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.
PAUL 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 MissouriKansas 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 billone 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 aboutthose 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 isand when I testified in front of the Senate about this, the very conservative panel member agreed with me when I said thisclearinghouses 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 nonothing 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 thatagain, with Warren Buffett being the exceptionthat 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 roughlyit depends on the agency25 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 crudand 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 lossesand a trillion dollars is a thousand billionwe 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 Reservethe 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 isyou 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 1993their 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
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