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Debt Ceiling Become Latest Pawn in Battle Federal Deficit; Big Oil Making Big Profits; Low Housing Prices Stressing Homeowners; Right to a Good Education; Too Big to Jail?
Aired May 14, 2011 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, HOST: I've got a message for everyone, from Tea Party supporters to backers of President Obama, if you are serious about dealing with our long-term debt in this country, then it is time to acknowledge that we need to talk about tax increases and spending cuts.
I'm Ali Velshi. Welcome to YOUR MONEY.
The debt ceiling has become the latest pawn in the battle over how to reduce our federal deficits. The Obama administration insists not raising the debt ceiling would be catastrophic, yet a number of Republicans are not blinking.
Will Cain is a CNN contributor.
Will, listen to this, I was among those in attendance this week when speaker of the house John Boehner made clear that he wants to see spending cuts equal to any debt ceiling increase. Listen.
(BEGIN VIDEO CLIP)
REP. JOHN BOEHNER (R-OH), HOUSE SPEAKER: We should be talking about cuts in trillions if we're serious about addressing America's fiscal problems. And these should be actual cuts, real reforms to these programs, not broad deficit or deficit targets that punt the questions to the future. And with the exception of tax hikes, which in my opinion will destroy American jobs, everything is on the table.
(END VIDEO CLIP)
VELSHI: Will, what serious conversation about debt reduction begins by absolutely taking the possibility or discussion of tax hikes off the table?
WILL CAIN, CNN CONTRIBUTOR: Not very many serious discussions.
I don't know. I remember when I was little; my dad took me to a car dealership Ali and said, this is how you buy a car. I remember they wrote the numbers down on a piece of paper and passed them across the table. My dad's number I'm sure was excessively low. That's the only explanation I can give for Boehner's statement, opening with a very aggressive fear that you know that you will fall back on later.
But to the point that you are asking, yes every serious conversation has to have both included. That is why I look to guys more like Tom Coburn. You can't question Coburn's ideological position, he is conservative. But he understands reality.
VELSHI: I hope you're right. That's what people around me at that speech were saying. That it's an hoping salvo.
Jeanne Sahadi, senior writer with CNNMoney.
Jeanne, we wanted to keep our debt at the level that it's at right now, not reducing it just simply keeping it from growing just through spending cuts, we'd have to cut our spending by 35 percent, that is about 1.2 trillion dollars or basically our entire government's budget for discretionary spending, including defense.
Now to achieve the same goal of keeping our debt where it is just through tax increases, so forget about spending cuts, the government would need to take in 50 percent more in tax revenue. Bottom line is it seems to me that we have to do both.
As I explained earlier, it's simply not feasible to seriously tackle our debt without both spending cuts and increasing revenue. Although you will continue to hear some conservatives say, this is a spending problem, not a revenue problem. I know this, you know this when is Washington going to start reflecting this?
JEANNE SAHADI, SENIOR WRITER, CNNMONEY: Well I think under a couple of scenarios. One if we have a bond market crisis, which is not necessarily likely but that would definitely inspire people to get busy negotiating and compromising.
The other might be if Americans stand up and say, you know what? I don't want a third of the federal budget cut. I want to have some of the federal budget cut but I'm also willing to pay a little bit more in taxes. Board members of the Concord Coalition, which is a deficit watchdog group, said something really smart this week.
The board is made up of formal lawmakers from the left and the right and they basically said, look, neither party has the muscle or the public trust to push through a one-sided solution. They don't have the votes for it. So bipartisan solutions are mandatory, it's not an option. Compromise shouldn't be seen as giving up or conceding too much --
VELSHI: Well it seems like it does feel like that these days. Let's bring Roland in. Roland Martin, CNN contributor. Roland, treasury secretary Geithner says August 2nd is really the day he runs out of options to keep America from defaulting on its debt. Part of me wishes he never said that. Because somehow I think on August 1, we are all going to be around here wondering what is going to happen.
But it is this climate of fear. Is it necessary for politicians to finally reach a meaningful compromise by threatening that the worlds going to come to an end? Is this not the business of Washington? And frankly, don't Democrats have some bigger role to play here in saying, all right, we get it, we have to cut a lot and we need some tax increases? ROLAND MARTIN, CNN POLITICAL CONTRIBUTOR: Ali, I'll give you this example. There are people sitting at home right now, they have been extending paying their light bill, paying their phone bill. And until the light company or the phone company sends them a notice saying, at 5:00 p.m. on Friday, your lights are going to get cut off unless you pay this bill, then people actually respond.
That is the American way. We operate by fear. We wait until the last minute. We sit here and procrastinate. That is what we do. We're very good at that. We're not all about planning and being proactive and going on the offensive.
When I watch this conversation, when you listen to speaker Boehner, first of all, he throws out trillions in cuts. But he won't specify. I think it is dangerous just to say trillions in cuts. When you also say, frankly, we're not going to have tax increases. Now, understand this, you have Republicans who will even suggest that if you get rid of oil subsidies, that's somehow a tax increase. And so they tack anything on as a tax increase.
