should synthetic cdos be banned? >> they don't serve much useful purpose in the efficient allocation of capital in our economy. real dlif tifs against real assets against real mortgages spread risk around. these are nothing more than paramutual betting but they scale up to such a huge level that they can take the whole system down. you said $600 trillion. remember, the u.s. economy is only $15 trillion in any given year. >> dave, you heard peter. what's your response? >> i think he doesn't understand the market. there is no difference between a synthetic cdo and a -- you put credits in the pool and assign different risks to different investors. with a cash cdo you are buying bonds issued already. these structures make it easier for people to hedge and bring in sources of capital that otherwise wouldn't be available to the market. the only reason the street went to synthetic cdos is because in many cases they are much cheaper and more efficient to implement with less transaction costs than cash cdos. it would take a f

the cdo. is that true? >> i think you're referring to the aca transaction, been referred to as the abacus, that's been discussed. any cdo -- at goldman sachs, when cdos were constructed, they weren't constructed in a vacuum. typically we need people that had investment criteria that they wanted to fill and invest in various parts of the capital structure, with various underlying assets at various prices. at the same time, we had to get that risk, which means somebody had to sell the risk to create it. that could be done in cash form, it could be done in synthetic form. so i think it's helpful to note that these deals weren't created in a vacuum. in that particular transaction, the function of providing the risk to it is from goldman sachs capital markets i believe is the correct entity. i would like to check it, but i'm pretty sure that's correct, that goldman actually provided the risk, mean bent short into the abacus/aca transaction. goldman sachs, in its hedging of positions laid that risk

both the cdo desk based in new york and as a result of synthetic cdo structured activities.both senior senior programs, the risk of loss on the super senior exposure was examined extensively, based on those stress tests and models, the likelihood of losses was considered extremely remote. ultimately, citi recognized the market-to market losses on the cdo. these losses occurred as a result of the unprecedent market events, housing price decline, and mortgage defaults not seen since the great depression. and anticipated by virtually no one, including those of us who dedicate ourself to building a business we believe was good for our clients and for the shareholders of our company. i hope i can be of some help to the commission of putting into perspective the nature of citi's cdo business. i look forward to answering your questions. >> impeccable timing. thank you. mr. barnes. >> chairman, vice chairman, and members of the commission, thank you for the opportunity to appear today. my name is murray barnes, i served as the manager director in the independent market risk manageme

should a cdo -- take a look at 94-e. 94-e it shows some of the assets that were included in the cdo had already been downgraded. d.c. that? >> yes, i do. -- do you see that? >> yes, i do. >> it had already been downgraded at the time they were recruited. they were not performing as expected. if it downgraded assets is included in th a cdo, is that something that an analyst with notes? >> we have rules that if an asset was on what, it would be taken down a few notches. once an asset was downgraded, it would be used at that ratings and no more, no less. >> would that be warning signs of the quality of the assets? >> it would have been a qualitative warning. quantitatively, it would not leave an analyst much room. at that point, we would have said, this is our best view. >> should it affect the credit analysis? >> absolutely. this is something that i tried to do later. once you take the path to downgrade, that is not likely to stop. we tried to implement something where the securities that had been downgraded already, but not on what. -- on watch. >> should it affect the analysis? it did n

should a cdo -- take a look at 94-e. 94-e it shows some of the assets that were included in the cdo had already been downgraded. d.c. that? >> yes, i do. -- do you see that? >> yes, i do. >> it had already been downgraded at the time they were recruited. they were not performing as expected. if it downgraded assets is included in th a cdo, is that something that an analyst with notes? >> we have rules that if an asset was on what, it would be taken down a few notches. once an asset was downgraded, it would be used at that ratings and no more, no less. >> would that be warning signs of the quality of the assets? >> it would have been a qualitative warning. quantitatively, it would not leave an analyst much room. at that point, should it affectt analysis? >> absolutely. this is something that i tried to do later. once you take the path to downgrade, that is not likely to stop. we tried to implement something where the securities that had been downgraded already, but not on what. -- on watch. >> should it affect the analysis? it did not affect the analysis here. the s&p analyst said in his

they had sewed authority over all collaterals within the cdo. that seems to be a bit different from the impression, but no one said they were involved in the marketing, but said they were involved in giving goldman the names to go into the cdo. i want to go around the horn to get commentary. jim, anything that makes you think they were -- >> i think theyunder scored the whole idea that the selection of collateral is going to be the issue here, and whether or not that was fraudulent. that's what we're going to have to look at. goldman loses its case, we'll have to relook at all the cdos in 2007. >> that would mean many other firms as well. jim cramer, in this statement, though, paulson and company saying the collateral manager had sole authority. this may be nuance and rhetoric, but obviously the s.e.c. is saying something different that paulson and goldman together came to aca with a list? >> my understanding is i learned that the collateral manager also had a position in abacus. i understand what jim bianno says, what tranche? but frankly every

