NO ADVERTISING, GOVERNMENT OR CORPORATE FUNDING

  • Latest News
  • Pitch a Story
  • Work with a Journalist
  • Join the Blog Squad
  • Afghanistan
  • Africa
  • Asia
  • Baltimore
  • Canada
  • Egypt
  • Europe
  • Latin America
  • Middle East
  • Russia
  • Economy
  • Environment
  • Health Care
  • Military
  • Occupy
  • Organize This
  • Reality Asserts Itself
  • US Politics
  • THOSE WHO BETRAYED GOT RICH


    NEW FINANCE BILL WILL NOT PREVENT ANOTHER CRISIS PT2. Bill Black on derivatives and rating agencies -   July 24, 2010
    Members don't see ads. If you are a member, and you're seeing this appeal, click here

    Audio

    Share to Facebook Share to Twitter




    You are, simply, the best! - Per Bengtsson
    Log in and tell us why you support TRNN

    Bio

    William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.

    Transcript

    THOSE WHO BETRAYED GOT RICHPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. The finance reform bill has passed both houses. President Obama is expected to sign it soon. Now joining us for his take on the finance reform bill is Bill Black. He's an associate professor of economics at the law school at the University of Missouri–Kansas City, specialist on white-collar crime, and he's the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.

    WILLIAM K. BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.

    JAY: Now, they say in the bill—one of the defenders of the bill are saying there's real progress on derivatives trading. Do you think so?

    BLACK: There is a bit of progress on derivatives trading, but it is easily evaded, and they've left loopholes that the lobbyists that she was talking about—those 300 lobbyists were active. And while aspects of the bill strengthened over time, other aspects of the bill created loopholes over time. And so, yes, it is a good idea. You shouldn't be doing non-exchange traded derivatives, and this bill encourages exchange-traded derivatives. But it has loopholes that allow people to evade it, so it's probably not going to be terribly effective. Clearinghouses are a good idea, and this bill wants clearinghouses for financial derivatives, so that's a positive. The difficulty is—and when I testified in front of the Senate about this, the very conservative panel member agreed with me when I said this—clearinghouses wouldn't have prevented this crisis. And the problem is the AAA ratings and the fact that losses were being deferred on this toxic waste, because as long as the bubble expands, you simply refinance the bad loans, and they don't have huge loss exposure. And that means the clearinghouses would not have required remotely adequate collateral, and they wouldn't in the future, either. In other words, bubbles defeat clearinghouses, and bubbles cause crises. So we have a fix, a clearinghouse, that, while a good thing, won't work against precisely the dynamic that causes these really severe crises. What else do we know created perverse incentives? Professional compensation. And here I just mention the rating agencies. They're a classic example. And, again, we have really good evidence on this. We know that the Goldmans of the world deliberately put the rating agencies in competition with each other in what in economics we call a "competition in laxity". In other words, whoever is willing to give the most absurdly inflated rating is who will get my business.

    JAY: And there's no—nothing in the current bill will change this?

