Bill Black: Are Pres. Obama's new measures effective or window dressing? - February 19, 12
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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.In President Obama's recent State of the Union speech, he appeared to come out swinging against Wall Street and financial institutions that committed abuses and fraud that led to the crisis in 2008 and continue. Here's a little bit of what he had to say.~~~PRES. BARACK OBAMA: And I will not go back to the days when Wall Street was allowed to play by its own set of rules. So if you are a big bank or financial institution, you're no longer allowed to make risky bets with your customers' deposits. You're required to write out a living will that details exactly how you'll pay the bills if you fail, because the rest of us are not bailing you out ever again.~~~JAY: Now joining us to assess whether these proposals from President Obama seem to be effective and meaningful is William Black. William is associate professor of economics and law at the University of MissouriâKansas City, 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 & LAW, UMKC: Thank you.JAY: So, Bill, President Obama says that banks are no longer to be able to take risks with your money, and they're going to have a living will. So they're not going to be too big to fail, 'cause, he says, we're not bailing you out again. So are we really now protected from all these things that triggered the 2008 crisis?BLACK: No, you're not protected from any of those things. And it's because both parties refuse to protect us against either of those things. So let's take it in pieces.Of course they're using other people's money, because that's what banks do. They use other people's money. So our money is still at risk. The major issue is with regard to the systemically dangerous institutions. These are about the 20 largest banks in the United States, and maybe about 15 outside the United States. And the administration is telling us that as soon as the next one failsâand it's a question of when, not ifâit will cause a global, systemic financial crisis.So the fairly obvious question we asked was: why would you allow that? Why wouldn't you get rid of the 20 largest banks' systemic danger? And it turns out that is not particularly hard to do, because these banks are massively too big to be efficient. In other words, we've got a tremendous win-win-win.JAY: Well, the argument that they're giving is that this "living will" thing works out a method that if a bank is on the verge of going down, they've already worked out the steps for going bankrupt and dealing with what thisâconsequences would be, and so there wouldn't be the systemic effect that it had 2008. But, I mean, one, I don't understand, if the bank's big enough, any living will bigâthat's really going to be deal with it. But the problem is, when these things happen, it happensâlike, a whole sector goes into trouble. It's not, like, just one bank.BLACK: The living will is the stupidest idea. It is a completeâthe Russians would call it a maskirovka. It's just a mask for what's really happening. And that's for the reasons you talked about, plus more.First, we've never been able to predict the exact failure mechanism of any crisis. You know, no one can tell you on what day Lehman Brothers is going to fail and how this is going to take the mutual funds to break the bankâthe buck and cause a major run, and thus cause 1,000 financial markets to seize up. Nobody can predict those things. And so you can't have a living will. And if you did have a living will, it wouldn't do you any good, because you would have a complete financial crisis, because the thing is systemically dangerous.So the only way to fix it is to shrink them, and to shrink them dramatically, to the point where they no longer pose a systemic risk. Here's the good news. Not only will that make our financial system vastly safer, it'll make those banks more efficient. They are way too big to manage.And the third win in the win-win-win is democracy, because if you allow systemically dangerous banks, what they do first is hold hostage the national economy. They say, you do anything to me and the entire economy comes down. And, of course, (b) they have so many resources that neither party is willing to take them on. And we've run a real-world test, right? We had a global disaster, a global, worldwideânearly worldwide recession. In the United States alone the household sector lost $11 trillion. And we still have nobody in either party seriously willing to take on and shrink the banks.JAY: Well, one of the issues you've raised many times and President Obama in the speech says he's now going to address is the issue of holding what was essentially criminal fraud and those people that conducted it accountable. Here's a littleâa further clip from his speech.~~~OBAMA: We'll also establish a financial crimes unit of highly trained investigators to crack down on large-scale fraud and protect people's investments. Some financial firms violate major anti-fraud laws because there's no real penalty for being a repeat offender. That's bad for consumers and it's bad for the vast majority of bankers and financial service professionals who do the right thing. So pass legislation that makes the penalties for fraud count.