Democrats also don't want to be honest on this conversation as well. This is the biggest problem that we have. The last point Ali, the American people have got to stop sitting here playing around as well. They can't say, I don't want anything cut. Oil companies are saying it. American taxpayers are saying it. And so we have the same problem every single year.
CAIN: Ali, let me say, Roland's right on one point very specifically. Winston Churchill just once said, you can count on the American people doing the right thing once they've exhausted every other option. We need these emergency situations to do the right thing.
So, yes, I don't think this is being overplayed. In fact, I would say if we do not raise the debt ceiling and we force short-term cuts, we hold the debt ceiling hostage well then you get ready for depression. That's where we are. Our economy is that fragile. The debt we've accumulated is that great. We have to cut.
VELSHI: But your fellow conservatives know that, right? I mean the fact is we know there are some people playing games with, we're not going to do this or that. The people you talk to understand that we're going to have to arrive at some compromise both on the debt ceiling and some kind of debt reduction plan?
CAIN: Yes. And let me try to explain their position, I talked about Boehner's poker hand earlier. This is the other problem. Whenever you have given Washington an extra dollar of income, they have made that an extra dollar of spending. It comes in, they spend it out. We need to see that extra dollar of tax increase will go to reducing the deficit. We have no history to suggest that will happen.
MARTIN: But also the other issue is when you hear Republicans say, oh, tax cuts are somehow going to spur the economy, it's going to cause people at the top income levels to begin to hire, and that's also not true. VELSHI: Is that true, Jeanne?
SAHADI: Tax cuts help the economy? I think that Democrats and Republicans both have a point. Republicans are ready to raise taxes too much, you can hurt economic growth. Democrats are ready to cut spending too much you can hurt economic growth.
Will is right because we don't have the public trust that the tax dollars will be used well. And if our taxes are increased, that that's what it will be used for. That's a hard intangible that both parties are going to have to work with because eventually if we come up with a bipartisan solution we are going to have to sell the public.
VELSHI: Well this is going to be a much easier conversation when we have specifics to deal with. What exactly do you want to go up in taxes and what exactly are you prepared to cut? I think we all agree, this is a much better conversation to have on specifics than in theory.
Jeanne, Roland, stay where you are. Will, stay where you are.
It's a basic concept. Your tax dollars are simply not enough to sustain your government. So I'm going to show you exactly where your money goes and why Washington does need a whole lot more of it up next.
(COMMERCIAL BREAK)
VELSHI: We spend a lot of time on this program talking about the deficit. You might be wondering why it is actually so important. Stripping away the politics for a second, without serious measures to cut the United States debt, your world could be very different in just a few years.
Here's why. By 2020, if nothing were to change, spending on Social Security, Medicare, Medicaid and the interest on our debt is on track to use up 89 cents of every dollar that the government collects in federal tax revenue.
That means only 11 cents of every dollar will be left behind to fund everything else that the government does. Jeanne, if we're on a path that is simply unsustainable, how quickly do we need to make changes? How urgent is it that we actually tackle this? And before you answer I'll tell you the reason I'm asking. Because people say this is a Republican scare tactic.
SAHADI: What's the Republican scare tactic?
VELSHI: That this debt is the biggest economic problem we face.
SAHADI: Well it's a math scare tactic. A lot of nonpartisan deficit experts say this is a problem. They want to start sooner rather than later not because we can't make it at 20/20 without making any changes. We probably can but we don't know what the consequence will be. We want to make changes sooner rather than later because they will be less drastic, it will give people more time to prepare and we will reduce the market risk that eventually the bond markets will turn on us --
VELSHI: And let me just translate it, what you mean is the risk that eventually other people who invest in the U.S. dollar or in U.S. bonds, treasury bonds will say, I'm not sure the U.S. can pay those bonds, so I want more interest in exchange for taking the risk of investing in the United States?
SAHADI: That's correct. Nobody can say no matter what they claim, they can't swear that that will happen in the bond market. But a lot of people think we are increasing the risk the longer we take to get our balance sheet in order.
VELSHI: Roland, we'll be reminded that nobody thought that letting Lehman Brothers fail was going to send the markets in the world wide economy into a tailspin. So these risks are true. Jeanne just laid out the math. Is the public -- are we ever going to react to that potential disaster before it occurs? You said it a while ago. Will said if we don't do these things that we are backed into it. If we get backed into this one, it could be very serious.
MARTIN: Let me use exactly what has taken place over the last three years. That is when you saw individuals, people watching this show right now, make some of the most ridiculous economic decisions and that is trying to own a home and a second home, trying to have jet skis and boats, vacations, huge credit card debt. They saw individually how their lives collapsed economically.
