lead analysts at morgan stanley, the main underwriter for the facebook ipo, received privileged information about the company, information that they didn't share with retail investors. finra, the financial industry regulation authority, regulatory authority, the u.s. senate banking committee, and the commonwealth of massachusetts have all announced probes into the matter, and that was quickly followed by a lawsuit filed by some investors against facebook and its ceo, mark zuckerberg, alleging that both withheld material information from investors during the ipo process. now, specifically, they're talking about forecasts that revenue would be lower in 2012. facebook tells cnn, by the way, that the lawsuit is without merit. ron gefner is a former s.e.c. investment attorney. henry blodgett is the ceo of business insider, a website. back in 2003, henry handled a civil charge with the s.e.c., banned from the securities industry. he's a good friend of our show. and i say this because it's relevant to our discussion. you probably know more about this now than most people do. >> unfortunately. >> if no laws were broken and no regulations were breached, and it's quite possible that that's the case, this still has some kind of a stink that makes investors think the system's stacked against them. >> that's right. this has highlighted a set of rules that really are grossly unfair to individual investors. and it was actually similar in my case. when i got in trouble, it was analysts were working very closely with bankers on ipo as. after the dot-com bust, people said, that's ludicrous, and we changed the rules. and again this is a case where we've got to change the rules. because in this situation, facebook basically preannounced a lousy quarter. the underwriter analysts found out about it and that was whispered, effectively, to big institutional investors and individuals never heard anything about it. and it had an impact on the amount the institutions were going to pay for the stock. >> ron, what's your take on this? >> it's still not clear to me. i don't know the substance of the information that was being communicated and the times of the information with respect to the prospectus that was provided to all investors, institutional retail investors alike. that said, the entire world is stacked one way another. we look at differentrieses to compare. it's a function of being an educated consumer. >> can you -- can my viewer be enough of an educated consumer in a system like this, or by definition, am i as a retailer investor at a disadvantage to the pros? >> now if you're comparing retail and saying retail means novice, of course, in every industry, every novice is at a disadvantage against a professional. if you feel you're at a disadvantage, then work with people who are the professionals and go to the fight with the same-sized gun as your competitor. >> so, henry, your take on this is, maybe the takeaway from our viewers right now is we shouldn't have been involved in this ipo? >> i think that is the takeaway. i think this highlighted one of many, many ways that individuals are disadvantaged. the good news is, you can buy index funds. it's exposed to u.s. equities and invested in american capitalism and you can make money, but you're not competing day to day with full-time professionals. >> but they don't have the excitement -- you know, the biggest, the most hyped ipo -- >> anybody who wants to play the markets, speculate, fine. as a form of entertainment, it's great. people go to las vegas, they know they're going to lose, but it's still fun. you can do the same thing in the stock market. my point is only that if you're actually being serious about investing for retirement, everything else, there are much, much smarter ways to do than to try to out-trade professionals. >> can the laws, can the s.e.c. and finra and these regulatory bodies ever have enough in place where my ability to invest is fair and protected? that i'm on a level playing field? >> that's a good point. first realize, laws are a dynamic world. >> exactly. we make laws because something's gone wrong. >> and in some ways, they overregulate. >> one of the reasons why morgan stanley, the lead underwriter, didn't just come out and say to everybody, here's some specifics with respect to what facebook's revenues are going to look like, is because as a regulation, it sort of prevents them from doing that. >> exactly, and it was designed to protect individuals by not getting research in advance, and then the company didn't live up to the forecast, so people would feel swindled. so it was best of intentions, it's just law of unintended consequences, big investors had very, very important information that small investors didn't get. so again we look at the laws. >> but separately, i want to highlight one of my concerns and why i want to know the substance of what was communicated. if the analysts at morgan stanley were communicating information, that they looked at public information and analyzed in such a way that some of their clients should get the benefit of their brain power, that's one thing versus if the analysts had access to information that not everybody had access to, which is what you're suggesting. >> it's very clear that it was the second. facebook proactively reached out to 21 analysts according to the "wall street journal" this morning to say, basically, take your numbers down. the new numbers were all very much in unison with one another. >> but you know that happens, right? the fact is, it the does happen. you're just saying it shouldn't happen? >> certainly in this case, it just should have been made available to everybody. >> how? given the current laws -- >> it should have been published. basically, look, i think facebook could have helped a lot here by instead of adding vague language to the prospectus, which i did, and people were unnerved by that. >> it basically said our revenues -- >> -- growing faster than revenues in the first quarter, but even to me, and i was a securities analysts, that's very different than second quarter's coming in weaker than we thought, the year's going to be weaker than we thought, if they just said that, then, fine, everybody gets the same information and we go from there. >> so you're suggesting that they received more granular information -- >> much clearer information. >> so the legal obligation is that the issuer of facebook is precluded from providing information inconsistent with what's contained in the prospectus prior to the ipo. >> so do people who are suing have a case? >> it depends. this is not a tale of two cities, it's