~~JAY: So, Bill, does this mean he's ready to start holding what, you know, people call the "fraudsters" accountable?BLACK: Well, it means that he gave a speech claiming that he would do that. But all the performance belies the speech. So what have we seen? Well, first, you know, I think this is the fourth or fifth time you've had me on to address the fact that they have not prosecuted the elites. And that's still true. And we're now over three years into this administrationâand, of course, the administration before that, five years' worth that they should have been prosecuting. So it's eight years and no serious prosecutions. That is a disgraceful record for both administrations.JAY: Well, he's implying here, 'cause he'sâState of the Union, he's speaking to members of Congress, he's saying to them, pass legislation that allows me to do it. Well, is that the problem, that he hasn't had the legislation?BLACK: No. And he hasn't asked for legislation. He just had the Dodd-Frank bill, the most massive piece of legislation in finance in U.S. history. And, like, you know, he forgot about it when he did this massive bill? I don't think so. He also, as you note, didn't ask for any specific legislation, didn't explain any specific problem that required legislation to be able to prosecute. So that is a complete nonstarter.What else have we just seen? Well, we've just seen that a memo was released because a citizen complained to Fannie Mae about illegal foreclosure practices. Fannie Mae hired an outside law firm to investigate, and the outside law firm confirmed many of the charges of the individual, you know, who blew the whistle on this stuff. One of the lines in that report is that it is axiomatic that these kinds of practices are criminal.JAY: What are examples of the practices you're talking about?BLACK: Examples of the practice are the robosigning. And that brings us, of course, to this giant settlement in which absolutely no one individually who committed the frauds is held at all accountableâno one's fired, no one loses a raise, no one has their bonus that they got for defrauding people clawed back, no one's indicted at the federal level. There are two indictments at the state level in Nevada. It is amazing.JAY: This is the deal just announced in the last couple of days, where states have made a deal brokered by the federal government that the major mortgage companies are going to supposedly pay a certain amount towardsâpenalty towards this, but it doesn't amount to that much, as I understand it correctly. But before we dig into it, let's see another quote from President Obama, 'cause he says he's going to create a commission that will deal with this. Here's what he said.~~~OBAMA: And tonight I'm asking my attorney general to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.~~~JAY: So, Bill, isn't this what you've been asking for?BLACK: No. It doesn't do any of those three things. And, again, seriously, after three years in office, you're going to finally create a working group, something you could have done on day one?So let's see what they said about the working group. The working group isn't staffed up, but when it's staffed up fully, it will have 55 personnel. Just in terms of investigative agents in the savings and loan crisis, which had losses less than one-seventieth as large as this crisis, we had 1,000 agents. That gives you an idea of scope.JAY: And just for people who don't know, you were part of that process, were you not?BLACK: Yes. I helped design that process. I helped train the FBI agents, the regulatory personnel, the assistant U.S. attorneys who prosecuted. I served as an expert witness. I worked on the criminal referral process. I worked on the process by which we detailed dozens of our examiners to work for the FBI so they could serve as their in-house experts. None of those things have been done in this crisis. And the number of investigative personnel is going to be somewhere between 25 and 30 versus 1,000. And this one is 70 times bigger.JAY: Well, how does this relate to the deal that just been brokered? 'Cause it does seem a little odd that there's a deal being made already before the investigation takes place.BLACK: Well, first, there was never an investigation, at the federal level, of robosigning. You're going to see some statistical analyses released by HUD, but there was never the equivalent of a serious criminal investigation. And that would have taken scores of agents working. So there's beenâthis supposed negotiation and supposed investigation is overwhelmingly been done at the state level, and the states don't have remotely enough resources to do what you would consider a full-scale investigation of any of these practices. And, as I said, there've been a little bit of investigation, two indictments in Nevada of two of the robosigners.But let me step back for your viewers as to what this means. Robosigning may sound like, well, they were just doing it mechanically and quickly, and that was impersonal, maybe, but certainly not criminal. No. It was axiomatic that what they were doing wasâinvolved multiple crimes. Robosigning primarily involved signingâknowingly signing false affidavits that said, I have checked the following things and the facts are as follow. And not due to investigations by the United States government, or even by the states, but due to competent depositions by, frequently, small firm, even sometimes solo practitioner firms, they finally took the testimony under oath of these people, and they admitted that they systematically, as a matter of policy, filed false affidavits, which is a felony.And they didn't do this a little bit. The large servicers did it over 10,000 times a month, over 100,000 times a year, and they did not stop it through any internal process. In other words, it was speeding up until private counsel found these felonies. No oneâand this stuff is all done under the management of senior lawyers. No senior lawyer, to my knowledge, involved in this massive filing of false affidavits has been sanctioned in any way by state ethics boards for attorneys, either.So President Obama announced this as his exemplar of accountability, and it is precisely the opposite. It is that people can commit hundreds of thousands of felonies at our most elite banks and it is not treated as a crime.JAY: Thanks very much for joining us, Bill.BLACK: Thank you.JAY: And thank you for joining us on The Real News Network.
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