And so you can take that same scenario and apply to the federal government. Right now, if you are spending - if the money that's coming into your home, if you're making $40,000 and you're spending 80 percent on housing or you're spending 70 percent and then the other money, let's say, on food and gas, then you look up and say, wait a minute, I only have 2 or 3 percent left to spend for my child's education, you're going to have a problem to pay for their education.
And so the people at home have to understand like that. How do I apply it to my life? It's the same exact example. And we see now how folks have changed their lifestyles as a result. Washington has to change its lifestyle, its spending habits, and its ability to deal with the dollar.
VELSHI: So we're all agreed here that this is serious. Will, you and I also agree that simply taxing the rich is not going to solve our problems. There are a lot of rich who need to be taxed more. But name me the politician who is going to tell the majority of Americans the truth, that in order to deal with this issue, things need to be cut. But it is also a revenue problem. It's become a Republican bumper sticker that this is not a revenue problem. The middle class is going to have to pay more in taxes to sustain the government that we have.
CAIN: You have to look for the guys who are willing to tell their own constituents what they don't want to hear. This is where I hold Paul Ryan in high esteem. Nobody, Republicans, Democrats wants their Medicare touched. Well Paul Ryan said, guess what? It has to be touched. I think that the honest proposal from Democrats in response to that would be, well guess what? We can't balance the budget by taxing just the rich. Middle class, you're going to have to pay more, too. So I am looking for that from a Democratic politician. Telling everyday Americans, if you want to keep the government the way it's running now, with these high entitlements you have to pay more in taxes by the way and lots more in taxes.
MARTIN: Actually Congressman Bobby Scott of Virginia, he actually said the exact same thing. When they were talking about extending those Bush tax cuts, he said, we can't afford any of these, even for the middle class. He's been one of those voices --
CAIN: Roland, you have to admit that's rare. There's not many Democratic --
VELSHI: I've got two names out of 535 elected politicians in Washington.
MARTIN: That's precisely my point there Ali. You don't have people because also the political systems we have set up, you have these safe districts, and then you have the competitive districts. Then you have people who are also going to the ideology. That's part of the problem.
VELSHI: Politics is getting in the way of solving this problem. I nominate the three of you to sit down and solve this country's problems and we will get some straight answers.
Will Cain, Jeanne Sahadi, Roland Martin, always a pleasure to have you on and helping our viewers understand this a little bit better.
Hey, I hear something you can understand, oil companies making billions in profits. So why do they get tax breaks and if we take them away, will that actually lower the price you pay for a gallon of gas? I'm going to check it out next.
(COMMERCIAL BREAK)
VELSHI: Welcome back to YOUR MONEY.
Christine Romans, host of CNN's "YOUR BOTTOM LINE" joins me along with Alfred Edmond, multimedia editor at large at "Black Enterprise" and Leigh Gallagher, she is the assistant managing editor at "Fortune."
Let's talk about gas prices, like everybody isn't already. When gas prices go up, people are quick to point out the profits of the oil industry. They're big.
Take a look at this. This is just for the first three months of this year. Exxon Mobil nearly $11 billion. BP, $7 billion, Shell and Chevron, about $6 billion apiece. Adds up to about $38 billion in just three months for big oil. This week, CEOs from the five major oil companies were grilled by Senate Democrats on whether their companies should be getting billions of dollars a year in tax breaks and subsidies when they're looking at profits like this. The testimony was testy. Exxon's CEO Rex Tillersan said that the tax changes under consideration are discriminatory and counterproductive.
And speaking about counterproductive, then there was this exchange. Take a look.
(BEGIN VIDEO CLIP)
SEN. ORRIN HATCH (R), UTAH: I have a chart depicting what I expect this hearing to turn into.
And there you go. Who's the horse and who's the dog?
SEN. CHARLES SCHUMER (D), NEW YORK: Well, you'd have an easier time convincing the American people that a unicorn just flew into this hearing room than that these big oil companies need taxpayer subsidies. That's the real fairy tale.
(END VIDEO CLIP)
VELSHI: OK. Slamming big oil has become an annual tradition on the hill. Leigh Gallagher what do consumers worried about gas prices really get out of a hearing like that?
LEIGH GALLAGHER, ASSISTANT MANAGING EDITOR, "FORTUNE:" Well there's a lot of theater here. As there is as you point out every time oil goes above a certain price. We saw this in 2008. There was a cry again to tax the oil companies, to raise the tax and tax their bonuses and things like that. The interesting thing to remember or to take note of is that oil company profit margins are actually much, much lower than those of financial services, of pharmaceutical companies, of tech companies, for sure.
I mean not that this company needs tax breaks and these companies need it. I would argue that no company in corporate America needs any more tax breaks than they already get. That's the big sad truth about our tax system. But what we're seeing here is theater. And this is topic du jour. This plays very well in people's homes and in people's daily lives.
