Bill Moyers interviewed William Black in April 2009.

The financial industry brought the economy to its knees, but how did they get away with it? With the nation wondering how to hold the bankers accountable, Bill Moyers sits down with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout.

The title of Black’s book about the S & L crisis is “The Best Way To Rob A Bank Is To Own One.”

I am in the process of reading that book now. In this interview by Bill Moyers, it was very interesting to hear Black bring the insights from his own experience and apply them to the current crisis.

If you are investing in the financial industry, stop immediately.

(Disclosure, I do own stock in AINV, CINF, and PSEC.  Is this following my own advice above?  I don’t know.  Is this a case of cognitive dissonance?  Again, I don’t know.  Someone, please help me before I invest again.)

It is also interesting to compare what Black had to say about Japan’s economic woes and what Paul Krugman had to say in the article alluded to in my post Things Could Be Worse, Let The Republicans Show Us How.

I felt the following needed more prominent display than in my comment on RichardH’s post Mel Brooks and the bankers.

This comes from the article mentioned in Richard’s post.

In 2005, the white-collar criminologist, economist, and lawyer William Black published a book entitled “The best way to rob a bank is to own one”.

Mr. Black has listed the four main characteristics of fraudulent banks.

• They grow very rapidly;
• They make really bad loans at high yields (because only borrowers who have no intention of paying back will borrow at exorbitant interest);
• They pile up huge debts; and
• They set aside pitifully small loss reserves.

YouTube has the video A Discussion with Michael Hudson, Ellen Brown, & Walt McRee about the public banking option.

Before you swallow this discussion hook, line, and sinker, you might want to look at my dissent below,

On Thursday April 6, 2017 two world-renowned economic thinkers came to Franklin & Marshall College in Lancaster, PA to discuss how a public banking option can affect governmental effectiveness.

This discussion focused on the key differences between government’s unquestioned reliance on private capital markets and how an entirely new, more productive arrangement could be devised.

I’d say there is a fair amount of hogwash in this presentation. If you really understand the relation between Federal Reserve Bank and private banks you can supply enough of your own knowledge to justify some of the words that are being said, but if you don’t, I think you might be bamboozled by what Ellen Brown in particular has to say. I watched about 20 minutes of this, and expected Michael Hudson to correct what Brown said, but he did not. I have read Hudson’s book “Killing the Host”, and the truth is more subtle than they are making out here.

I think a good way to understand private banks is that they get money wholesale and lend it at retail. They get the wholesale money from many places including depositors, investors, and the Federal Reserve Bank. I haven’t been able to find a reference that explains the percentages that the many wholesale suppliers are responsible for. To pretend or give the impression that private banks only have one source of wholesale money is to give you a very distorted picture.

Fractional reserve banking allows banks to lend more money than they have, but if they run into trouble, they have the Federal Reserve Bank to provide them whatever money they need (at a cost of course).

Investopedia has the article Wholesale Money that gives a hint at what I mean by wholesale money. I do not know what Fraction of the wholesale money comes from the Fed at any particular moment in history, but when the system runs short, only the Fed has an infinite supply (in the USA) to fill in whatever is needed. The excerpt from Investopedia talks about a situation in England that has close parallels to what would happen in the USA with the Fed instead of the Bank of England.

A defining moment of the subprime crisis happened in 2007, when Northern Rock, a British bank which had relied on wholesale markets for most of its finance, was no longer able to fund its lending activities and had to ask the Bank of England for emergency funding.

I have now watched the entire video beyond the initial 20 minutes that aggravated me so. There is lots of good information and ideas buried in this manure pile.

I do think that Ellen Brown is close to an idiot in understanding all the issues. Poo-pooing the need to watch out for fraud in a public bank is too naive to believe she could actually believe that. Michael Hudson was correct that their need to be stiff penalties including jail time for cheaters. There will always be cheaters and attempts at corruption. Read William K Black’s book, “The Best Way o Rob a Bank Is To Own One: How Corporate Executives and Politicians Looted the S&L Industry”

Her introduction of the idea of using block chain for the Federal Reserve to serve the banking needs of the public is a complete red herring. Block chain is merely a computer security method which has nothing to do with the fundamentals of running a bank. None of the large and small financial institutions that serve the people at the retail level, use block chain to deal with USA money.