a tale of three cities. there are cases being brought against morgan stanley, facebook, and also nasdaq. and the people who are bringing cases against nasdaq, seem, i think, on its face initially to have the stronger cases. >> already, henry blodgett and ron gentner, thanks very much. coming up next, it's not just facebook's debacle that has us all scratching our heads about what exactly is going on on wall street. we also have jpmorgan's massive trading loss a few weeks ago. now, is all of this taken together enough to give president obama another chance to reform wall street? when we come back, i'll ask the woman who dared to challenge wall street, who said we need to hold accountable a financial service industry that has run wild. elizabeth warren joins us next. people with a machine. what ? customers didn't like it. so why do banks do it ? hello ? hello ?! if your bank doesn't let you talk to a real person 24/7, you need an ally. hello ? ally bank. no nonsense. just people sense. jpmorgan chase, one of america's soundest financial institutions. a big-time wall street bank considered too big to fail. but it recently admitted to losing more than $2 billion on complicated trades involving credit default swaps. sources tell "cnn money" the losses could be as high as $7 billion. credit default swaps are like insurance, but they're not. they are more complicated and they're highly volatile. let me explain to you, investors buy insurance son some underlyig thing, let's say a loan. they give money to the bank like a premium. if that loan doesn't get paid, the bank has to give money to those investors. . but in this case, they were betting on something that didn't even exist and that neither the bank nor the investors had any underlying interest in. this is the same mess that wreaked havoc in 2008, almost bankrupting insurance giant aig. if you recall, and you probably do, the u.s. government spent more than $180 billion to bailout aig, because it was like jpmorgan chase is today, too big to fail. while that crisis spurred some financial regulation, what happened then could entirely repeat itself today. now that jpmorgan chase's ceo jamie dimon, who has really pushed back on regulation, has egg on his face, could this be the time for president obama to get it right with respect to regulation on wall street? well, one of the best-known advocates for financial reforms joins me now. elizabeth warren was one of the main architects of consumer financial protections, through the consumer financial protection bureau. she was brought in by the obama administration to get the consumer watchdog group off the ground. she's now a democratic candidate for senate in massachusetts. elizabeth, good to see you. thanks for being with us. >> it's good to be here. >> elizabeth, four years after the financial crisis, are we or are we not better equipped to shield the economy from risky bets that are made by institutions like j.pmorgajpmor? >> well, we are better equipped. there are some changes that have been made, like the consumer financial protection bureau, which that means we're feeding a little less risk into the system. but the real question is, are we adequately equipped? and i think what the jpmorgan chase problem shows is that, you know, there has been no change in attitude out there. the banks still want to load up on risk in order to juice their profits. and they're's still not adequat oversight of that. and as long as that situation exists, we're at risk. >> here's the question. why should i care that jpmorgan chase, a private company, with lots of money, is taking risky bets? because my mind goes back to 2008 and aig, and i think, i don't care if you do it for you and your shareholders, but at some point, it starts to risk the entire economy. am i overstating the case here? >> no, you're not. and that's exactly the point. if these banks load up on too much risk, and as long as it all pays off, you know, then they take the profits home. but as soon as it reverses, the losses are on the rest of us. and never forget what happened in 2008. it meant that people lost their jobs, it meant that small businesses couldn't get the money they immedianeeded in loa keep their businesses afloat. it meant that people lost their pensions. it meant that this whole economy nearly went over the edge. and you know what makes this so important is that, burn me once, shame on you, burn me twice, shame on me. this is now a point where the american public says, wait a minute, we bailed you guys out. the understanding was that there was going to be a new day here. there was going to be some change. but the financial institutions, instead of saying, okay, we get it. we made a terrible mistake, thank you for bailing us out, instead, they fought back against the regulations. they hired the biggest lobbying force ever assembled on the face of the earth. they fought those regulations, and when dodd/frank passed, they just moved to guerilla warfare. and they continued to lobby congress, they continued to lobby the regulatory agencies, to delay the implementation of the rules, to put loopholes in the implementation of the rules, to tangle the rules up, to undercut the regulators so they wouldn't have adequate funding to supervise. and that leaves us in the same old stew. >> elizabeth warren, always a pleasure to talk to you. thank you for joining us. >> always good to talk to you. coming up next, jpmorgan has a long and colorful history in washington. this week was no exception as the senate banking committee took up a debate on its debacle. but would wall street reform really prevent another financial crisis? my next guest says no. stephen moore joins us when we return. are you still sleeping? just wanted to check and make sure that we were on schedule. the first technology of its kind... mom and dad, i have great news. is now providing answers families need. siemens. answers. mary? what are you doing here? it's megan. i'm getting new insurance. marjorie, you've had a policy with us for three years. it's been five years. five years. well, progressive gives megan discounts that you guys didn't. paperless, safe driver, and i get great service. meredith, what's shakin', bacon? they'll figure it out. getting you the discounts you deserve. now, that's progressive. call or click today. ♪ in a world where ♪ there is so much to see ♪ there's still no other place ♪ that i would rather, rather ♪ rather, rather be ♪ [ male announcer ] dip into sabra hummus and discover a little taste of the world. enjoy sabra dips. adventure awaits. i tell you what i can spend. i do my best to