the number of big players involved in the cdos seems to be fairly small. i notice that some of the other ones outside of deutsche bank, the other international players are only down 2% to 3%, and might is this be limited to few people if at all or just to goldman sachs? >> well, aagree, bob. the problem i have is that i have seen the confidence of the environment we are in starting to fix itself a bit, and i think that, you know, whatever fairy dust holds the markets together and gives it liquidity, that psychological aspect could be damaged by what i perceive to be a long ongoing investigation with lots of nasty headlines potentially. >> all right. the important thing here, and we are closing out the week, and trish, the dow jones industrial average basically flat for the week. the s&p 500 may be down .01%, and the big win ser the nner fo is the nasdaq down 1% there. is the closing bell, and you know who is next, trish regan. >>> it is 4:00 p.m. on wall street, do you know where your money is? welcome to the "closing bell," i'm trish regan in for the mari

anderson was up $300 million synthetic cdo, referencing certain other securities. this reference subprime or mortgage-backed securities. many of those securities were originated by new century, a subprime lenders notorious for poor quality loans. goldman participated as one of the short investors. you can see from the exhibit. they bought the short side for $100 million, about 50% of the short side, 50% of the reference assets. from the beginning of the deal, right from the beginning, goldman was selling anderson securities to clients, but it is betting against that cdo. it got in the words there, protection that pays off. if the cdo-reference assets start losing money. so if you will take a look at the following e-mail. goldman's clients rejected the deal, first of all, because it had so much for quality, new century mortgages. for example, look at the third page of the exhibit through a class and asked how goldman got "comfortable" with all the new century collateral. in particular, the new century deals. take a look at the internal response at the top of the pag

-- synthetic cdo? >> 8 cdo -- acd cdo pool of mortgage assets that are pulled together and can be sliced in a way that will yield a particular credit exposure. the reason one would want to pool mortgages is because it gives the versification so that you can pool mortgages for not just one community but distributed over the entire country. the reason one would want to slice it is so you can pick your place on the credit spectrum and say i like the more senior mortgages, where the more junior risks. a synthetic mortgage, you do not pool the actual mortgages, you pool securities that are indexed to specific pools of mortgages. courts in other words, -- >> in other words, you do not really have any ownership. you are just betting on the fortunes of that cdo. is that correct? >> yes, you are doing it to get a specific risk in a specific place at a specific level of the spectrum without necessarily having to assemble a particular security so you could do it more quickly and more precisely. >> how does that d

took the ultimate safety of these cdo positions. i don't think it was a situation where the regulators were not active. it certainly felt active from the company's standpoint. i don't think he was a situation where the regulators didn't know what was going on. as i said, they lead with is a day by day by day. i think that the mistake that was made by everyone about the value of these instruments was fundamentally also made by the regulators. and i think that's basically what happened. i don't think it was a failure of regulatory involvement with the company. >> thank you. that's it. >> thank you very much, ms. murren. mr. wallison. >> thank you, mr. chairman. let me start with you, mr. prince. i want to thank both of you for coming to this, and answering our questions. let me start with you though, mr. prince. you talked about -- >> mr. wallison, paul the mic a little closer to you i think for everyone so we can hear your voice. easy for me to say. >> sorry about that. mr. prince, you talk about a 30% decline in housing prices compl

this was not a cdo issued here, this was a synthetic cdo, where the whole point was to bring together a long who loved if, a short who hated it. it was goldman's duty to create a portfolio that maximized the difference between the two? >> a lot of strong evidence, the way this thing was constructed internally, bad cash flows, bad covenants, a lot of problems with this. >> well, that's fine. there's nothing wrong with that inherently, and the s.e.c. has not said there is. the s.e.c. simply said the role of paulson & company was not disclosed so that the long side of the trade didn't have all the material information. but those things themselves are not sins, okay? >> well, we can disagree on that. >> maybe we will, and a jury will decide, but the problem is, because of that strange factor that even you and i can't agree on, that's why the practice is so widespread. it falls into this gigantic gray area. >> would you buy banks now? i guess that is the bottom line. >> no, i wouldn't have bought them before. the only thing that was keeping the whole u.s. banks sector in a growth industry

took the ultimate safety of these cdo positions. i don't think it was a situation where the regulators were not active. it certainly felt active from the company's standpoint. i don't think he was a situation where the regulators didn't know what was going on. as i said, they lead with is a day by day by day. i think that the mistake that was made by everyone about the value of these instruments was fundamentally also made by the regulators. and i think that's basically what happened. i don't think it was a failure of regulatory involvement with the company. >> thank you. that's it. >> thank you very much, ms. murren. mr. wallison. >> thank you, mr. chairman. let me start with you, mr. prince. i want to thank both of you for coming to this, and answering our questions. let me start with you though, mr. prince. you talked about -- >> mr. wallison, paul the mic a little closer to you i think for everyone so we can hear your voice. easy for me to say. >> sorry about that. mr. prince, you talk about a 30% decline in housing prices compl