VELSHI: It sure does. Alfred, talk to me about this. It does feel like that in tough times, we get angry about profits. Is it a little un-American to all of a sudden decide profits are what make you evil?
ALFRED EDMOND JR., MULTIMEDIA EDITOR AT LARGE, "BLACK ENTERPRISE": Well, absolutely. I mean we want companies to be profitable. I've said this on the show many times. We don't want unprofitable companies. But the problem with these hearings is that the target is really the same target as those spammers who send you e- mails saying, if you don't buy gas for a day, somehow it's going to affect gas prices. It's not. What I say is that the oil companies have to do a much better job of explaining the relationship between what they do and retail gas sales, which they are not in the business of retail gas sales. So while I think it's hard for them to argue they need the tax credits or the tax breaks, they could be doing a much better job of helping people understand how all this works.
VELSHI: Christine, before all of us start telling everybody that it's wrong to be mad at the oil companies. What part of this is legitimate?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well the headlines for me is that there is something funny about how gas prices in Chuck Schumer and Orrin Hatch found something funny about it. What is wrong about the tax breaks in the like, I mean some will say that a manufacturing tax break isn't really fair if it's an oil driller, some people will say that royalties and industry try's to roll royalties, that royalties are paying for drilling our oil out of our land, they try to roll that back in as well as their -- but the bottom line is, when money is running out, you have big deficits and everyone's looking for money. We all start fighting about money. That's what this is.
VELSHI: That's so many of the fights that we've seen. Let's talk about something else that matters to people a lot, your home prices. According to a new report, they continue to fall. Down 30 percent since their peak by the way back in 2006. The median price for a single family home now just shy of $160,000. If you're a homeowner, you can blame all those foreclosures and empty houses in your neighborhood for bringing down the value of your home. If you're a home buyer, actually it's good news because you have got mortgage rates well under 5 percent for a 30 year mortgage. It is like a buying opportunity for me.
So why are homes at low prices with low mortgages not selling like hotcakes? One clue might be found in this report from the Federal Reverse. While overall consumer loans are up, mortgages are not seeing a similar rebound. Alfred is this another sign that owning a home may not be part of the American dream?
EDMOND: I think temporarily and very, very temporarily. But the truth is -- this is a symptom of a much bigger problem. People are struggling to regain income. People are struggling to regain jobs. They're very tentative about taking on something as big as owning a home. So I think this is a snapshot in time of what goes up must come down but also what goes down, must come up.
VELSHI: Leigh we're hearing that a quarter of everybody who applies for a mortgage and let's assume that by the time you apply for a mortgage, you might have a sense that you'll get one. A quarter of the people that apply for mortgages are getting rejected.
GALLAGHER: Banks are just so tight right now. And that is not really helping things especially when you look at the numbers they are going in the wrong direction. Foreclosures are up, prices are still falling. That is not the way it's supposed to happen, we were supposed to be out of the woods by now. So this is really, really a little bit unexpected. There are some bright signs. Inventory is going down. But foreclosures are bad because they drag down all prices and the more prices go down, the more people get under water because their homes aren't worth as much anymore. And then they default. That adds to foreclosures.
VELSHI: For some people Christine this is good. If you do have credit and you have enough money for a down payment and you're planning to live in a house, this is the deal of a century?
ROMANS: Yes and the real deals are not being had by regular people that we are talking about they are being had by very sophisticated investors who don't even; they are going in with cash. Thirty five percent of home sales in March were cash home sales. So that is people coming in with money, they don't care about lower interest rates and they don't care about being denied by the bank. They have the money.
VELSHI: So those with money are winning this game.
ROMANS: So when I see those with money are starting to make money on a depressed asset, I start to think, wow if we could all figure out a way to get in there --
VELSHI: It might be a leading indicator, it might mean that these things are starting to get a little bit better. In fact "Fortune" had a cover story out recently saying that the housing industry is coming back.
Now let's talk about this one. This one is very interesting. We're going to talk about it on the other side of the break. I will tell you why that I am interested in it. Being in a good school district might help the value of your home but should the quality of your child's education be determined by your zip code? Some people think so. We will check it out next.
(COMMERCIAL BREAK)
VELSHI: Welcome back to YOUR MONEY.
Christine Romans, Alfred Edmond, Leigh Gallagher, all still with us.
Some parents are going to go to extreme measures to make sure their child receives a quality education, even to the extent of lying about where they live to get into a better school district. This is not altogether uncommon. We've seen it in Ohio. This week we saw it in Connecticut. But it's a nationwide problem and it begs the question, should the quality of your education be determined by your zip code?
What we saw in Connecticut is a woman who has been charged with larceny for stealing the value of an education because she got her kid into a school in a district that was better than her own. Alfred, what does it come to that we're stealing other people's zip codes to get our kids in a better school? EDMOND: It's a much bigger problem that public education is financed locally. So, yes, if I live and I'm paying -- I happen to live in a community where I'm paying five figures in taxes each year to support the local school system and someone who is not paying those taxes is getting into that system, yes I may feel like I'm being stolen from.