RT has this Keiser Report episode.

The ‘Mnuchin massacre’ and one-way bets on the dollar are among the topics for Max and Stacy in this episode. In the second half, Max interviews Nomi Prins, author of the soon-to-be-released book, ‘COLLUSION: How Central Bankers Rigged the World’. They also discuss the current market situation and how a new Fed chairman may approach a crash.

I may have a few long term philosophical differences with what is being said here, but in the short term, I agree with their outlook as to what may be most likely to happen. Mnuchin is actually right that it is better for us for the dollar to decline relative to the rest of the world’s currencies, for, as this report says, it was inevitable anyway. Yes, there will be pain in this country during the transition. At least some of the pain will be felt among the oligarchy that has wealth denominated in dollars (of course they can shift a lot of that wealth into other currencies or into gold.) In the short term, we don’t have the manufacturing capacity to replace everything we buy from other countries, but if managed well (and there is certainly no quarantee on that) our employment level in the manufacturing sector will rise to adjust.

As for the conversation with Naomi Prins, I have to also agree with her analysis of what is happening. Philosophically, I understand the fiat monetary system we have and how it can be managed well. In actuality, it is not being managed well, and it is not being used for the best purpose for all of society. I think that to some degree the Fed was forced to take the actions it did in a futile attempt to compensate for what the rest of our government refused to do. The Fed didn’t have all the right tools, so they had to use the tools that they had.

As I have been saying all along, the tremendous infusion of liquidity that the Fed has created has not caused inflation yet, except in the stock market. There was no place else for the oligarchs to put that liquidity. If and when the economy turns around so that investing this liquidity actually makes sense, then we could have a terrific inflation problem. To offset this possibility, the Fed and the rest of the government needs to have an emergency plan on how to reduce the Fed’s flooding of the economy with liquidity. The trouble is, that I don’t see the practical way to do this.

The real solution is to suck the liquidity out of the economy with much higher taxes on a stiffly graduated basis so that large incomes and great wealth bear most of the burden. Then the liquidity needs to be put back into the economy by the government by its purchase of goods that are truly useful to the economy (infrastructure, education, research, health care, etc.). It is just that in this political environment, it is impossible to get such a policy enacted.

New Economic Perspectives has the article Oral Testimony of William K. Black.

The article points to a transcript of the testimony Joint Committee of Inquiry into the Banking Crisis. Rather than read the article’s summary of the testimony, I went right to the transcript. The transcript is long, so even the lengthy excerpts below are only a small part of the transcript. (I wish I had found the link to the promised video.)

Marc MacSharry

Okay. In terms of the likelihood of a repeat, does Professor Black think that the set of parameters that currently exist make it quite likely that it will all happen again?

Professor William Black

Yes, and it will be worse. This is not just Ireland and Europe – this is the United States. There has been no accountability for the bankers and no accountability for the regulators. So, it will take the next boom before this happens again. In the savings and loan crisis, as the committee heard we got over these 1,000 felony convictions. None of those people, to my knowledge, participated in the current crisis precisely because they had criminal records. That is what we call specific deterrence. There will be no specific deterrence out of this crisis. The worst actors who know exactly how to use these four ingredients of the recipe that I told the committee are out there, and what they have learned from this crisis is that it is a sure thing and not much of anything happens to one. That is a really perverse incentive structure. It is critical that one reverses that.

Notice the mention of Stephanie Kelton and her current position. This is a name that I have been trying to get readers of my blog to burn into their memories. It is going to be extremely important for people to know who she is, and to remember who hired her – Bernie Sanders.

Marc MacSharry

Would Professor Black feel that the euro, therefore, is arguably unfit for purpose because of the smaller economies on the periphery like Ireland, which are less than 1% of the eurozone?