complex securities like synthetic cdos and others that wall street created.t is nice to have you here. the synthetic cdo market, you started in structured products in early 2000 and watched this market grow. was there a place for this product to begin with? some would say including me it is somewhat reflective of wall street's ability to create things that in some ways don't even seem necessary. >> there are investors in the world that need aaa securities or need exposures to various underlying asset classes. and i think the genesis of this product had a lot to do with rather than building out all their own complete infrastructure was to outsource some of the asset management responsibilities of these products to the collateral manager of a cdo, but also to generate the proper risk return where in the capital structure, what ratings they would get and the return they would get for taking a less liquid debt investment that was backed by the cash or synthetic but essentially the bonds issued, the tranches issued by the cdos. >> i get cdos, though, but then a dr

the cdos, they pressured cdo managers and demanded it from investment banks. and in fact, magnatar says their situations were known to the dealers and cdo managers. so, this was common for the sponsors of cdos. >> right. so, if it's fraudulent, i mean, if it's a criminal act, then this is a crime that was happening across wall street -- >> although i'm not sure that the crime was deciding to construct a synthetic for the purpose of getting short exposure. >> well, that's what they are for. why else would you construct one, right? >> that's exactly right. so i don't think that's the problem anyone has. i think the problem is, did the dealers have an obligation to tell the other side? >> right. >> and frankly, even there, i think that raises question, and i'm not a lawyer, about the s.e.c.'s case, though. because as a buyer, if you were given the collateral information and you saw the weighted averages of the quality of the collateral, is that really the material information that you needed as a qualified institutional buyer to do your own due diligence? or did

i have another -- other testimony, managers of the cdo, in cdo, gus harris told staff, if they lose market share they'll be fired. we have that testimony. contemporaneous testimony. were you troubled by it when you heard it? i don't know if you heard it all, but... >> as i said, no employee of moody's has ever been fired for market share issues. >> were they threat. >> no. >> any evidence market share drove ratings, have you look at these exhibits and listened to why just told you. >> as i testified early, ratings quality is paramount -- >> if we look -- >> supposed to be paramount. >> we look at other things that are relevant to running a business and that include market share and, in particular, ratings includes market coverage, whether we are paid for that coverage or not. because we are operating a system in which the comparative elements are important. so, being able to compare one security to another, with a common view of credit, or a common language for credit is expressed in the rating i think is important. that is different from market share for financial purposes. >> are you sur

certainly the purchasers of the cdo, the synthetic cdos, knew somebody was on the other side. it was either goldman or somebody else, if gold pan w. how material is it to them, that goldman is putting it together or paulson on the other side? >> so if it's not the s.e.c.'s strongest case, is it politically motivated or not? there's so many elements as to how it was ruled out, the 3-2 vote. >> we don't know it was a 3-2 vote yet but it's been reported that we a lot. i assume it was. it has a lot of those touches in the sense. i mean, i would be astonished if the white house had called the s.e.c. or if senator dodd or anybody in the congress had called the s.e.c. i would not be surprised if the s.e.c. itself, or the three commissioners, presumably the chairman and other two, thought it was useful in the political mix at the time. they live in washington. they read the papers. they're aware of the situation. i would not be surprised if that was the factor in their thinking. >> that's tough to prove. >> of course it is. >> the unfortunate thing about the investigation is the inves

billion -- they buy in a matter of a couple of months $15 billion of punitive -- of triple a rated cdos backed by sub prime mortgage. >> wait, wait. >> all right, sorry. >> cdo. >> collateralized debt obligation. now, what is that? all right, so the loans create the bonds. the bonds -- the loans go into a trust. the trust as i said is traunched up. it's sliced in that there are -- there are junior and senior claims on this trust. if you get them -- if you're entitled to get the first dollars that get repaid you have less risk than the first person who gets the last dollars that get repaid. so you get a lower rate of interest and you have a higher rated bond, a triple a rated bond. the person who gets the -- who experiences the first losses to come from the trust gets a triple b minus rated bond and a much higher rate of interest. what wall street is it took the triple b minus rated bonds and piled them all into another trust. slice that up and 80 percent of that is triple a rated. so what howie hubler buys is essentially a pile of triple b rated sub prime mortgage bonds $15 billion of t

-- super senior cdo's.y were rated aaa-plus and had minimal risk. my view, which i expressed at the time, was that the cdo business was an arbitrage as activity -- and arbitrarized activity. i believed these transactions were not completed until the distribution was fully executed. having said that, it is important to remember that the view that the securities could be retained was developed a time when aaa securities have always been considered money could. -- considered money-a gogood. i served on the search committee that led to the selection of the companion. ultimately, citi took $30 billion of losses, a substantial cause but of the bank's financial problems that led to the assistance of the united states government. i believe that the overriding lesson of the financial crisis was that the financial system is subject to far more severe downside risk than almost anyone had foreseen. i believe that it is imperative that private institutions and the government act. citi, first under chuck prince and then