But the larger issue is that because of the way we finance public education, you are going to get a better education depending on what zip code you're in.
ROMANS: It shouldn't determine what kind of education you get, but it does. In my school district -- I moved to a town, just like you did, that has a quality public school and I pay the taxes that reflects that. But when you call this district office, it says press 1 for hours, press 2 to talk to the principal, press 3 for the anonymous residency hotline, you can turn people in. I'm not kidding.
I asked other parents -- this is normal. They're trying to root out -- some schools, Steve Perry says some schools hire public investigators to check out everybody's address and make sure it's --
EDMOND: Ours does as well.
VELSHI: Clearly connected to our employment issues, to our competitive issues. I mean, every parent, no matter how bad the situation is would like their kid to get a good education. Shouldn't we be entitled to do that in the public school system no matter where you are in this country?
GALLAGHER: Of course, I mean, these parents have their children's best interest at heart. This was not -- we could argue it's not really a criminal move.
But you have to set the boundaries somehow, otherwise, some schools would be packed and others would have no one in them. The sad truth is that schools -- our school system needs fixing and needs more funding.
It needs better schools. It needs better teachers and so until that's solved, we're going to see more of this.
ROMANS: People who are advocates for vouchers, like to hold this up as an example of why you should be able to take your money -- they like to look at it -- people who support reform and more money for public schools say, no, this is a good example of why all schools need more money and reform.
EDMOND: Every person that gets caught, we see a couple of high- profile situations, there are probably hundreds who don't, who figure out a way around the system. So we really need to look at the larger infrastructural issues.
ROMANS: Yes, no simple answers. VELSHI: Here's another one. Students across the country are gearing up for summer break and some people are asking, should they be? It was meant for a time when kids had to help up the family farm, which most of us don't have to do anymore.
So could that time be better spent improving math, science and reading scores? Should kids be allowed to be kids during the summer? America does not do well in international comparisons on math and science.
We're in school 180 days a year, but guess what? The country that's at the top of the list, Finland -- they're in school 190 days. They only get 10 more days of schooling. South Korea, they go to school for 220 days. So I used to think, why not keep them in school all summer? I don't know, Leigh, is that the solution?
GALLAGHER: I don't know. It's tough. I'm a big believer in summer jobs to teach kids responsibility and there is a case to be made for that. On the other hand, you know, there is some -- they call it the spring slide or summer slide, kids forget stuff.
And that's especially pronounced in lower economic situations so you're looking at a divide situation here. Is it going to be easy to get kids to go to school year round? No. But they're already doing it in Houston, in Chicago and in some places.
VELSHI: Well, two working parents may not mind kids going to school year round.
ROMANS: You have to figure out child care changes and all that, but the other thing is we talk about these different zip codes. Do we really want to have a whole year of education is the education is not good? Are we necessarily wanting to spend more money --
EDMOND: Each income level has to have a solution tailored to their needs. But even with the summer job situation, a lot of low- income kids can't get summer jobs.
And you have a lot of kids at middle and low income who are kind of spending idle times. They lose with the academic slide and they come back and they suffer. And in the long run, the long-term implications of that is a poorer-performing workforce.
VELSHI: Here's something most of us didn't learn in school. Fang and in it that's apparently short for isn't it, but now can found in the dictionary. In scrabble's dictionary anyway in an effort to attract a younger demographic, the word game is adding slang. Good business decision or the latest sign of the apocalypse? It's 9 and 5 point respectively for the words if you're scoring at home, by the way. Christine?
ROMANS: Yes.
VELSHI: Yes, what?
ROMANS: It is a good business move and it's a sign of the apocalypse. Yes.
VELSHI: Alfred?
EDMOND: That's a scrabble buff and scrabble fanatic, it hurts me. It really, really does. I think the great thing about scrabble -- my mother used to play with us as kids -- it really does force you to expand your vocabulary.
VELSHI: And distinguish between slang and I got no issue with slang. I love using it, but scrabble. It's a one place you have to think yourself, is that slang or that is real --
EDMOND: Exactly, exactly.
ROMANS: They could make a slang version of scrabble.
EDMOND: Thank you.
ROMANS: Just one slang version.
EDMOND: The Ebonics haters are going to --
GALLAGHER: I have no problem with words like tweet or bling, words that are - but, I haven't even heard isn't it until today --
EDMOND: Tweet is a real new word.
GALLAGHER: New words that are part of the zeitgeist, I'm totally fine with. But slang I think it's a travesty.
VELSHI: Kids these days. We just lost all our kid viewership here. Thanks to all of you. It's always a pleasure to have you all here. Leigh, Alfred and Christine.
If a dealership sold you a car with no brakes and took out a life insurance policy on you, you'd probably be demanding criminal charges.