    BLACK: No. And indeed, more generally, there's nothing to fix rating agencies. And everybody from every political perspective (with the exception of Warren Buffett, who is the leading owner of Moody's) agrees that this is insane. Everybody agrees that—again, with Warren Buffett being the exception—that the rating agencies were a disaster. And, again, people have to understand the scope of this disaster. Ratings run from down in the range of a single-C up to a triple-A, and there are roughly—it depends on the agency—25 levels of ratings. Every single time the top what's called "tranche" of these toxic waste derivatives that have losses running that range from $0.50 to $0.85 on the dollar, these always got AAA ratings, which is the best conceivable ratings. It's the ratings that US treasuries, backed by the full faith and credit of the United States and are considered in finance to be risk-free, have. These toxic crud—and they were called in the trade "toxic", they were called in the trade "liar's loans"—weren't even C. So when we say the rating agencies screwed up, we don't mean that they took something that, you know, should've been a single-A and they call it a triple-A. No, we're talking about something that should have been 25 levels lower, and they called it AAA. If they're willing to do that, then they're going to be willing to bless the next insane thing, as long as the competition and laxity is allowed to exist. So the failure of this bill to address professional compensation, and that's just one example. The same story exists for the top-tier audit firms, the big four accounting firms; the same thing exists for appraisers. Americans don't know that over 10 percent of all appraisers in America have signed a petition calling for the government to step in and regulate and enforce because of this Gresham's dynamic. A Gresham's dynamic is where cheaters and the least moral people prosper, and they drive the honest, moral people out of the marketplace. And that's what the appraisal industry was telling us. And the regulators refused to any do anything. And now, after a crisis measured in trillions of dollars of losses—and a trillion dollars is a thousand billion—we have, supposedly, the greatest reform bill since the Great Depression, and it completely ignores this causality. And, of course, bottom line, all of these things are what the FBI aptly term the "epidemic" in mortgage fraud and warned in September 2004, in open congressional testimony, would cause a financial crisis if it were not dealt with. And we see again, we look at the bill, and it essentially ignores white-collar prosecutions. It's a travesty of a bill if it was supposed to be designed to fix the problems that cause crises. The consumer bill was the other thing you asked me about. That is a good thing. But you can tell somebody has a really malicious sense of humor, because they put the new consumer agency into the Federal Reserve—the leading opponent of protecting consumers. This is the agency that under the HOEPA law [Home Ownership and Equity Protection Act], which goes way back to the '90s, had unique authority to protect us from otherwise unregulated mortgage bankers and anyone else who made mortgage loans. And even board members at the Federal Reserve went to Alan Greenspan and asked him to take action against these enormous abuses in the liar's loans and subprime, and Greenspan refused to act. And virtually every study ever published by the Federal Reserve about consumers is hostile to any regulation to protect consumers. And that's where the bill put the bureau that's supposed to protect consumers. And then the bill makes a big deal about the fact that they're creating independence from the Federal Reserve, so that the head of this bureau won't be unduly influenced. Well, why put someone into an agency hostile to the purpose of your bureau and then try to protect them? You know, why not just create an independent agency? And the answer is: they don't want this agency to really be any kind of fundamental departure from business as usual. Now, if Elizabeth Warren is appointed as head of this bureau, we might get some really important things. But you have to remember the people who stuck this in the Fed not only don't want it to succeed; they just don't think protecting consumers is all that important, and they think that it's actually potentially bad for the safety of the financial system. And so there is this group of folks, the regulatory heads, who, again, have been historically very hostile to protecting consumers, who get to override this bureau if it does too much. And, again, that is insane in terms of a response to what we should have learned helped cause this crisis, because protecting consumers would have been one of the best ways to protect banks. What you have to understand about this crisis is—you know, we teach in economics that the wonderful thing about voluntary market transactions is that both parties are made better off, right? I go into the restaurant, I give them money, they prefer my money, and they give me a really good meal, and I prefer that meal. We're both better off. That's a win-win. That's a really good thing in life. But in nonprime mortgages it was a lose-lose. And my book The Best Way to Rob a Bank Is to Own One, and the classic article by a Nobel prize-winning economist, George Akerlof, and Paul Romer, a wonderful economist, in 1993—their title says it all: "Looting: [The Economic Underworld of] Bankruptcy for Profit". So the banks, the lenders, often failed because of these frauds. The consumers were hurt, the people who bought the homes, because they were brought into homes at the absolute peak of the bubble. And that's why this crisis is the greatest loss of wealth of the working class in America in 80 years. It's a financial holocaust. And that's even more true, of course, of minorities. So we had the exact opposite of what economics predicts: both parties to the transaction were made worse off. Well, why? Because the agents were made better off. Who were the winners? The rating agencies, the senior officers who walked away rich, the least moral appraisers, the least moral of the outside auditors at the big accounting firms. They were all the winners. They got rich by betraying their responsibilities. And so if you had had an Elizabeth Warren and if she had banned this nonprime product to protect consumers, now, that would enormously reduce this financial crisis.

    End of Transcript

    DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


    Comments

    Our automatic spam filter blocks comments with multiple links and multiple users using the same IP address. Please make thoughtful comments with minimal links using only one user name. If you think your comment has been mistakenly removed please email us at contact@therealnews.com