and cdo squares -- >> but there had to be a buyer on the other side of this trade. and to the -- you know, so -- >> but there had to be -- well, they were buying the cds protection. so there had to be a celler protectio protection, right? so yes. but the reason the investment banks were going after it, creating these new products, is because hedge funds were pouring in and the s.e.c. would have seen that problem. >> stephen, we're going to leave it there. thanks so much. obviously the two hedge funds managers on this desk take a little bit different view on this situation. >> he's right that the derivatives market has gotten out of control, but this is independent of hedge funds. i think his point is that hedge funds have spurred the demand that have made banks fall all over themselves to do this. but the reality is this is a different issue. >> right. okay. i think we're going to take a quick break here. more "fast money" up next. >>> all right. thursday a very important day. the 40th anniversary of earth day. so it's earth week here at nbc. take a look. ♪ we rode

his firm is creating the subprime mortgage bonds and creating the cdos and he spent 18 months at war with his own firm. he is trying to talk people out of buying the stuff that his firm is selling. he becomes an annoying character to a lot of people at his own firm. he is the other principal short seller. >> how much of all of this is made up just so that these people can take the money whether it is credit default swaps and all of this language that the average person cannot figure out? >> the jargon is probably not self consciously invented to hide what is going on, but that is the affect. people are happy to have that effect on wall street. the complexity is a form of obscurity. if you make it complicated enough, no matter how transparent it is, and a lot of this is not even transparent. you just this way the public from taking too much of an interest. -- you just dissuade the public from taking too much of an interest. i thought that if i explained this to people, they would be outraged. they really need to know. you need to know. >> let me ask you. you may or may not know about

. >> i think that what happened here is that the regulators also mistook the ultimate safety of the cdo positions. >> in an institution with hundreds of thousands of transactions a day and something over $1 trillion a day running through it, that you will know what is in the position books and i didn't know it when i was running goldman sachs and you would not know it on the board of citi either, you were depending upon the people there to bring you problems when they exist. >> hopefully part of the commission's effort will be to try to examine why and how people as smart and with as much experience as a tom harris and a david bushknell and the rating agencies and the various regulators, how all of them could have had what turned out to be a false belief about these instruments. >> did he just blame tom harris? what can we take away from the financial system and the collapse? mary thompson is in washington, and she monitored the hearings. what did you learn, mary? >> well, when you listen to the sound bites that we played the quotes from mr. rubin as well as mr. prince, a couple of thin

so just reflecting on the cdos, you take an original loan on original collateral. i'm a real estate person so sticks and bricks some breakfast is what i him a real value, real assets. you take it to the next stage, securities and rbs. you take it to cd on many synthetic cds you and i want to talk about the underlying value of these because the fact is i don't know what kind of stress test you did, but here's just some basic tax rate from 90 to 91, real home prices to drop nationwide by cumulative of 3%. by the fourth quarter 2007, at which point these cbo super you write off 18 billion. the home prices have only fallen 5%. so i guess what i'm saying is what was the stress test? was at number going down? they fallen from 90 to 91 at 3%. i know is that it does in california. so the question is, how stressful was the stress test? it doesn't seem like much. 5% apologize for the time you guys took an $18 million right off. >> when they comment on that because one of the things are referred to the commission earlier about the intrinsic cash flow model. and that was reall

that structuring business had cdos. we knee early on that at times they were going to use liquidity puts. but at the time when they first started doing cdos, the underlying collateral was not subprime collateral. >> i'm sorry, what? >> it was not subprime collateral. >> what were they using 1234 >> regular mortgages. prime mortgages. >> right. >> that was our understanding. later we began to -- >> but they were still using low-level tranches of the mortgages were they not? >> that was not my issue. later they began to use derivatives in a synthetic way to create cdo exposure and that business began to pull some of the supersenior synthetic exposures in the bank. we did learn about that. we did do do an examination of our london branch office, our london office of the occ examined their branch office. and we did get a sense of the expoture there -- exposure there in the early months of we've. but the exposure we got at the end of 2007 was a little larger than at the beginning of 2007. what we didn't know though was that

>> should synthetic cdos be banned? is finreg 85% done?night on "the kudlow report" -- senator jim demint is trying to save the republican party's conservative soul. he will visit with us. >>> plus, should synthetic cdos be banned? is financial regulation 85% done? 25 reasoned for a v-shaped bull market economic recovery. finally, apple had a blowout 90% profit on macintosh and iphones. fasten your seat belts, everybody. "the kudlow report" begins right now. good evening, everyone. i'm larry kudlow. welcome back to "the kudlow report" where we still believe free market capitalism is the best path to prosperity. richard shelby said today that financial regulation is 85% done. so are bipartisan talks back on schedule? here's chief washington correspondent john harwood with the latest. is it true? >> i think they are making progress, larry. it is almost certainly going to get done. for a time today, the backstage negotiations over financial regulation moved out of the spotlight. instead you had a house financial services committee reviewing w