make it work. i'm back on the road safely. and i saved you money on brakes. that's personal pricing. before the break, we heard from elizabeth warren who's running for senate in massachusetts about why banks need to be regulated. my next guest says that regulation would not have prevented jpmorgan's hedging losses and they don't have anything to do with taxpayers anyway. stephen moore is an editorial writer with "the wall street journal." i consider him a friend, but today, i think you're crazy. how can you say that risks taken by banks don't have anything to do with the taxpayer? were you living in malta in 2009? >> ali, look, let's go back to the financial crisis in 2008 and 2009, when the banks collapsed. >> right. >> it's important for people to understand, the main reason that those banks collapsed and we saw these massive hundred billion of dollars of losses, what were the banks investing in, exactly what investors told them to invest in, mortgages and mortgage-backed securities, which turned out to be worthless. it wasn't fancy mortgage-backed securities or derivatives -- >> well, the mortgages were the main fund. we created this much, much bigger world by having bets on bets and bets on things that were synthetic and derived and whatever. ultimately, aig, sure, if mortgages hasn't had gone sour, they wouldn't have gone, but regulation didn't know what they were betting on. >> this is my point, though. often times we have this mentality, i think you have this mentality, sometimes, that regulators have this -- >> it's a dream, not a mentality. it's a dream. i fantasize that -- >> and look, they don't. do you think that the federal regulators would have seen some of the folly in what jpmorgan was investing in? i think not. the other point i would make to what elizabeth warren was saying on the show is, look, it was two years ago that dodd/frank was signed into law. two years ago, this was supposed to be the most sweeping financial regulation of the banks and other financial institutions that we passed in 50 years, and it didn't do anything to prevent the crisis -- >> because republicans worked very hard to water this down. elizabeth warren's running for senate today. she would have been the head of the consumer financial protection bureau, but for a bunch of republican senators who wouldn't let that happen. >> look, here's my concern with this rush to regulate. i think, and i think you would agree with this, the united states, if we're going to remain the economic superpower, we have to be the financial capital of the world. we have to be the place where the deals get done, where we have the most efficient capital markets, and here's where i disagree with you, ali. i think this massive push to impose new regulations on our financial institutions is not going to make them safer. i think what you're going to see is a lot of this the business moving to tokyo, to london, to beijing, to places that -- >> sure, regulation has got to be smart. let me ask you this. do we agree -- is this a nonpartisan issue even in america that it's dangerous to have too many, too big to fail financial institutions? >> you know, that's a very tough question. we've been struggling with that at "the wall street journal" editorial page. because we have created this sense, in the market, that these large insurance companies, these large banks, these large brokerage firms have become too big to fail. and that, therefore, they have this kind of taxpayer safety net. now, i hate that. you know me. i hate the whole idea of bailouts. i'm not sure what the best solution to this is, because the fact is, we will bailout these institutions if they fail. >> right, that's the danger, right? the danger isn't that jpmorgan goes and makes bets with its own money. why do i care about that? i care because if they do something bad to the economy, we're going to have people in iowa who can't get home loans like last time. we'll have major companies that can't raise money and have to fire people. that's where the connection is, right? >> that's right. and there's also something special about banks. and i want to make this point. look, the reason we care about banks as opposed to insurance companies and brokerage firms is that banks also have deposit insurance, right? that the taxpayers stand behind that. so you could make the case that there should be special regulations on the way banks invest, because they have that special protection of fdic insurance. i don't see that necessary for other kinds of financial institutions. so maybe what we need to do is separate out the banks from these other kind of financial institutions. >> let's go to someplace where we agree. i have this fantasy that regulators should be able to regulate what aig did and what jpmorgan did. my fantasy that the regulator is somebody who's in that achieve investment office in london, i don't know why this stuff always happens in london, looking over the books with them, as a partner, not as an outside eye, but somebody who says, what would happen if this didn't go your way? what would happen if this bet you made went the wrong way, and we'll be able to say, huh, that is dangerous to the global economy, so can we do something else? in other words, i'm not asking for people to do forensic work that's smarter than the smartest people in finance, but is there not some way that you can actually have regulation that's effective that way? >> you can have much more -- the one area that i would agree with, with elizabeth warren, is i think we do need more transparency in these traits. here's an interesting point i would challenge you on, ali. if you look at what jpmorgan was losing money on, those were hedge fund bets. and what hedging is, was hedging against risk. in other words, they were trying to reduce their risks with these hedge bets. let me ask you this question, ali. how many people in the united states congress do you think understand what a hedge fund is, what a derivative is, what a credit default swap is? so you're asking these members of congress who have no knowledge of these markets to be regulating them. it's another reason i'm skeptical that the brains in washington are going to be able to avoid these kinds of financial catastrophes that we saw in 2008. >> i share a lot of your views on that. i still don't know that's a reason not to do it. it's a good discussion, and you're always up for it, even though you're a little dose of crazy. stephen, always, always a pleasure. stephen moore is an editorial writer and a great thinker with "the wall street journal." uh-oh! another election about plumbe