Deeper into financial reform legislation
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TEXT OF INTERVIEW
Steve Chiotakis: Of course, floor debate continues in the Senate for financial regulatory reform. But as lawmakers piece that legislation together, Fortune Magazine’s Allan Sloan says he has some
ideas of his own. Good morning, Allan.
Allan Sloan: Good morning, Steve.
Chiotakis: What do you have in mind?
Sloan: One is to make sure that the people running these institutions have real reason to fear them failing, cause I have to give up money. Then we would actually clear up derivatives and make it possible to understand them. And then we would make the credit-rating agencies, which everyone criticizes but no one does anything about, have to actually shape up or lose their primacy with the government. Piece of cake.
Chiotakis: Yeah, piece of cake I’m sure. Let’s dig in just a little bit. You say if someone has or if some company has some of their own money in the game, they’re less likely to be so reckless. What would that idea do to the incentive of buying or investing into a product?
Sloan: Well it would mean that if you bought a product — you know, especially a product involving a lot of borrowed money — that you would have substantial money of your own at risk, so you have to be very careful about what you buy. Also, I’m heretically proposing that unless people put a serious downpayment up for a mortgage — and I define serious as 10 percent — that that mortgage cannot be put into a mortgage security because you want to make sure that the people whose mortgages are in the securities are not just going to walk if the house price goes down by 3 percent.
Chiotakis: And all of these depend on ratings, of course, and so we have, here we have S&P and Moody’s and Fitch. And they have all this power in everyone’s ear?
Sloan: Right. Everyone is talking about whacking these guys and taking away their power, but the government depends on them enormously. So if I’m a bank and I’ve got something with a triple-A rating for these characters sitting in my portfolio, the capital I have to set aside for this is considerably less than if I just have, you know, some mortgage loan to some deadbeat like Sloan or Chiotakis.
Chiotakis: So all right, Allan, I’m going to sort of hedge this: What are the chances even one or two of your ideas make it to law?
Sloan: Oh the chances of some of them making it in are excellent, because versions of them are in the legislation. The idea of running the table and having all of them I think is not very good. But I’ll happy to sell you a derivative, so if that happens you and I can both be rich enough so we won’t have to be on the radio anymore.
Chiotakis: I’d say that’s triple-B. Hahahah!
Chiotakis: The heretic himself, Allan Sloan, from Fortune Magazine. Allan, thanks.
Sloan: You’re welcome, Steve.
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