Coming up next, I'm going to talk to someone who says that's exactly what Goldman Sachs did to its clients without standing trial.
(COMMERCIAL BREAK)
VELSHI: If you've been waiting to see a criminal conviction in the wake of the financial crisis, this was a good week for you. Raj Rajaratnam, the hedge fund titan accused of insider trading was found guilty Wednesday of conspiracy and securities fraud. Some of his information was obtained from a Goldman Sachs board member providing yet another headache for the investment firm itself dealing with an ongoing investigation.
Matt Taibbi is a contributing editor at "Rolling Stone." He built a case against Goldman Sachs long before anyone in Congress started sniffing around.
Matt, Carl Levin Senate committee says it's got enough evidence to move forward with criminal charges against Goldman Sachs. Our own Eliot Spitzer says in your latest article that based on that he'd be dropping subpoenas by the truckloads.
But the Justice Department still seems reluctant to move forward. Assuming that the viewers today have not read the article, lay out your case in short form.
MATT TAIBBI, CONTRIBUTING EDITOR, ROLLING STONE: Well, the Levin report is a 650-page document, and to put that into as short a hand as I can possibly make it, they're saying that late in 2006, Goldman Sachs realized they were sitting on a time bomb of toxic mortgage assets.
That they conspired to unload those assets on their clients and then bet against them at the same time, and then later on, the report also sort of lays out that in the process of investigating this issue, the Senate questioned Goldman.
They also had testimony in Congress and it lays out that they believed that Goldman lied about some of these activities --
VELSHI: Lied to congress. All right, let's bring in Megan McArdle. She's the business and economics editor at "The Atlantic." Megan, you've read the articles. Matt laid out a convincing case?
MEGAN MCARDLE, BUSINESS AND ECONOMIC EDITOR, THE ATLANTIC: I think it's really tough. These cases are incredibly difficult to bring and when. If you notice, Eliot Spitzer didn't in fact secure a lot of convictions despite all the subpoenas he laid down.
What he did was he got settlements from firms and in some cases, it wasn't really clear that the firms had done anything wrong.
The problem is that a firm that's dependent on capital for its lifeblood, once you drop a subpoena, they kind of have to settle a deal even if they didn't do anything because otherwise --
VELSHI: Goldman has done that elsewhere. They've come up with a settlement, but, Matt, you've been on this case a long before a lot of people thought. I mean, one might think you've got some kind of an issue with Goldman. But you definitely think they've done something wrong?
TAIBBI: Yes, absolutely. I don't think anybody could read this report and not see that Goldman definitely conspired to sell assets that it itself did not believe in on unsuspecting clients.
One of the great e-mails in this entire document came after they sold $10 million worth of a deal called Timberwolf on an Australian hedge fund and they're celebrating afterwards.
And one guy says, we found a white elephant, a unicorn and a flying pig all at the same time. In other words, we found the ultimate sucker and this kind of stuff is all throughout the report.
VELSHI: Now, Megan, while regular people were actually affected by these toxic assets that Goldman was dealing in because they might have been in their pension funds or might have been their city that invested in them and lost money.
Generally speaking the other side of the deal, one of those Goldman deals, was always an institutional investor. Why - let just put the argument for - why wouldn't those institutional investors have done the necessary homework to understand that Goldman was selling them junk?
MCARDLE: Well, I think the fair argument is these investments are incredibly complicated and it's very hard to know what happened. But the fact is that we generally assume that an institutional investor, like a pension fund or a hedge fund has the intelligence, the know-how and the motivation to figure out what's going on in the other side. So we don't offer them the same protections as we offer ordinary investors.
VELSHI: That's not true anymore, right? I mean, now I think we've probably learned that it seems they don't --
TAIBBI: If I could jump in there, Ali. There's definitely a legal standard that requires an investment bank like Goldman Sachs to disclose adverse elements of the deal, like for instance, they had a $2 billion short position against --
VELSHI: Let's spell that out, you're saying that they had a legal obligation to tell somebody they were selling an investment to they had a $2 billion bet against that investment?
TAIBBI: Absolutely.
MCARDLE: If I could jump in here --
TAIBBI: Goldman actually in that deal even said affirmatively that their interests were aligned with the client because they had a $6 million stake in that same deal. But they didn't disclose they had a $2 billion bet against the deal.
VELSHI: Megan?
MCARDLE: Look, inherently someone who is selling you an asset is going short that asset, right? They aren't owning it anymore and you presume that there is a reason for that. Markets are made by people betting one way or the other and what you have to do --
VELSHI: I'm not sure that makes sense for an investment firm, though.
MCARDLE: What we have to do is disclose. It's perfectly legal for a dealership to sell me a car I'm not going to like or that's too expensive for me. It's not legal for them to sell me a car that's not what they represented it as.
And we set certain legal minimum standards and that's what happened here. At least, John Losera and all the devils who are here argues that he actually has gone through these documents and says that a lot of these things were disclosed. That in fact Goldman laid out in very lengthy detail all of the ways in which this could go wrong. I haven't read the disclosure documents personally.