Professor William Black

The euro is a disaster. It never made sense in terms of the economic literature on an optimal currency area. My colleague, Professor Stephanie Kelton, who is now the chief economist on the Senate budget committee, is one of a number of scholars who wrote this in advance and their predictions have proven absolutely correct.
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Professor William Black

We have not set this up but I thank Deputy Doherty. My answer is not in response to Ireland. I am not talking about Ireland. I am responding to the generic question. Here is an example of that dated 15 July 1987 from Charles Keating, our most notorious fraud in the savings and loan crisis to his chief political fixer. “Highest priority – get Black. Good grief – if you can’t get Wright [the Speaker of the House] and Congress to get Black – kill him dead – you ought to retire.” That is the kind of thing I am talking about. Our joke in the savings and loan crisis was the highest return on assets was always a political contribution for any banker. In our context, the Speaker of the House held hostage our Bill to get funding to close the institutions, to extort special favours for several fraudulent Texas savings and loan branches. Five US Senators who became known as the Keating Five sought to keep us from taking enforcement action against the worst fraud. The President of the United States attempted to appoint two members, chosen by Charles Keating, to run the agency. I told the committee it was a three presidential appointee agency that ran it. A Mr. Phelan, doubtless a distant cousin, was hired by the House ethics committee to investigate the ethics complaints against the Speaker of the House, James Wright. He did resign at the end of this process, but three of the recommended charges by Mr. Phelan after his investigation were that an ethics case should be brought against the Speaker of the House for his effort to fire William Black, his effort to fire Joe Selby, who was one of those two top regulators I told the committee about, and because he held hostage our funding to extort favours on behalf of folks.

In the United States context, these people do not go quietly. If you bring cases against powerful bankers, they will enlist their political allies and they will give very large political contributions to do that. In our context, Alan Greenspan was used to recruit the Keating Five, the five US Senators. He was hired as a lobbyist initially by Charles Keating to recruit those Senators. The United States is not unusual in those terms. If you take on really powerful bankers you will find that you get political push-back. If you do not pick regulators who will stand up to that – this is what I referred to as the Mike Patriarca level – Mike Patriarca was asked by a US Senator, one of the five who was meeting with us, whether he was saying that Arthur Young & Company, then one of the top tier audit firms, would prostitute itself for a client. Committee members, as legislators, know that if they ask that of a bureaucrat what the only possible answer is. When there are five Senators the only possible answer is, “Oh no sir, I would never say that.” The actual answer from Mike Patriarca was “Absolutely, it happens all the time.”
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Professor William Black

When I was an enforcement and litigation director I negotiated these things all the time and here is the key that you need to understand. Bankers make the decision and their priorities are not to go to jail, not to lose their job and not to have their bonuses clawed back. To accomplish those three things they also have a fourth priority to not throw anybody junior to the wolves. In the United States we have much broader plea bargaining powers than exists in most of Europe. If you throw the junior person to the wolves we will flip him which means we will get him to plead and to testify about the more senior people. The committee will note that in all of these major deals in the United States nobody got named, loses their bonus, loses their job or goes to jail and they are happy to trade off fines.

The fines sound large. They are large in absolute terms but relative to JP Morgan Chase, to pick a non-random example, they are literally a few weeks’ revenue so they do not care. Also, bankers do not pay the fines; it is the shareholders. This is the third in a triple whammy hit if you follow the recipe to the extent that the banks have followed this recipe. First, they have caused huge losses to the shareholders directly by making bad loans intentionally. Second, they have taken a whole lot of money that should have gone to the shareholders in the form of bonuses for destroying the institution or at least causing huge losses. Third, they come along and are happy to sign an agreement in which the shareholders pay the fines to make sure that they have no accountability. Therefore, this is an utterly useless exercise in terms of deterrence.

I think I understood a lot of the testimony because I am a regular reader of the New Economic Perspectives blog and of the book, “The Best Way to Rob a Bank Is To Own One”. I wonder how much is understood by ordinary people and perhaps even the members of the committee that took the testimony.

I take particular interest in the talk of Gresham’s Dynamic, which I am not sure Black did justice to in explaining it to the uninitiated.

Back in the late 1980’s and early 1990’s I was remarking on the Gresham’s Law as it applied to Mutual Fund Managers. The only ones who could keep their jobs were the ones who were taking insane risks and achieving insane (if temporary) returns for their funds. It was hard to find a mutual fund that was still being managed by prudent investors. I even had to keep reminding myself that it was not how much money that I was making on paper, but it was about how much of it that I would eventually get to keep.

The American public still does not get what a crucial failure of the Obama administration it was and still is in the failure to prosecute the bankers (fraudsters.) This is why I keep harping on this issue to the same extent that Bill Black does.

