Former financial regulator Bill Black says it’s important to reimplement the Glass-Steagall Act – but it’s not enough to prevent another financial crisis.
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SHARMINI PERIES, EXEC. PRODUCER, TRNN: It’s the Bill Black Report on the Real News Network. I’m Sharmini Peries coming to you from Baltimore. Bernie Sanders, Democratic party presidential candidate, in his speech to Wall Street on January 5, he carried out a scathing denunciation of Wall Street, and he mentioned our regular guest Bill Black, and a Real News interview that was published on November 26, 2013, titled Documents In JP Morgan Settlement Reveals How Every Large Bank in the U.S. has Committed Mortgage Fraud. Let’s unpack what he meant by that. For that we are joined by Bill Black. As you know, Bill Black’s a regular guest on the Real News, and he joins us today from New York. Bill, welcome. BILL BLACK: Thank you. PERIES: So Bill, tell us what Bernie Sanders meant about his comment. BLACK: Well, Bernie Sanders is the only candidate in either party who has made it clear what is actually inescapable about this crisis but never talked about by leading politicians. And that is it was brought upon by the three most destructive fraud epidemics in world history. So we have really good numbers on this. We know that 90 percent of the liar’s loans roughly were fraudulent. We know that liar’s loans by 2006 represented 40 percent of all the loans made in that year. So we’re talking about over 2 million fraudulent loans being made by the lenders in just that single year of 2006. We know that from 2003 to 2006, in other words the critical period in which the bubble hyperinflated, that that was due almost entirely to the massive increase by 500 percent of liar’s loans, and we know that these loans produced these enormous losses. So when someone tells you it’s the subprime crisis, correct them and note to them that by 2006, half of all the loans called subprime were also liar’s loans. They’re not mutually exclusive. And remind them that the investigators who actually did investigate, unlike our Justice Department, found that overwhelmingly that it was the lenders and their agents who put the lies in liar’s loans. Second epidemic was appraisal fraud. We know that this was epidemic no later than 1998. In other words, hugely, a ten-year lead before Lehman Brothers’ crisis. And we have excellent surveys, 2003 and 2006, that show the percentage of appraisers who were extorted by the lenders and their agents again to inflate appraisals rose to 90 percent by 2006. And we know that both the Clinton and the Bush administrations ignored the warnings from the appraisers, which they put in writing from 2000 on, and had 11,000 appraisers sign a petition begging the government to act, which it failed to do. And of course, we know that there’s no fraud exorcists. So once you make these loans fraudulently, the only way you can sell them to the secondary market, and ballpark 85-90 percent of these loans were sold to the secondary market, is through fraudulent reps and warranties. Again, we have excellent information from whistleblowers like Richard Bowen at Citigroup that show that the percentage of fraudulent representations in warranties in these secondary market sales by city rose to 80 percent of all of the loans they were selling to Fannie and Freddie. So Bernie Sanders is the only person in senior levels of government, period, of anybody. Actually, even Senator Warren hasn’t made this point yet, that says, look. This crisis isn’t just about greed. Yes, there’s certainly greed. It’s about fraud. To remedy it we have to deal with the fraud itself. We have to appoint people who are actually–and this is not just to the Justice Department. The Justice Department can’t do it alone. They can only prosecute successfully if they get the restoration of criminal referrals. And again, in a savings and loan crisis, less than 1/100 the loss of this crisis, about 1/160 in terms of losses of this crisis, we made over 30,000 criminal referrals just from our little savings and loan agency. Flash forward to the current crisis, banking and savings and loan regulatory agencies made zero criminal referrals. The Bush administration eliminated the entire process of criminal referrals, and President Obama has not restored it. So I think that would be one of the first things that a Sanders administration would do, appoint new leadership at the regulatory agencies, which is appallingly bad, still, and restore the criminal referral process. And then, of course, appoint an attorney general who would actually be dedicated to prosecuting the crimes by the elites. So that was one of the, it’s not played that