the trading division, largely driven by fixed income and of course, instruments like these -- well, cdos. today's earnings news, not surprising, when you've been given a $ 23.7 trillion windfall state support and been the chosen one by the government to be at the he had of the chain le goldman sachs was for jp morgan. today, evidence that the fraud may stretch well beyond goldman sachs. dick foelt defending his use of the repo 105's, an accounting technique that goldman used to make it appear they had much more money they actually did, in order to cheat and steel more. fold says we've got it all wrong. >> lehman and his people have been unfairly vilified. there's been a lot of misinformation about repo 105. among the worst were the erroneous are reports on the front pages of newspapers claiming that lehman used 105 to remove toxic assets from its balance sheet. that simply was not true. >> no they were just using it to hide the fact that they were insolvent so they could continue gambling with those toxic securities. back with us, gretchen morganson who broke the story with for "the new

there was the cdo and the synthetic cdo.that time there were probably billions upon billions of dollars into these instruments so you read today probably that deutsche bank was creating them. ubs was creating them. why they went after goldman begs the question, if everybody was doing it, why goldman? i think that really dove tails into the political agenda behind all of this. that is is that goldman is the biggest fish out there. they're the ones who have engendered most of the populist vitreol towards wall street. that's why they went after goldman not so coincidentally on the raging debate about wall street. i think there will be more action brought. >> brown: what do you think. >> i think that's absolutely right. it was very widespread. i think goldman and other transactions followed the same pattern, whether it's fraud or not will be seen. but many other institutions were engaged in this. every time you say the people were betting that housing prices would go up, there has to be another end of that bet. they were betting

little town in new jersey, and she created, he works at lehman brothers and he create some of the cdosthe. so i talked to some of these people. i have gotten some of the observations as it were. to try to answer that question. so i've only been curious about it, and some of them are kind of more obvious than others. if you think about it, instead of an evolution maybe they're always has been. there is an evolution, was an evolution in the creation of some of these investment products. first you had mortgages and then you mortgage-backed securities, and then they involved into some other debt products to create these cdos. credit default swaps obligations and then have other versions and credit default swaps. things really evolved. and became much more complicated each year and if one is trying to outdo the next in terms of creating these products. and to me, it got to the point where the very people at investment banks didn't under understand them. if you had senior people. the senior people, the roberts and chucks, stan o'neal, the first two gentlemen help run citigroup. and they were

apparently these belgians adoor synthetic cdos. that doesn't sound just bad it sounds really, really terrible. >> it sounds absolutely terrible and it's the woirs kind of thing to come out. it's obviously not the case. it's the kind of, obviously not literally true. but it's the type of thing that people say to their friends, to their girlfriends, to whoever, to their colleagues, to sound cool, and people -- >> goldman wants to make him out to be one bad apple. >> sure. >> and not indicative of the entire firm. >> and to goldman to defend no one else within the company has really been identified. so, they have an argument in -- they would have an argument in saying he is one bad apple. >> joe, good morning. it's andy over here in london. i was just wondering from your perspective, goldman's clearly embars aed by this e-mail trail. the s.e.c. and others are going to pick up on that clearly this week. do you suspect, from your perspective, that they're alone in having these kind of dichotomies, shall we say, within the business pract

they even ran into greece and iceland with these cdos and the like. who, you know, with them embedded in the government every term, who can come against this cartel? i heard money's going to crash this year at the end, at the library all these sites say that the dollar's going to crash. did you hear anything about that? thank you very much. >> guest: well, as i mentioned to the other question whether the dollar crashes or not really depends on whether we get another revelation that indicates that a lot of these assets really aren't worth what the fed and banks are saying they are worth which is, which is not impossible. i don't believe they're worth what either of those entities say they're worth. and we do have a problem. we have a problem that wall street and certainly the senior managers and ceos of wall street have an incredibly tight relationship with washington. you know, ceo of goldman sachs now, and the firm is being charged by is sec at the same time, has had many meetings with obama. you know, there are continued reports, you know, before th

. >> so you were not aware that he was restricted in any way from working on cdo deals with certain banks >> i was not aware of that. we had a contentious relationship with most of the investment banks that were out there. there were many times when it would be requested to remove an analyst for a transaction or that they not be put on the next transaction because it was a contentious relationship. that happens quite commonly. we did not make it a practice to remove people from transactions. >> did you ever do that? did you ever remove a person from a transaction with particular banks because of complaints from that bank? >> not because of complaints. because of timing. >> the following conversations with the banks, did ask -- when they asked for a removal of someone, did you accommodate that? >> there would be cases where they would ask because of the timing that the analyst told them that they needed to be able to work on a transaction because their plane was full. at that time, i would get somebody else on the transaction. >> it was only a complaint that the analyst was not moving quic

he knew if he wasn't creating this cdo if he wasn't creating it somebody else would be.hey got caught up with this. the bigger these firms got the more each group -- and i've talked a lot. each group knew about their own area. and the risk level and maybe they said well, yeah i can see with a that can happen but they didn't have a larger view -- how the dominos could fall and the overall risk of the firm. there were some firms that were better than others. goldman sachs does a much better job of drilling down and seeing where the risk is throughout the whole system. goldman sacks was late at catching this as well. they get a lot of credit and people either love them or hate them but. in the spring -- or late summer of 2006 josh burmbaum at goldman sachs was at paulson & company and he was over there and invited by john paulson on this short on these toxic mortgage products and he was bullish and paulson voted him over there and he gets a lot of credit and i think there's a real lesson there that paulson invited groups of analysts, many of whom who were bullish over to th