Naked Capitalism has the article Matt Stoller: Why the Democratic Party Acts The Way It Does.  This is another in a series of my posts that drive a few people (at least one) into a tizzy.  The article itself is too long for anybody to read except for maybe one or fewer people reading this post.  Here is the excerpt talking about the recriminations in the Democratic party over the recent electoral loss:

Everything is put on the table, except the main course — policy. Did the Democrats run the government well? Are the lives of voters better? Are you as a political party credible when you say you’ll do something?

This question is never asked, because Democratic elites — ensconced in the law firms, foundations, banks, and media executive suites where the real decisions are made — basically agree with each other about organizing governance around the needs of high technology and high finance. The only time the question even comes up now is in an inverted corroded form, when a liberal activist gnashes his or her teeth and wonders — why can’t Democrats run elections around populist themes and policies? This is still the wrong question, because it assumes the wrong causality. Parties don’t poll for good ideas, run races on them, and then govern. They have ideas, poll to find out how to sell those ideas, and run races and recruit candidates based on the polling. It’s ideas first, then the sales pitch. If the sales pitch is bad, it’s often the best of what can be made of an unpopular stew of ideas.

Still, you’d think that someone, somewhere would have populist ideas. And a few — like Zephyr Teachout and Elizabeth Warren — do. But why does every other candidate not? I don’t actually know, but a book just came out that might answer this question. The theory in this book is simple. The current generation of Democratic policymakers were organized and put in power by people that don’t think that a renewed populist agenda centered on antagonism towards centralized economic power is a good idea.

I am proud to say my blog, here, has persistently put policy on the table as the culprit, much to the annoyance of a few (at least one).  This article reviews a book about how the policy of the Democratic party was turned into what it is today.  This shift started before Bill Clinton became President.  Though Bill Clinton is the most famous person for pushing these changes forward, the man of ideas behind this shift is the author of the book being reviewed.

I have some ambivalence about the book, the movement, and the review.  I had been seduced by many of the ideas for which Bill Clinton became the embodiment, although I had been repulsed by some of the other ideas.  I still struggle with the feeling that there were problems with the Democrats and the party that led to the rise of Clinton who seemed to “fix” many of those problems.  Something did need to be “fixed”, but I have become completely disenchanted with the way they were “fixed”.  I had my doubts about some of these “fixes” at the time, but it seemed hard to argue with “success”.  I supported some of the “fixes” at the time, that I now recognize have turned into disasters.  I also railed against some of the bad ideas at the time they were proposed and enacted.

Inequality For All is a movie that will be playing in Kendall Square, Cambridge (search for “inequality” on the page) starting September 27, 2013.

Democracy Now has an interview Inequality for All: Robert Reich Warns Record Income Gap Is Undermining Our Democracy.

The video covers a number of topics. Here are just a couple of excerpts to whet your appetite.

ROBERT REICH: Let me just be clear. In the late 1990s,1999, Bob Rubin, Larry Summers, others in the administration, did agree to support Republican bills to get rid of the Glass-Steagall act, which as I said, had separated investment from commercial banking. They also opposed the move a by the Commodity Futures Trading Corporation to regulate derivatives. That is what got us into trouble, the lack of oversight from derivative trading. These are bets on bets. Wall Street was making a fortune on them, certainly by 2007. And those bets were out of control. So, let’s just put it this way. Bob Rubin is also a friend, but I spent a lot of time in the administration battling Bob Rubin because, Bob, again I like him, his view of the economy is through the eyes of Wall Street. Those eyes — the Wall Street’s view of America, is not where most people live. It is just not — it doesn’t take account of the problems, the challenges, the realities faced by most people. It views the economy as sort of a bunch of assets to be moved around wherever they can get the highest use and best use. And people are not simply assets.
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ROBERT REICH: It is very interesting to examine who the great economic criminals are. It is interesting you mentioned the Pinochet coup because two years after that, Milton Friedman came down to Chile to meet with Pinochet to urge economic reforms that were basically quite brutal and brutalized a great number of people. Milton Friedman was not necessarily a supporter of Pinochet, but certainly hated Allende, was very supportive of what Kissinger and Nixon had both done and that is helped Pinochet take over eventually

AMY GOODMAN: Interestingly, this week, Kerry met with Kissinger to get advice on Syria, on September 11th.