    Comments


    Latest Stories


    The Resegregation of American Schools
    What Role Has Russia Played in Eastern Ukraine?
    Can Johns Hopkins Afford to Pay A Living Wage? (2/2)
    University Sit-In Targets World's Largest Private Coal Company
    The Modern History of Venezuela and the Need for a Post-Oil Economy - Edgardo Lander on RAI (6/9)
    Can Johns Hopkins Afford to Pay A Living Wage? (1/2)
    One Percent of Environmentalists Killings Lead to Convictions
    Investigation Finds Former Ukraine President Not Responsible For Sniper Attack on Protestors
    The Modern History of Venezuela from 1973 to the Caracazo Massacre - Edgardo Lander on Reality Asserts Itself (3/9)
    Ukraine Transitional Gov't Moves Militarily To Reclaim Seized Buildings
    IPCC Report Flawed By Narrow Focus on Carbon Emissions
    The Modern History of Venezuela: The Bolivarian Revolution - Edgardo Lander on Reality Asserts Itself (5/9)
    Obama Signs Directives to Reduce the Gender Wage Gap
    Eastern Ukraine Lacks Political Representation in Kiev
    Demystifying the Role of Mitigation in the Most Recent IPCC Report
    Hypersurveillance State Won't Prevent Another Boston Marathon Bombing
    The Modern History of Venezuela from 1973 to the Caracazo Massacre - Edgardo Lander on Reality Asserts Itself (3/9)
    Univ. of Maine Faculty Reinstated After Students Protest Against Cuts
    The Modern History of Venezuela from 1908 to 1973 - Edgardo Lander on Reality Asserts Itself (2/9)
    IMF Will Address Global Inequality, Says Managing Director Christine Lagarde
    Raising Big Banks' Leverage Ratio Good, But Not Nearly Enough
    TRNN Replay: Austerity Road to 19th Century
    Has Palestinian Maneuvering Revived Peace Talks?
    Late Jackson Mayor Lumumba's Son Wins Primary to Replace His Father, Runoff Election Ahead
    Quebecers Reject PQ and Elect a Liberal Government Representing Big Business
    TRNN Debate: Decriminalization vs. Legalization
    The Beginning of the Chavez Era - Edgardo Lander on Reality Asserts Itself (4/9)
    "Off With His Head": Court Upholds Obama's Power to Kill
    Workers at Nation's Top Hospital Strike For Fair Wages
    From Exile to Radicalization in Venezuela - Edgardo Lander on Reality Asserts Itself (1/9)
    Rwanda 20 Years Later: Genocide, Western Plunder of Congo, and President Kagame
    Ukrainian Protesters in the East Demand More Autonomy From Kiev Government
    Hunger Strikers Demand President Obama Halt His Record 2 Million Deportations
    Indian Parliamentary Elections - A Primer With Vijay Prashad
    West Looks to Carve Up Ukraine & Privatize Industries Held by Kleptocrats
    Where Are Israeli-Palestinian Peace Negotiations Headed?
    The Multiple Kingdoms of Saudi Arabia (5/5)
    Do the Afghan Presidential Elections Signify Progress?
    Republican Presidential Hopefuls Pay Homage to Billionaire Casino Tycoon Sheldon Adelson
    Will Extremist Lieberman Become Israel's Next Prime Minister?
    Why do the Saudis Want the US to Attack Iran? (4/5)
    Immigrant Advocates and Families Tell President Obama 'Not One More'
    Elections, Pipelines, and Protests - The Canada Panel
    Chris Hedges on "Israel's War on American Universities"
    Baltimore Residents Decry Lack of Affordable Housing
    Yellen Talks the Talk But Will She Walk the Walk?
    Hopkins Hospital Workers Speak Out against "Poverty Wages"
    Will Venezuela's New Floating Exchange Rate Curb Inflation?
    The European Central Bank's War on Wages is Pushing Europe's Economy to the Brink
    Supreme Court Decision Opens Floodgates for More Campaign Cash
    Charles Keating, the Financier Behind the Savings and Loan Scandal, Dies at 90
    Saudi Arabia and the al-Qaeda Monster (3/5)
    Maryland Residents Voice Opposition to Natural Gas Fracking Export Facility
    Supreme Court Ruling Gives Wealthy Individuals More Influence Over Elections
    What are the Saudis Afraid Of? - Madawi Al-Rasheed (2/5)
    Baltimore's MICA Adjunct Professors Set to Vote on Unionization
    Boycott of Israel Moving to Next Level?
    Hypocrisy Dressed Up as "Realism" Justifies American Alliance with Saudi Dictatorship
    Immigration Reform in the Shadows of Cesar Chavez's Legacy
    Leaked Senate Report Shows Use of Torture As "Ineffective"
    UN Report Says Climate Change Will Threaten Food Production Worldwide
    The Hypocrisy of US Calling for Enforcement of International Law
    How the Ecuadorian Economy Grew in a Global Recession
    'Shadows of Liberty' Trailer
    Kristina Borjesson on Why CBS Shut Down Her investigation into Flight 800 (2/8)
    Glen Ford on Racism in the American Media (3/8)
    Paul Jay on What Drives Corporate Media and What Drive The Real News (4/8)
    Creating a New Media Paradigm After Citizens United (5/8)
    Should The Left Engage with the Mainstream Media? (6/8)
    What Is the Financial Backing For The Real News? (7/8)
    Standing up to Character Assassination (8/8)
    Oligarchs, Fascists and the People's Protest in Ukraine