you remember, people were talking about the financial collapse and deregulation, people talk about cdos, the instruments that are kind of like insurance but not regulated like insurance. what the fcc did in the bush administration was something similar. they classified, you know, a network technology which is clearly a network as though, you know, access to the internet as though it were twitter or some unregulated technology. so they have to do, essentially, call insurance, insurance. call a network title ii, not title i. internet access is not twitter, it's more like the phone network. >> host: so if say, per se, the fcc wanted to adopt title ii, is it as simple as the commissioners meet, they debate about it and there's a vote? >> guest: it's that simple. you just need three votes from the commission. it's clearly, in my opinion, the obvious way of reading the statute. justice scalia in a dissent with three other justices thought it was the obvious way of reading the statute, and several years ago when commissioner copps dissented from the original order changing the statutory framew

now, let me translate what synthetic cdo means.e up something that people can bet on. that's what it means. >> uh-huh. >> there's no societal benefit. they're not raising capital for a business. they are just creating something so people can bet on it with less regulation than las vegas. so, obviously, the derivatives chapter is very important for regulation and also being able to bust up these banks and sell them off if they get upside down. >> could i hire senator mccaskill? that was a very good description. >> she's good. >> of synthetic cdos. well done. >> let me ask you, chrystia, about mika's biggest complaint, and that is that it doesn't break up the banks. that even after this bill passes, we still have five or six financial institutions. that if they go belly up, we're going to have to bail them out. or the economy will go under much like it did after lehman brothers. >> well, there is, as you know, a heated debate about whether too big to fail is actually the heart of the problem. i'm on the side that says too big to fail

on the conference call wells wouldn't even talk about their cdo exposure. >> chris, but your rating on citi, even though you upgraded, is a neutral. what -- >> it is a neutral. but given where i was, this is a sea change. >> that is true. all right, contribution we've got to leave it there. thanks so much for joining us. christopher whalen, institutional risk analytics. >> thank you. >> going to take a break here. more "fast money's" up next. >>> with the market splitting down the middle, the broad rally is behind us. so how do you find the best in breed? "fast money" shows you the way. >>> plus, see which under the radar plays are outperforming. when america's post-market show continues. u.s. and foreign stocks online, in 12 markets, 24 hours a day, all from the same account, and settle in u.s. dollars or the local currency. plus, we'll guide you with international research and realtime quotes, so you can diversify your portfolio, wherever -- whenever. and we'll be on call around the clock, while you trade around the globe. fidelity investments. turn here. >>> let's break down some of

. >> are you talking about if you're an investor in goldman stock or you're an investor in those cdo products? >> if i'm an investor in abacus, i would want to know what paulson's doing, and they didn't disclose that. >> is it your view -- i mean, jake, if you can put it in context, i know you referred to henry blodgett and those infamous e-mails. but is this just as bad as any other sort of crisis that we've seen on wall street to date, or is this something different? >> i think this is different. what the heart of this case is is goldman's conflict of interest, that they're telling their investors that this is a great fund to invest in when they know that paulson is going short and that there are problems with this fund. so goldman's conflict of interest, there's been a lot of suspicion on wall street that they've been doing things like this for years. this case i believe will prove it. >> jake, what do you make, then, of that they lost $90 million on this transaction? >> you know, goldman makes money, they lose money. that's not going to save them here if they misled investors. i

claiming that the cdo's and clo's were all mortgages. they were not. they were corporate loans. we tried to tell them that. he ignored that. he continued to talk about lehman. i will be kind, and just say he talked about lehman in an unflattering way. books did you look at where the discrepancies were, the use of repo 105? did that, that all the? >> and not at all. >> i am over time. >> yes. >> the chair this think all witnesses for their testimony today. some members may have additional questions for this panel. they may wish to submit them in writing. without objection the hearing record will remain for 30 days open -- [reading] this hearing is adjourned. [gavel] >> now we will begin opening statements. >> thank you. we meet again today to look at another massive corporate failure. we have heard the sad song of corporate greed and breakdowns one to many times in recent years, and in some sense suggests enron, madoff fraud, and the massive problems of aig. the problems at lehman brothers add another burst to the troubling refrain. in the lehman brothers tune it deeply troubles

with respect to the cd 0 west -- cdo's, they were transferred into packages that created these creditult swaps. there is nothing really synthetic about the transactions, from the standpoint of the mortgages existing, so i am not sure what you're talking about with respect to the synthetic cdo. but the mortgages were in place, some of them were good, some of them are dead. there was -- some of them were bad. there was not someone examining them on an individual basis, nor was that transparency in place for the regulators to see that. that is what we have to make sure that we accomplish in this legislation, giving those regulators the opportunity to look inside those bonds on the transaction by transaction basis. host: sex be chambliss, thank you for being with us today. -- sex be chambliss -- saxby chambliss, thank you for being with us today. criticism becomes optimism. senators expressed hope for a deal on regulations soon. they write -- looking at the bigger picture of financial reform, we will take your phone calls. at 8:30, we will be speaking to the director for the national park