ROBERT REICH: On September 11th. There are these unfortunate parallels. So in defining an economic criminal, I think it would be interesting to see the interactions between economics and politics. The criminal actions to me, around the world, particularly in the United States, are the underminings of democracy. That is, if we cannot have a democracy that controls, that limits the excesses of capitalism, the brutality of capitalism, then we don’t have any hope of a just economy. And the people who are making it difficult for our democracy or any democracy to function—again, very poignantly reflected in this Fortieth anniversary of the coup in Chile—are those people who could very well be defined as economic criminals.

I just participated in a Web event where Elizabeth Warren talked about her Bank on Student Loans Fairness Act that she has introduced in Congress.  There were over 10,000 people participating in this event.

Elizabeth Warren promised that keeping the interest rate low on government Stafford Student Loans is just a first step in solving the crisis of student debt.  When we are talking about student debt, we are not just talking about 20-something-year-olds.  Many people are carrying student debt into their 50s and beyond.

Here are Senator Warren’s remarks when she introduced her bill to the Senate.

When I started my career in 1967, it was a policy of all companies to pay for the advanced degrees of their employees.  My Master of Science in Electrical Engineering was paid for  by Texas Instruments, RCA, and Digital Equipment Corporation.

In today’s world of high unemployment and international competition for jobs, companies have discovered that they don’t have to pay for their employees’ educations.  They can always find somebody who has already earned their advanced degree.  The corporations are saving huge amounts of money by not having to pay for this expense.

The same set of circumstances that has let the companies off the hook for this expense is causing governments to cut back on their support for higher education.  High unemployment stresses government budgets at all levels of government.

It is probably true that we never should have depended on corporations to shoulder the burden that government should have borne.  Now that there are no corporations willing to take on this burden, who should take up the slack?

Now the private citizens must individually bear the burden.  This is an untenable situation.  Bearing this burden puts people into a lifetime of debt.  They cannot buy houses while they owe the cost of a house for their education.  They cannot save for retirement.  They will not be able to help their children pay for college.  They cannot buy the goods and services that provide the demand stimulus to keep our economy out of depression.  They will not be able to support their parents when their parents, you and me, become too old to take care of themselves.

What about this big picture is too big for our citizens to comprehend?

You can sign a petition at BankOnStudents.org to let your Congress people know how upset you are about their failure to act for the best interests of the country.

Another place to keep track of this issue is StudentDebtCrisis.org.

We must raise our voices in support of Elizabeth Warren’s efforts because she cannot accomplish our goals by herself.

Jonathan Weil wrote the commentary, Bank of America Edges Closer to Tipping Point, which I found on the Bloomberg web site.

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value.

The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

Consider this post along with my previous post, Financial Improprieties Abound as Stocks Rally. I hope there won’t be any buyer’s remorse when the Republicans in the House get to deal with the second leg of the impending banking disaster.  Nah, the voters will just blame Barney Frank.

You might also want to consider The Best Way To Rob A Bank Is To Own A Politician,

I have been reading the book 13 Bankers, The Wall Street Takeover, and the Next Financial Meltdown, by Simon Johnson and James Kwak.

Simon Johnson is Ronald A. Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management and a senior fellow of the Peterson Institute for International Economics. He is coauthor, with James Kwak, of The Baseline Scenario, a leading economic blog, described by Paul Krugman as “a must-read” and by Bill Moyers as “one of the most informative news sites in the blogoshpere.”

James Kwak has had a successful business career as a consultant for McKinsey & Company and as a software entrepreneur.

There are too many important passages to quote here, but there are a few key ones that I want to remember.

                              INTRODUCTION                         5

  Why did this happen? Why did even the near-collapse of the finan-
 cial system, and its desperate rescue by two reluctant administrations,
 fail to give the government any real leverage over the major banks?

   By March 2009, the Wall Street banks were not just any interest
 group. Over the past thirty years, they had become one of the wealth-
iest industries in the history of the American economy, and one of the
most powerful political forces in Washington. Financial sector money
poured into the campaign war chests of congressional representatives.
Investment bankers and their allies assumed top positions in the
White House and the Treasury Department. Most important, as
banking became more complicated, more prestigious, and more lucra-
tive, the ideology of Wall Street -- that unfettered innovation and
unregulated financial markets were good for America and the world-
became the consensus position in Washington on both sides of the
political aisle. Campaign contributions and the revolving door be-
tween the private sector and government service gave Wall Street
banks influence in Washington, but their ultimate victory lay in shift-
ing the conventional wisdom in their favor, to the point where their

page 76 of 13 Bankers.

