They Gave AAA Grades to Bad Loans; War Funds Steered to Pet Projects
BLITZER: Before the financial markets collapsed like a house of cards last year, credit rating agencies gave their highest rates to some highly problematic securities made up of those unreliable subprime loans. Now these agencies are being targeted for major reform. CNN's Brian Todd is looking into this. Brian, what are you finding out?</s>BRIAN TODD, CNN CORRESPONDENT: Wolf, on Capitol Hill and on Wall Street, there is new scrutiny for those firms accused of allowing so many shaky mortgages to lead to a wider financial meltdown.</s>TODD (voice-over): Did Wall Street's umpires gloss over some critical weaknesses in the mortgage market right before the financial meltdown? The three top credit rating agencies are accused of giving overly optimistic ratings like the top designation AAA to shaky mortgage backed securities right up to the point many of them failed. A whistle blower at Moody's told Congress his group gave some securities inflated ratings that it knew were wrong. And...</s>ERIC KOLCHINSKY, FORMER DIRECTOR, MOODY'S INVESTORS SERVICE: The groups always routinely bullied by business managers and their decisions are overridden in the name of general rating review.</s>TODD: Clients like investment banks would shop around to get the most favorable rating. But a representative of Moody's said there was no favoritism or fraud. They were just plain wrong in judging the market.</s>RICHARD CANTOR, CHIEF RISK OFFICER, MOODY'S CORP.: We were not alone in being mistaken about this. Most observers of the market, I would say nearly all observers of the market, were completely surprised by what happened.</s>TODD: Officials at the other top ratings firms, Standard and Poor's and Fitch, also deny wrongdoing and say they, too, simply misjudged how far the housing market would fall. Credit rating agencies are supposed to rate how strong or weak so-called mortgage-backed securities are. Since many of those securities were created from unstable subprime mortgages they plunged in value when the housing market collapsed and the financial system nearly crumbled with them. Mortgage backed securities are created when big investment banks buy a bunch of mortgages from local banks, pool them in portfolios and sell them to investors around the world. What effect does the credit rating crisis for those securities have on average homeowners?</s>PROF. JOHN COFFEE, COLUMBIA LAW SCHOOL: Until we get the credibility of credit ratings restored, housing finance in the United States is at a total standstill. All of these asset-backed securitizations have been paralyzed. They're no longer being done. Unless they are done small banks really can't finance the demand for housing.</s>TODD: Now some members of a congressional committee looking into all of this also say that these credit ratings firms have conflicts of interest. That they're paid by the investment banks underwriting those mortgage securities to rate those securities, but that the underwriters also want to trade the securities so they have an interest in higher ratings. But all three firms say they are transparent about what they do and they have built in firewalls to guard against conflict, Wolf.</s>BLITZER: Has there been any disciplinary action, Brian, taken against these analysts who gave these loans, these AAA ratings when they should have really given them D minus or F?</s>TODD: In a word, no. From congressional testimony, from our own calls to these firms, there's been no word of any disciplinary action, no terminations, to any analysts or others who gave these inflated ratings. One official from Fitch says that they give ratings by committee, not by individual. But again, these companies reiterate they just didn't know that the markets were going to fall. A simple misjudgment so why fire anyone.</s>BLITZER: Can anything be done basically about the system because so many investors out there, they go out and buy these AAA rated bonds when -- they rely on these companies.</s>TODD: That's right. Well, the one gentleman we interviewed from the piece, Mr. Coffee, from Columbia he's part of a task force looking into this for Congress. A bipartisan task force. He says they're looking into doing a couple of things here. One, making it mandatory for these firms to do their own due diligence about these securities. Right now they just rely on the word from the investment banks who are underwriting it. Also create more of a risk of liability if they screw these things up. You know whether that ever comes to pass or in what form once it gets through Congress, we don't know yet. But they're trying to reform.</s>BLITZER: These firms have their credibility at stake.</s>TODD: That's right.</s>BLITZER: And they obviously messed up this time. Let's see what happens. Thanks very much. Money meant to help troops fight a war is instead being spent on senators' pet projects geared more toward helping their home states. Let's bring in our senior congressional correspondent Dana Bash. She's digging deeper into this. Dana, what are you learning?</s>DANA BASH, CNN SENIOR CONGRESSIONAL CORRESPONDENT: We're learning that even in a time of war, Wolf, even in a time of record deficits here on Capitol Hill, pork still reigns.</s>UNIDENTIFIED MALE: I'd like to present each of you with a...</s>BASH (voice-over): Utah National Guardsmen returning from risky deployments receive a gesture of appreciation. A video scrapbook about their battalion and tour of duty.</s>UNIDENTIFIED FEMALE: It's your story told your way.</s>BASH: It's produced by a business in Utah called StoryRock. Utah's senator, Robert Bennett, wants to help his home state company take this nationwide. So he's secured a $5 million earmark in the defense spending bill. And get this. It's coming from the fund that's supposed to pay for basic needs for troops at war. Like food, fuel, and ammunition. We found Senator Bennett and asked him why he's taking money from wartime operations funding. (</s>On camera): Why is it important to make what is essentially scrapbooks for members of the National Guard?</s>SEN. ROBERT BENNETT (R), UTAH: It's been proven to be a very strong retention tool, recruitment tool. The military spends a lot of money to try to get people to re-enlist. We're frankly saving them some money.</s>BASH (voice-over): Bennett is unapologetic, and hardly the only senator using this budget to bring home the bacon. We counted 59 earmarks from both Republicans and Democrats totaling nearly $172 million. In the fund slated to pay for troops' essential needs.</s>SEN. JOHN MCCAIN (R), ARIZONA: This is the life blood of our military.</s>BASH: Anti-earmark crusaders like John McCain call it an outrage. And the Pentagon which didn't ask for the pet projects doesn't like it either.</s>GEOFF MORRELL, PENTAGON PRESS SECRETARY: Every dollar that we are forced to spend on things which we do not need requires us to take money from things which we do need. And the people who lose in that trade-off are our troops and the taxpayers.</s>BASH: The Pentagon did not request cold weather gloves for troops in Afghanistan. But Delaware's Tom Carper got $5 million for one company, W.L. Gore, GORE-TEX, which has 640 employees in his state.</s>SEN. TOM CARPER (D), DELAWARE: You know, special forces fighting in very difficult conditions in the winters in the mountains in Afghanistan, I want to make sure they have what they need to be safe.</s>BASH: Carper admits his earmark will help folks back home. But says it helps troops, too. That's what Olympia Snowe says. She's sending $20 million home to Maine to fix Humvees. (</s>On camera): Is this something that the Pentagon specifically asked for?</s>SEN. OLYMPIA SNOWE (R), MAINE: You know, I don't know. But, you know, we-- it's not only the Pentagon's decisions. It's -- there are several branches of government. Legislative branches. One of the three. And I think it's -- it's a mutual decision making process.</s>BASH (voice-over): In fact, all the senators we talked to with pork projects had one common defense.</s>BENNETT: Congress has the power of the purse.</s>BASH: It's their job.</s>BASH: Now there is more transparency in earmarks these days. Lawmakers are required to make them public and post them online. But, Wolf, watchdog groups argue that they are still a problem because they are still projects that are secured by powerful lawmakers and sent back home with no bidding and no competition. Wolf?</s>BLITZER: All right. Thank you. He went around the world to try to get his abducted children back from his ex-wife. Now in a CNN exclusive, an American father jailed in Japan has a message for his kids and for his country.