    TRNN Debate: Is Obamacare In the Interest of Workers?
    Too-Big-To-Fail Advantage Remains Intact For Big Banks
    Obama and the Saudi Agenda
    TRNN Replay: Investigating the Saudi Government's 9/11 Connection and the Path to Disilliusionment - Sen. Graham on Reality Asserts Itself pt 1
    The Iraq War's Real Legacy
    Petitions with 100,000+ Signatures Call for Snowden's Passport to be Reinstated
    We Need to Harness People Power - Andy Shallal on Reality Asserts Itself (4/4)
    BC Pipeline Fight and Quebec Elections - The Canada Panel
    Jonathan Schell - 1943-2014: Board Member of TRNN on Why We Need The Real News
    Teachers on Strike from the UK to Argentina
    Connecticut Poised to Become First State with $10.10 Minimum Wage
    Oil Spill Threatens Wildlife and Local Economy
    DC School Test Scores Up, But Poor Black Kids Are Doing Worse - Andy Shallal on RAI (3/4)
    Obama's Proposal To End NSA Bulk Data Collection Won't Protect Privacy
    How Google, Apple & The Biggest Tech Companies Colluded to Fix Workers' Wages
    An American Should be One that Questions Their Government - Andy Shallal on RAI (2/4)
    What's Driving Putin & Obama's Posturing on Ukraine?
    Hundreds of Students & Faculty Occupy College Campus to Fight Cuts to Public Higher Ed
    Due Process 'Impossible' In Harsh Death Sentencing Of Over 500 Muslim Brotherhood Members
    Has Anglo-American Capitalism Run Out of Steam?
    Being the "Other" in America - Andy Shallal on Reality Asserts Itself (1/4)
    TRNN Debate: Should Baltimore 'Ban The Box'?
    How Fallujah Became the Iraqi Government's New Battleground
    Why I Decided to Blow the Whistle on the NSA
    NASA Climate Predictions Show Serious Threat To Humanity
    Professor Who Teaches Israel-Palestine Conflict Accuses College of Violating His Academic Freedom
    CIA and NSA Wrongdoing Requires Independent Investigation, Says Former Church Committee Staff
    Are Tuition Breaks Enough To Combat High Student Debt And Low Graduation Rates?
    Industries Across the U.S. Are Stealing Wages From Their Lowest Paid Workers
    Who In Ukraine Will Benefit From An IMF Bailout?
    NSA Recording All International Calls From U.S.
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (2/2)
    BP Gets Green Light to Drill in Gulf, But Has Safety Improved?
    Residents Still Not Drinking Tap Water Two Months After West Virginia Spill (1/2)
    Libya's Descent Into Turmoil Three Years After NATO Intervention
    From Pipelines to Peladeau - Canadian Report
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (1/2)
    Congressional Progressive Caucus Budget Strikes Back Against Austerity
    Libya Three Years Later - Chaos and Partition
    Why Was Gaddafi Overthrown?
    Should Ukraine and West Accept De Facto Crimea Joining Russia? (2/2)
    Tony Benn Saw Socialism as the Culmination of Democratization
    Why Didn't Bush/Cheney Attack Iran and Can Obama Make and Sell a Deal? - Gareth Porter on Reality Asserts Itself (3/3)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi? (2/2)
    Crimea Referendum: Self Determination or Big Power Manipulation? (1/2)
    Sen. Graham: President Must Side with Openness About CIA and 9/11
    Manufacturing a Narrative for War - Gareth Porter on Reality Asserts Itself (2/3)
    Protesters Hit the Streets of Brooklyn to Demand $15 Minimum Wage
    Hammer: 'Moral Bankruptcy' Behind Massive GM Recall
    White House Withholds Thousands of Documents from Senate CIA Probe
    I Grew Up Believing in Time Magazine's Version of America - Gareth Porter on RAI (1/3)
    Western European Banks Vulnerable to Ukrainian Sovereign Debt Crisis
    TRNN Debate: What's Driving Inflation in Venezuela? (2/2)
    CIA vs. Senate: Who Is Obama Protecting?
    Will Tipped Workers Get Excluded Again From Minimum Wage Hike?
    TRNN Debate: What's Driving Inflation in Venezuela? (1/2)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi?(1/2)
    TRNN Replay: A Look at Who's Poised to Become No.2 at the Fed
    How Right-Wing Nationalism Rose to Influence in Ukraine (2/2)
    Netanyahu Attacks Boycott As Campaign Enters New Phase
    Moving Towards a Police State - Michael Ratner on Reality Asserts Itself (7/7)
    Fighting Reagan's Secret, Illegal Wars - Michael Ratner on Reality Asserts Itself (6/7)
    Puerto Rican Independence Movement and Cuba Further Radicalized Me - Michael Ratner on RAI (5/7)
    The Butcher of Attica - Michael Ratner on Reality Asserts Itself (4/7)
    MLK and a Radicalizing Moment in American History - Michael Ratner on Reality Asserts Itself (3/7)

    RealNewsNetwork.com, Real News Network, Real News, Real News For Real People, IWT are trademarks and service marks of IWT.TV inc. "The Real News" is the flagship show of IWT and Real News Network.

    All original content on this site is copyright of The Real News Network.  Click here for more

    Problems with this site? Please let us know

    Linux VPS Hosting by Star Dot Hosting