TAIBBI: I have.
MCARDLE: There are two competing versions of the story.
VELSHI: Matt, you've read them?
TAIBBI: Well, I've read all the documents in this report and I've also talked to some of the principals in this entire story. I definitely know some of the client that is Goldman was talking about were completely blindsided by the fact that, for instance.
They were buying assets out of Goldman's own book when they were told that Goldman was buying these assets off the street. They definitely did not make key disclosures that they were legally obligated to make.
VELSHI: Megan, I think Matt wants to see somebody from Goldman arrested or charged with something. What do you think has to happen?
Because clearly whether or not you think Goldman broke any laws, any of us who followed this got the impression that they were perhaps not dealing in the best interests of some of their clients.
MCARDLE: I think they probably aren't, just like most vendors aren't always -- look to their own interests before the interests of their clients.
But here's the thing. I think there is a real desire to have a sense of closure on this, a desire to track down a villain, figure out who did this to us.
And I think that really underweight the power of human stupidity and poor system design. It can produce terrible results even without anyone doing --
TAIBBI: You're not ashamed to do the job that you do. How you were not ashamed to apologize for these billionaires who ripped off ordinary people. I can't believe that --
MCARDLE: There weren't ordinary people. A hedge fund is not an ordinary --
TAIBBI: How about this? They ripped off a billion dollar from Morgan Stanley, which then in turn took a $10 billion bailout from the taxpayer ergo they ripped us off. How do you answer that?
MCARDLE: How do I answer that? I think that, you know, in fact, they do deals with big banks. There are questions about how we should have done those bailouts.
But the fact is it's not Goldman Sachs' responsibility to make sure that Morgan Stanley makes money. More than it's the Atlantic's responsibility to make sure that Rolling Stone makes money.
VELSHI: It's a good point, yes. I think I'll just leave it right there.
TAIBBI: I don't know how that makes sense on any planet in any universe. That is just insane.
VELSHI: Last word to you, Megan?
MCARDLE: Well, you know, I think that it's very morally satisfying to try to track down people who did things to us. But I think in the end, justice wants to make a case that Goldman didn't just do something that we don't like.
They want to make a case that Goldman did something that was actually illegal at the time when they did and that's a lot harder standard to meet. In fact like in the aftermath of this crisis, what you get is a lot of cases brought that fail
Eliot Spitzer didn't make his cases. A lot of Rudy Giuliani's cases ultimately fell apart. Even some of the Enron stuff has been falling apart. And so it's actually a lot more difficult to track down --
VELSHI: Not that this conversation could have been a lot better, but we would hope was that somebody from Goldman Sachs would participate in the conversation. They didn't.
We reached out to them and they gave us the following statement. Let me read it for you, with respect to Senator Levin's remarks about misleading testimony with respect to the big short, the testimony we gave was truthful and accurate and this is confirmed by the subcommittee's own report.
The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledge that they were intermittently net short during 2007. We did not have massive net short positions because our short positions were largely offset by our long positions. And our financial results clearly demonstrate this point.
I will just explain to our viewers obviously that long positions mean you're buying something with the understanding or hope that it will increase in value. When you are short on something, you are betting that it is going to lose value and that's what this hinges on.
Matt Taibbi is a contributing editor with "Rolling Stone." Megan McArdle is business and economics editor with "The Atlantic." Obviously, the article's worth a read because it stirs the pot a little bit.
Any one of you can invest in the next hot start-up company before it goes public. I'm going to show you how when we come back.
(COMMERCIAL BREAK)
VELSHI: You know, a lot of the news that we get, the news we cover on money here at CNN comes from CNNMoney.com. CNNMoney has just revamped its web site. I want to show you some of the new features so that you can enjoy some of the stories that we cover on your own and go in greater depth.
The new page is what the home page looks like. It will always have a big story up here and the latest stories. You can get quotes on the site. It will also tell you what the most popular stories are along the side here. A lot of great advantages, but for those of you who use tablets or like the way the tablets work.
There's a tablet on the side of the page and you click it and you get a tablet view of those stories. So if this is the way you like doing things or you use an iPad or one of those kinds of devices, you can use the tablet view as well.
Now if you have been trolling this site like I have, and I enjoy doing it, you might have come across this story earlier this week, Groupons do or die moment. It's talking about the startup, Groupon, you know, the daily coupon web site. It's expanding. It's changing its business model. It's been called the fastest growing startup in history. It's expecting sales to top $3 billion this year, not bad for a company that is two years old.
Investors have made millions on startups like Groupon. There are ways to get in on the action as well. The question is should you, and if you should, how do you do it?
I want to have that discussion with Matt McCall. He's the president of Penn Financial Group. Matt, you get all these vibe about these new companies, these newly public companies and IPOs. How does the average person get involved in this and should they?