that this could mean other banks on wall street involved in structuring these deals, cdos, could be suedcc. you can see more complaints like this. on the other side rk you have people who say no, this is political grand standing, the obama administration that wants to get financial reform past. that was a very junior banker at goldman. and so this is more political grand standing. we'll see which way it goes, but for now, it is giving the entire market room to pause. >> and the charges, civil charges against goldman. what is their response so far? >> that they're unfounded in fact and law. they say they'll vigorously defend them. obviously, we've been calling them, but have not gotten any further than that statement. we'll see. this is interesting because you remember arthur anderson, right? >> sure. >> people may say it isn't that significant, but could be regardless of whether you think the charges are of giant scale or small scale. >> erin burnette following all this on cnbc and you'll have more throughout the programming day. thank you very much. good to see you. >>> with more o the

. >> andrew, just take one last whack on synthetic cdos and should the banks be involved in that trader? just take one quickie for me, budsy. >> larry, what else do we need? we almost had the meltdown because of trading derivatives and if that didn't precipitate the waning of banks trading those, i don't know what will. >>> steve liesman with new developments in the sec fraud case against goldman sachs. could be a big blow for all regulatory agency. >>> the uk lifting flight bands caused by the volcanic ash cloud over europe. ♪ as you can see, this isn't your typical midwestern farm. the reason lies six thousand miles away... in japan, where a producer of specialty eggs needed corn for feed... grown to precise standards. cargill identified the producer's needs, then introduced an illinois farmer to grow the exact corn needed... and developed a system to ship it separately, connecting the farmer with a japanese customer... who was very appreciative. this is how cargill works with customers. >>> check out apple which has seen shares rise 16% since the beginning of the year. at least eight

now i want to give some other testimonies, managers of the cdos used all the staff if they lose markethare there going to be fired. we have that testimony? contemporaneous testimony. we are troubled by it. i don't know if you heard it all. as i said, no employee at moody's has ever been fired for market share issues ever. >> have they been threatened thing would be fired? >> not that i'm aware of. >> is there any evidence that the market share drove the ratings? have you looked at the six of its? have you seen what i just told you? >> as i testified earlier, the ratings quality is paramount. >> it's supposed to be paramount. >> we look at other things relevant to running a business. that includes market share and in particular market coverage whether we pay for the coverage or not because we are operating a system in which the competitive elements are important. so being able to compare one security to another with a common view of credit or common language for credit as expressed in the reading i do think is important. that is important for market share purpose. >> ms. corbet comer us

originally sparked by anger, over bank bailouts that were paid to pay off bets like that goldman sachs cdo. the tea partiers are notably absent from the current debate on financial reform. in fact, a recent poll of tea party supporters shows them very angry about health care and government spending. but the $23 trillion put at risk by our banking system and the $4 trillion used by them in bailouts? the gambling with your pension? the obliteration of your children's work? the burying of your home? it doesn't really bother them. here to mix it up, cenk uyger, who called attention to this in his column in the "huffington post." cenk, does this mean that the tea partiers are socialists? that they're in favor of a giant government takeover of the banking system? they seem fine with it. >> i actually think that the protesters themselves are honest and genuine about their feelings. an i think they really were worked up about the bailouts. but i have to be honest, i think they're suckers. i think they get easily duped by groups like americans for prosperity and freedom works, which are corporate-s

>> i was that we know for the record that cdo broke apart who got the subsidy.and homeowners got a de minimis part of the subsidy. the vast majority would to shareholders and management. >> mr. holt aiken, would you be willing to provide information for the commission under oath or under subpoena or voluntarily? >> one can get from the websites that i want to talk just a minute as we wrap up your about the affordable housing goals, because i want to understand a little bit about how the process worked. hud would propose them. how -- was a process in which fannie and freddie would say here's what we legitimately can meet or do they really flow out of hud? what you look at them for safety and soundness? >> i was not -- the ofheo director is not directly involved in setting the goals, but we do playable and i am a little familiar with alan burks. and from my understanding, it was a sort of a back and forth, that the goals were frugally proposed by hud. there was pushed back by fannie and freddie. and eventually they came out with a number where hud thought it showe

there needs to be transparency in these cdos and what he is proposing today the complete bureaucraticr. the government gets to determine how much risk, how much is too much risk. >> of course. but we didn't have a course correction. because wall street destroys everything around it. one thing if the dry cleaner goes out of business and you have to redo it but they went -- and by the way, they literally, they're like you don't let kindergarten children play unsupervised. >> where is this coming from? >> let's get -- >> from every rational economic thinker in the world now. >> let's change the subject. let's change the subject. another guy, number two in the operation was out today, the vice president joe biden, with the ladies on "the view" and talking about the good assignments he gets with his relationship with the president. >> the president and i are philosophically in sync and handed big chunks of responsibility over to me. everything from iraq to the middle class task force. >> going to israel. >> to our -- things i run on a day-to-day basis so it's good. >> that's a long list th