way by the mainstream media, but that’s actually the biggest difference that has opened up, not just between Senator Sanders and Senator Clinton, but between Senator Sanders and every other person running for office or actually holding positions. And it’s, you know, if he can get that into the debate and force people to take fraud seriously, that’s the only real chance for success going forward, because the Dodd-Frank act pretty much ignored the fraud component. It ended liar’s loans, but that’s like ending a particular ammunition, whereas of course there are always other forms that you can commit the frauds through. That’s, to me, one of the biggest takes from the Sanders story. Now, we know also that major differences that we’ve discussed with the viewership previously, in terms of Sanders wants to end the systemically dangerous institutions, Senatory Clinton wants to keep them alive. Senator Sanders promises to bring back Glass-Steagall and to bring back the regulations that used to make Glass-Steagall real. PERIES: That’s an interesting point, Bill. I mean, bringing back Glass-Steagall. And in fact, if Glass-Steagall had been in place some of what happened wouldn’t have happened. Do you believe that? BLACK: That’s true, but it’s a little complicated. So here’s the story, basically. One of the bizarre things in American politics is that Democratic presidents have consistently in modern history reappointed Republican appointees who are very strong partisan Republicans to run the Federal Reserve. So Bill Clinton did this twice, with Alan Greenspan, and President Obama did this with Bernanke. So the first time a Democrat’s actually been appointed is Janet Yellen by President Obama, basically a year ago. So Alan Greenspan detested Glass-Steagall, and he did everything possible through regulatory exceptions and refusals to enforce against violations of Glass-Steagall. And that meant that Glass-Steagall, before it repealed, was really swiss cheese by the deliberate abuse of it by Greenspan. So if you just brought back Glass-Steagall, it wouldn’t do that much. You have to also go back to the more effective regulation. So if you brought back Glass-Steagall with the more effective regulation, yes. It would have been a material reduction in the crisis. But it wouldn’t have stopped any of the three epidemics of fraud that drove the fundamental crisis. So it’s a contributor, but it is not a primary cause. Now, going forward, of course, it could be the primary cause. There are many scenarios that can cause financial crisis. It is unambiguously bad for the world to have repealed Glass-Steagall. It increases risk, it increases the risk of fraud, but it also distorts the economy. It gives a federal subsidy not to protect depositors, but to protect shareholders, who are competing with other corporations who do not have that federal subsidy. And that’s just insane. That’s insane from a libertarian perspective, from a conservative perspective, from a progressive perspective, from an absolute middle of the road perspective, that’s nuts. And it has, you know, viewers can look at the Financial Crisis Inquiry Commission report. You’ll see that they don’t really tie it much to Glass-Steagall, but they give the facts. And one of the facts is Citigroup. Citigroup lost a ton of money, and enough money that it would have all by itself caused Citigroup to fail, right. So when people say it had no role, that’s absurd. It would have actually caused Citigroup to fail, with the investments they made that they couldn’t have made under a real Glass-Steagall with real regulations. And Citigroup was one of the largest entities in the world, and Citigroup’s failure all by itself would have caused a global financial crisis. Now, of course, it didn’t cause that crisis, because Citigroup was bailed out. But we don’t want to have to make that choice. And every time we bail out Citigroup and Citigroup’s shareholders and Citigroup’s managers, we make the next crisis more likely. If we get rid of the systemically dangerous institutions, as Senator Sanders is proposing, then they can no longer hold the global economy hostage. Which is what they do. They say, hey, you want to let us fail? Fine, but we’re taking the entire world economy down with us. And of course, nobody’s going to, as a politician, say okay, great. Destroy the world. PERIES: Bill, as always, I thank you so much for joining us and giving us such a clear picture of what’s going on on Wall Street and what Bernie Sanders is trying to do. BLACK: And happy Sanders to everyone that watches Real News. Thank you for your support. PERIES: And thank you for joining us on the Real News Network.
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