Title: TWIB: Causes of financial meltdown

" As the economy nationwide shows signs of an economic rebound the question is how to prevent another collapse. The debate over how to regulate the nation's financial system is in full swing in Washington has been for some time absolutely and our next guest has a thing -- saying. On that subject joining us now what his state is Bob poston. Chairman of MFS investment and author of the soon to be released book. Too -- to say how to fix the US financial system. That's a big big subject Bob but welcome to the show. To be here and we're all looking forward to reading this but as I understand the fundamental theory -- thesis that you make. In looking at what happened in the past. It was failure of our securitization. System that really began this set of abdominal -- a two part question. Bring us through what that processes but more importantly. How do we fix the damn thing."

" Well you're right securitization was the key to the financial crisis. In 2006. We were securitized -- close to 100 million dollars of loans a month. What does that mean somebody would make a loan mortgage like broker they would -- so money center bank they would be pulled. And then they would issue different crunches of securities. Representing different claims on the cash flow. Now this problem was defective and every point. And in order to fix it. We've have to fix every point. Let me just make sure it's not quite the same and it's almost. A -- slam kind of system I mean there was nothing that really. Backed these loans note though nobody there were mortgages they were. They were reasonable mortgages or loans and they've been good loans this whole thing would've worked. But does that keep the problem was first. The poor people -- the mortgage brokers had no skin in the game right they could make the mortgage and then they could sell 100% of it. To the New York City banks and simulator and see you later so that they didn't have any incentive to do the due diligence and get the documentation right. And as the that demand for these mortgages increased. The quality became lower and lower and we started to have lots of sub prime loans. Which were sold under percent of the market and the mortgage broker didn't care so so is that solution in part. To get everybody to have some quote skin in the game absolutely the mortgage broker needs skin in the game they need to retains a 5% of the interest or loss possibilities in the mortgage. The money center banks that puts together the -- needs to retain some of the lost possibility. In the securities and the second thing we need to do is to simplify this system. Those mortgage securities that we're issues. Many of them had very complicated. Structures there or non transparent. And so investors thought they knew what they were buying but they really didn't. And the third point is the credit rating agencies. Most of these securities rated triple A or double play it's not a pretty good yeah but it turned out that within six months or year they were down to junk status. And so we really need to make sure that the credit rating agencies are giving accurate. An honest ratings which they were right or."

" We heading in the right direction now in Washington fixing every little point in the system as you said the -- are we heading in the right direction but give us some hope here. Well actually I'm loan securitization were not doing very much this year will."

" It seems that some people believe that if we recapitalize the banks will start lending a lot. But that's really not gonna happen their lending is actually declined. In any event banks only account for twenty to 25%. Of the total credit extended in the country. The non banks do the rest and they need securitization and so far there's very little happening on the securitization forum."

" Let's get back just for second -- the title of your book too big to save how to fix the US financial system. One of the big issues right now is when a really big financial firm that is seen as too big to save fails. The question is who who sort of pays to take this apart dismantle it and right now there's this plan between the White House and Barney franks committee. It calls for these companies basically have all the money from the government is that essentially what what what it's about."

" Well and in with that work. I think. The week we've so far. Save after recapitalize. 600 financial institutions of the threshold question is where they all too big to save I doubt it. We've seen this small banks which by definition worked too big to say we think credit card companies. Which in my view don't threaten global financial systems for the first thing we need to do is that narrows the group of companies that we really considered to be. Too big to fail. Then the second thing is when they do get to be the situation where there insolvent. How do we recapitalize them. What we've been doing so far is buying preferred stock with very little in terms of upside potential. So when Bank of America we put 45 billion dollars into that bank. At the time when this market cap was may be thirty million. And we have only 6% of the upside because we've got preferred. With some warrants which are like options but we as taxpayers on a 100% of the outside. And very little upside so in my view if we're gonna recapitalize these institutions should get some idea so we should we should we should get as much of upside as we have down. Brought you may have already answered that question but you have deep experience in financial services you're also a professor. Greed. But country's effort. In fixing the system what about the response the government had and -- having now what grade would you give them I guess I give them would be I think I'm surprised in terms of short term liquidity we did a good job. The Fed came in and supported a lot of institutions when the short term market surprise. Froze up. But in terms of longer term structures in terms of putting. A lot of moral hazard in the system in terms of the way we bailed out banks. We didn't do very well at all so I would give that effort see and I gave a short term liquidity. We're good in the short term. But we've really created a situation where we have lots of institutions that -- now on the federal -- We've guaranteed a lot of debt would raise deposit insurance. We've really put the situation where the government is really supporting a large part of the financial institution. We need to figure out how to get out of that situation it's not a good situation. In."

" The long run we have done a lot -- adversely impact the federal debt. In the deficit that we're now carried. How long can we continue to have and run that's kind of death."

" Well we are and very high deficit. Were over seven trillion now and probably. Realistically we don't change anything will be running budget deficits of say. One trillion a year for the next ten years. And I think it's too much. Most of our debt is held by foreign investors we've already heard. Some complaints from China saying are you guys really. Going to keep the issue currency you're going to Justin pleaded away and they -- change the currency standard move away from the US dollar plant anything that I think they they are starting to move in that direction and I don't know how fast we're gonna move but I think the answer is that we've got to get a lot tougher. About budget deficits we just can't keep going on this way and that means dealing with -- Medicare means dealing with Social Security. Bringing back the sort of pay go legislation that we had in the nineties where if you were gonna increase spending at a cut spending someplace else. Just too easy to increase spending and not worry about the other side on that note Bob -- is an author of the soon to be released too big to say thanks for joining us thank you for having me. Up next on the businesspeople with Peter -- lines of the Boston Globe publisher gets set to retire. Half an issue with intensity for casinos come from Matthew."