MATT MCCALL, PRESIDENT, PENN FINANCIAL GROUP: Well, first of all, should they is a real big question because you take a lot of risk. A lot of these companies aren't publicly-traded. So it's very difficult, first of all, to get shares to invest in these companies.
Second of all, there's not a lot of information out there about these companies before they go public. And even more importantly, a lot of times you can actually get into this company, but your money is tied up for years. You can't sell it tomorrow like you sell a normal stock.
VELSHI: So you look at a company like Facebook or Groupon. If there's an IPO, an initial public offering, usually the people who get those first shares are investment houses and their good clients, right? So generally a guy like me is not going to get stock on the first day unless I buy it on the open market. Is that wise?
MCCALL: No, that's not wise because what happens is typically they price an IPO at a certain price, let's say $10 per share. That stock may open that first day of trading at $20 a share. You're paying twice as much as a person who brought it the day before.
VELSHI: Which is a private sale, you could have gotten -- MCCALL: Investment banks can get in. So typically what you want to do is wait a few weeks and watch the action. Zip Card for example, a lot of people Zip Card just went public the last couple weeks.
Stock came up high 20s, fell to the low 20s in a matter of days. But it had a lot of individual investors calling me that day that wanted to get in and buying at the high rate.
VELSHI: Even though it fell, bottom line is if you were one of those pre investors, the smart money that you and I can't be, you still probably made money on that.
MCCALL: Yes, still up money right now, but keep in mind, a lot of people that get in pre-IPO can't sell for the first six months or so. There's a lot of risk that goes along with that.
VELSHI: OK, and of course, I mean, one example is a company like Google where that would have made sense to buy the first day. But how do you know? When do you know when it's time to get into a new company because while all this nonsense about the first few days or first few weeks or first few months is absolutely true, what if I think Groupon is a great company or Facebook is a great company when it goes public one day. When should I invest?
MCCALL: Well, what I do typically is take a look, Zipcar is a great example. You take it and compare it to similar companies and see how it's valued.
For example, let's take Hertz. Hertz is trying to become the next Zipcar. So you compare those two companies and say to yourself, well, Zipcar has reported earnings this week. They're losing 95 cents a share in one quarter. Is now the time to jump in? Probably not so you look for a price whether it be $18 or 19 a share and be patient. Let it come to you.
VELSHI: That's a very good point. Be patient. Let the stock price come to you. Is there a way to invest in startups using either an exchange-traded fund or a mutual fund where somebody else does the hard work for you?
MCCALL: What there is, power share's private equity exchange. What that does, invest in a basket of private equity companies. What they do, take a step further, they own a lot of these companies that are private and eventually take them public.
So you're buying into a basket of companies that are publicly traded and within there, they own other basket of companies that are privately traded. It's one way for the investor to get in there and what's nice, in the last 12 months, this is actually up 23 percent and it pays a 4.6 percent dividend on top of that.
VELSHI: If you're dying to invest in a company before it's a public company, that's your way to do it.
MCCALL: That's your only way for the average investor. Unless you're sitting on hundreds of millions of dollars then you can call your broker and get in a Groupon right now.
VELSHI: All right, power shares private equity, ETF is PSP Matt McCall, president of Penn Financial Group. Always great to have you on the show.
MCCALL: Thank you.
VELSHI: All right, protecting consumers in the wake of the financial crisis. Why Congress needs to stop meddling and let the agency designed to protect you do their job. My "XYZ" is next.
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VELSHI: Time now for "The XYZ of It."
Next week on this show, we'll talk with Harvard professor Elizabeth Warren and the time couldn't be better. The Consumer Financial Protection Bureau was her idea. She very well end up running it. The agency hasn't even opened its doors and already it's under attack.
Forty four Republican senators are vowing to block confirmation of any nominee to head the bureau unless major changes are made to curb its authority. Now, I want to make sure you heard me right, 44 Republican senators want to curb the authority of the first and only Consumer Protection Financial Bureau.
They want to make it easier for banking regulators to veto its rule making, replace the director with a whole board and subject its funding to appropriations, meaning goodbye independent agency. I'm not saying the bureau is perfect as it's written. But this smacks of an obvious effort to gut an agency that frankly was watered down to begin with.
So my question to you 44 Republican senators, who exactly are you trying to protect? What is it about protecting consumers that rubs you the wrong way? Can't have it both ways, you either want Americans to have more protections from predatory financial actors or you don't. So whose side are you on?
You point out the Consumer Protection Financial Bureau will directly affect every American by limiting what financial products they can buy. Yes, that's exactly the point. Banning the kind of loans that led to the financial crisis is a win for both consumers and the banks.
Because borrowers will know what they're getting into and banks won't be able to take on the kind of risks that almost drag down our entire economy. Enough with the political posturing already, let the watch dog do its job. That's it for me.
Thanks for joining the conversation this week on YOUR MONEY.
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