The total volume of private mortgage-backed securities (excluding those issued by Ginnie Mae, Fannie Mae, and Freddie Mac) grew from $11 billion in 1984 to over $200 billion in 1994 to close to $3 trillion in 2007.

page 117 of 13 Bankers.

Kevin Murphy, Andrei Schliefer, and Robert Vishny have argued that society benefits more when talented people become entrepreneurs who start companies and create real innovations than when they go into rent-seeking activities that redistribute rather than increase wealth. If this is true, then this diversion of talent to Wall Street constituted a real tax on economic growth over the last two decades.

Even though I have been saying that the diversion of talent to Wall Street is a major driver of us out-sourcing our technology, I recognize one weakness in the above quote.

As I have also said these ideas are not binary, either rent seeking is good or it is not. Or real innovations are good or they are not. The real issue is one of balance. Without sufficient rent-seeking activities, entrepreneurs would stymied by lack of capital. Too much rent-seeking and we lose too many entrepreneurs of “real” innovation.

THE BEST DEAL EVER                     121

THE GOLDEN GOOSE

The boom in real estate and finance in the 2000s resulted from the
explosive combination of a handful of financial "innovations" that were
invented or greatly expanded in the 1990s: structured finance, credit
default swaps, and subprime lending. Most financial regulators looked
on the creation of this new money machine with benevolent indiffer-
ence. Structured financial products were sold largely to "sophisticated"
investors such as hedge funds and university endowments and therefore
subject to limited oversight by the Securities and Exchange Commis-
sion; credit default swaps were insulated by regulatory inattention and
then by the Commodity Futures Modernization Act; subprime lending
was winked at by the Federal Reserve. That was how the financial sec-
tor wanted it, and Washington was happy to oblige.

THE BEST DEAL EVER                     123

Asset-backed structured products became Wall Street's new cash
cows, in the form of mortgage-backed securities (MBS) and their
cousins, collateralized debt obligations (CDOs). The original mortgage-
backed securities created by Ginnie Mae in the late 1960s were "pass-
through" securities: mortgages were combined in a pool, and each
security had an equal claim on the mortgage payments from that pool,
spreading the risk evenly. Private MBS, however, are typically divided
into different tranches, or classes, that have different levels of risk
and pay different interest rates. Because the "senior" tranches have the
first claim on all the mortgage payments, they have the least risk, and
the credit rating agencies routinely stamped them with their AAA
rating-the same rating given to U.S. government bonds. The "junior"
tranches are riskier, but therefore pay higher interest rates to investors.*

A CDO is similar, except that instead of being built out of whole
mortgages it is built out of mortgage-backed securities or securities
backed by other assets (such as credit card loans, auto loans, or student
loans)^ By building CDOs out of junior, high-yielding MBS tranches,

*In a stylized example, an MBS offering might be composed of 85 percent senior MBS and
15 percent junior MBS. If 5 percent of the underlying mortgages default, the junior
investors will lose one-third of their money, but the senior investors will lose nothing. The
senior investors only lose if over 15 percent of the underlying mortgages default. By con-
trast, in a pass-through MBS, there are no tranches; if 5 percent of the mortgages default, all
investors lose 5 percent of their money.

THE BEST DEAL EVER                     139

 A McClatchy investigation found that even as the housing market was
starting to crumble, Moody's was forcing out executives who ques-
tioned the agency's high ratings of structured products and filling its
compliance department with people who had specialized in giving
those ratings.53

See the March 4, 2003 article, Buffett warns on investment ‘time bomb’, for the following quote:

But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system.

Remember the above snippets when you hear Warren Buffet’s testimony before the Financial Crisis Inquiry Commission on June 2, 2010.

As the largest single investor in Moody’s, he thought that there was no way for people to know in the midst of a bubble that they were in the midst of a bubble. So you could not fault Moody’s for the ratings that turned out to be not so good.