, SOMETIMES THE FEE

PAID THE RATING AGENCY, MIGHT BE

$5 MILLION OR MORE, AND WAS

ALWAYS BASED ON WHAT RATING YOU

GAVE THEM.

IF YOU WANT TO UNDERSTAND THIS

IN VERY SIMPLE TERMS.

>> Jon: YES.

>> IT'S LIKE A BASEBALL LEAGUE

IN WHICH THE HOME TEAM HIRES THE

UMPIRE, PAYS THE UMPIRE AFTER

EACH INNING, TELLS THE UMPIRE

THE FEE WILL BE BASED ON THE

QUALITY OF HIS PERFORMANCE AND

IF THEY DON'T LIKE HIS

PERFORMANCE HE'LL NEVER UMPIRE

IN THEIR STADIUM AGAIN.

THAT'S THE FUNCTIONAL ANALOGY.

>> Jon: NOW, AGAIN, I HAPPEN

TO FOLLOW BASEBALL...

[LAUGHTER]

THAT'S INSANE.

THAT'S AN INSANE SYSTEM.

NOW, WE DID HAVE IN THE

DODD-FRANK BILL A CENTER THAT

WAS GOING TO OPEN UP, AN OFFICE

THAT WAS GOING TO THROUGH

GOVERNANCE REGULATE THESE

RATINGS AGENCIES.

IT WAS WRITTEN INTO THE

DODD-FRANK BILL.

HOW IS THAT GOING?

>> IT'S NOT BEEN FUNDED.

THE SEC CAN'T SET IT UP WITHOUT

THE FUNDS.

>> Jon: SO WE SET THIS THING

UP A YEAR AGO TO PROTECT

OURSELVES FROM RATINGS AGE SIX,

BUT WE HAVEN'T OPENED THE OFFICE

YET BECAUSE WE HAVE NO MONEY FOR

IT.

>> YOU GOT IT.

[LAUGHTER]

>> Jon: AS A PROFESSOR, AS MAN

OF KNOWLEDGE, DO YOU EVER WANT

TO IN THREE STOOGES PARLANCE

GO --

[APPLAUSE]

I HONESTLY FOR THE LIFE OF ME DO

NOT UNDERSTAND HOW WE COULD HAVE

GOTTEN OURSELVES INTO THIS

POSITION IN ANY RATIONAL WAY.

>> YOU KNOW, A GUY IN YOUR

PROFESSION HAS HAD THE ONLY LONG

CAL ANSWER.

A MAN CALLED AL FRANKEN WHO

STARTED OUT IN YOUR FIELD AND

PROVED ON TO A HIGHER FORM OF

COMEDY.

[CHEERING AND APPLAUSE]

HE HAS A PROPOSAL THAT WILL

REALLY WORK.

IN THAT DODD-FRANK ACT, THERE IS

HIS PROVISION THAT SAYS THE SEC

SHOULD STUDY, HE WANTED TO ADOPT

IT, BUT IT ONLY WENT THROUGH IS

THE SEC SHOULD STUDY WHETHER WE

SHOULD SEPARATE THE PAYMENT OF

THE RATING AGENCY FROM THE

SELECTION OF THE RATING AGENCY,

SO THAT YOU CAN GIVE THE CHOICE

TO INVESTORS AND HAVE THE

PAYMENT STILL COME FROM THE

ISSUER.

THAT COULD WORK, BUT ALL WE'RE

GOING TO DO IS STUDY IT FOR ONE

MORE YEAR.

>> Jon: WHO FIGHTS IT?

DO THE RATINGS AGENCIES FIGHT

THIS?

DO THE CORPORATIONS FIGHT THIS?

AND WHY CAN'T SOVEREIGN NATIONS

GET IN ON THAT GRAVE I HAVE

TRAIN?

>> WELL, SOVEREIGN NATIONS DON'T

PAY.

THEY MAY HAVE MADE A MISTAKE IN

NOT PAYING.

IT'S NOT SO MUCH CORPORATIONS.

IT'S BAYICALLY THE INVESTMENT

BANKS.

WHAT HAPPENED OVER THE LAST

DECADE IS ALL OF THESE ASSET

BACKED SECURITIZATIONS THAT

YOU'VE SOME WHEAT HEARD ABOUT,

THEY'RE ALL ISSUED BY MAYBE

SEVEN TO EIGHT INVESTMENT BANKS.

>> Jon: AND THESE ARE THE

C.E.O.S THAT TOOK ALL THESE

MORTGAGE SECURITIES AND SPREAD

THEM OUT THROUGHOUT THE WORLD?

>> FLOODED THE WORLD WITH THEM.

AS THE QUALITY WENT DOWN, THE

RATINGS WENT UP, BUT ONLY SEVEN

OR EIGHT INVESTMENT BANKS DID

THAT, AND THEY HAD REAL MARKET

POWER OVER THE RATING AGENCY,

WHEREAS INDIVIDUAL CORPORATIONS

GO TO THE MARKET ONCE EVERY TEN

YEARS, DON'T HAVE THE SAME

CLOUT.

>> Jon: NOW, WHY THEN DID

INVESTORS FREAK OUT WHEN

STANDARD & POOR'S DOWNGRADED OUR

DEBT.

THE MONEY HAS BEEN FLOWING OUT

OF THE STOP EVER SINCE THAT

HAPPENED.

HERE'S THE PART THAT FREAKS ME

OUT THE MOST: THE INVESTORS OF

THESE LARGE BANKS AND EVERYTHING

ARE POURING THEIR MONEY INTO

U.S. TREASURIES, THE VERY THING

THAT HAS JUST BEEN COULDN'T --

DOWN GRADED AS MORE OF A RISK.

HOW IS THAT EVEN POSSIBLE?

>> WELL, FIRST OF ALL, STANDARD

& POOR'S DOWNGRADE WAS PROBABLY

THE SPARK THAT SET OFF THE

POWDER KEG THAT'S BEEN SITTING

THERE.

THE POWDER KEG IS THE PARALYSIS

IN CONGRESS, WHICH I'M SURE

YOU'VE DEALT WITH BEFORE.

>> Jon: FAMILIAR WITH IT.

>> AND THE MESS IN EUROPE.

STANDARD & POOR'S DID THE SAME

THING WITH GREECE, ITALY, SPAIN,

PORTUGAL, AND THE EXPERIENCE

THERE WAS THAT DOWNGRADING

CREATED SOMETHING OF A PANIC.

SO THERE WAS A PANIC, BUT WHEN

INVESTORS HAD THE CHOOSE, STILL

THE SAFEST THING AROUND WAS

EITHER U.S. TREASURIES OR GOLD,

SO MUCH OF IT WENT INTO U.S.

TREASURIES.

>> Jon: IT JUST FEELS A LITTLE

BIT LIKE THE PEOPLE THAT GOT US

INTO THIS MESS, THAT DESTROYED

THE INFRASTRUCTURE OF OUR

ECONOMY AS IT'S CRUMBLING DOWN

CAME TO US WITH THE BAGS OF

MONEY THEY WERE ABLE TO GET OUT

AND GO, CAN YOU HOLD THIS FOR ME

UNTIL THIS ALL GETS FIXED.

>> YES, GOOD.

I LIKE THAT ANALOGY.

[APPLAUSE]

>> Jon: YOU'RE SUPPOSED TO SAY

NO.

THANK YOU VERY MUCH FOR GIVING

US THE OVERVIEW.

WE APPRECIATE IT.

PROFESSOR JOHN COFFEE.

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