. >> if we wind back the clock, new reform should i have known if i was buying these cdos from goldmanhn paulson was one of the architects? in the new regulatory world would that be in there? >> no. i worked at goldman. that's proprietary. >> in reality, if i'm guy buying this stuff, don't you think that's an important piece of information? >> you are never allowed to know. i bought whole baskets from fidelity which is a great investor. i shorted things that sorrows wanted to buy. you're not allowed to give that information. that's how you get fired. i went to my goldman contacts and said had i given this guy's name up they would have fired me. >> i'm not talking about two sides of the trade. i'm talking about a guy outside of goldman instrumental in building that product they sold. there is a big difference between which side you're betting on and the guy that put it into the house. >> is there really? every basket i ever put together or shorted was put together by me with a nominal interference from goldman. that's the way the baskets are designed. i've designed a lot of baskets and

telling a friend "the cdo business is dead, we don't have a lot of time left."also brags in an e-mail, "the only potential survivor is the fabulous fab." the fabulous fab is now on paid leave. there's also this guy, his boss, goldman ceo lloyd blankfein. he said, "appropriate steps to defend the firm and its reputation are being taken." and likely to defend also its ability to make money. they make a ton of money. goldman has profits of more than $13 billion last year and will release first quarter numbers tomorrow. they'll likely be huge. the company expects to hand out $5 billion in bonuses. lloyd blankfein got $9 million in goldman stock last year alone. in '07, when paulson -- when the deal went down, paulson pulled in nearly $68 million. john paulson, let's talk about him. he picked the toxic mortgages then bet against them. here's the lowdown on him. according to the "wall street journal," his firm paulson and company made $15 billion betting against the housing market in 2007, of which paulson personally got $4 billion. he made slightly more than $1 billi

moreover, it is important to appreciate that the cdo business, which was a small part of a large andcial organization, was being managed by highly experienced traders and risk managers and was fully transparent to our regulators, who were embedded across the company. in retrospect, it turned out that that risk assessment, while widely held, was dramatically wrong, given the wholly unanticipated and significant collapse in residential real estate values across the board, in nearly every community and geographic location nationwide and across many parts of the world. in that context, let me safe something about risk. i always believed that the resilient -riskfunction at citil part of our business. after becoming c.e.o., one of the very first things i did was to name david bushnell as the chief risk officer of the company and to change the reporting structure, so that the risk function was then completely independent of the businesses, which it was not before. the risk professionals were not paid on profits, were not paid on volumes or revenues of the business units, and i believed that

host: is the discussion the same about synthetic cdo las's? guest: these are the ones that do not include any actual mortgage bonds. they are simply derivatives, insurance policies. you can have one home in california, for instance, if there were no derivatives created from this, there would only be one mortgage bundle out there that would include the risk of this house, but when you include these synthetics, you can create thousands which refer back to the same mortgage. so it exposes much more people to the upside or downside, if the person that owns the house gets in trouble. host: "the wall street journal" has just that story. individual houses at the very base of these complex financial processes. i wonder how many people would agree with one of these guys moving out of his home who says he bears no grudge against mr. paulson and goldman. guest: that is surprising but funny because most homeowners have no idea what happened to their mortgage after they sign the paperwork. i give them credit for not being better about the experience, but i

they meet together and goldman sachs put together what is known as a synthetic cdo, kind of make up on our own terms. what if you, clients, decide you want to go short on a security that we make? for you to go short, you necessarily have to have another side going long. because there is not anyone there to do it for the size of the trade, mr. paulson, why don't we be back participants? we are going to go long, but temporarily. at the same time, to cover our own hides -- goldman sachs speaking -- we will buy insurance on our long position, which is going short through aig. what happens there is you have goldman in a position, both servicing client that is betting on something going down and that the same time being in a position, making a security that it needs to sell to other clients. like being a middle man. this is what goldman was hammering on the past few days. we are a market maker. the question is, what the sec thing hinges on, it is fine to be a market maker but were you actually allowing one side of the trade, the short side, to help you structure in effect a self-fulfilling p

i don't know, what is the purpose of a synthetic cdo?to society that is. >> yeah. >> okay. >> does anybody around the table know? >> i was wondering about that. >> no, seriously. what do they do? i'll tell you what, senator corker, you're one of my favorites. and the reason why is during the 2006 campaign, i would actually wear baseball caps that would say "harold ford beat senator corker real, real bad" because harold's a friend of mine, even though senator corker is a good republican. but he was gracious to me. even after that. senator, you're a good man. and by the way, are you -- any truth to rumor that you're going to move in new york and try and run for senate up here? >> well, you know, tennessee's been great to me. i plan on zaing there. i appreciate you having me on. i hear the music. you all have a good day. >> all right, senator, very good. boy, you know what? we are finding some great voices in the new republican party. he's a great voice for the republican party. >> then we're going to get to donny deutsch coming up in a few