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Bill Black: Clinton admin. thought that prosecuting big bank fraud wasn’t worth the governments time and could destabilize banking system – Obama continues the policy today

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore. And welcome to this week’s edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City, Missouri.

Bill’s an associate professor of economics and law at the University of Missouri–Kansas City. He’s a white-collar criminologist, a former financial regulator, author of the book The Best Way to Rob a Bank Is to Own One.

Thanks for joining us again, Bill.


JAY: So what are you working on this week?

BLACK: So I got to play historical detective, and the question was, we had just gotten through this savings and loan debacle. We were up to over 1,000 felony convictions of—just in major cases. George Akerlof and Paul Romer had said, hey, now we know how to prevent these crises.

JAY: What year are we in?

BLACK: We’re in 1993. The national commission to investigate the causes of crisis says that fraud was invariably present at the typical large failure. And the new administration comes in, Bill Clinton and Al Gore, and they want to reinvent government.

So, what’s been the big success story that all the public administration scholars are writing up? Well, it’s been the effort to re-regulate the savings and loans. This is the greatest success against elite white-collar criminals, and it’s a sexy story because we take on all these powerful politicians and such.

And so the mystery I was trying to investigate is why right at that time does the administration turn its back on preventing frauds and start adopting exactly the practices that we had warned were bound to produce widescale looting.

JAY: Okay. Let me add quickly a little bit of context here. And make sure—and tell me if I’m wrong here, Bill. Bill was a financial regulator. He was involved in investigating the whole savings and loans crisis. And so you were in the middle of all of this.

BLACK: That’s right. We had led this effort, and we, you know, went up against the Keating Five, the five U.S. senators who tried to prevent us from cracking down on Charles Keating, and they removed our jurisdiction. And this was in all of the media. It was a really big deal, and it was treated as the great success story.

And then comes in the Clinton administration, and they want to reinvent government and make it much more effective. And you’re going, hey, we are the folks who’ve done exactly that. The media is praising us. The public administration scholars are praising us. The white-collar criminologists are praising us. The economists are praising us. And instead they do a 180 when they come in and they move completely away from the things that work against fraud and they move completely to the things we warned produce a criminogenic environment that produces widescale fraud.

JAY: For example?

BLACK: So, for example, they deregulate it. So Akerlof and Romer, their famous line is that the economists lacked a theory before 1993 about fraud, and so they didn’t see what the regulators in the field saw from the beginning, that deregulation was bound to produce looting—”bound” is their word, “looting” is their word. And then, of course, they supply that theory in 1993.

So this is exactly the same time the new administration comes in. And it now has the theory, has the benefit of what causes disaster, and it has the benefit of knowing what prevents the disaster and how you take on these elite frauds. And so you might think they would say, hey, this is a great model; we want to reinvent government; let’s do it along these lines. Instead, they do exactly the opposite.

So, what do they do? They deregulate. And they start by doing what the agencies can do on their own. And so they get rid of the underwriting requirements as their very first thing they do in financial regulation. That’s the worst possible thing. That’s what makes possible the liar’s loans that you see. And remember, this is right after our success in 1990, 1991 in cleansing the industry of liar’s loans and preventing that crisis in savings and loans.

What’s the next thing they do? They come and they instruct us—and I personally witnessed this—that we are to refer to the banks and the savings and loans as our customers, we the regulators, and we are to think of the banks and the savings and loans as our customers, and we are to think of how we can provide service—those are all direct quotations from how we were trained. And, of course, we rebelled and said this was obscene, this, completely improper; it will destroy effective regulation and such.

What else did they do? Well, they closed down the prosecution of savings and loan frauds. Now, we [inaud.] many times about having over 1,000 felony convictions in major cases alone, but that pipeline was still going. There would have been thousands of additional convictions, but the Clinton administration took away the FBI agents and most of the prosecutors and reassigned them to other things, which largely brought an end to the prosecutions and such. So they did everything in every possible way.

So I’m wondering what could cause this. And it turns out there’s actually books by the people that were in charge of the reinventing effort, and they explain—and this is a book by Bob Stone, Confessions of a [Civil] Servant or something like that, who says, we had a meeting with Al Gore right at the beginning of the reinvention effort, and I told Al Gore my three lessons for how to reinvent a large entity like the federal government.

Now, the first two are just propaganda things. You know, tell simple stories with props and repeat them over and over and over again. But the third was: don’t waste one second worrying about fraud, waste, and abuse. Now, that is an almost word-for-word quotation of what he told Al Gore. And after Al Gore heard that, Al Gore put Mr. Stone in charge of the reinvention of government effort.

JAY: And what’s the explanation of why one shouldn’t spend one cent on this?

BLACK: One second.

JAY: One second.

BLACK: One second of time on it. Stone isn’t big on explanations, right? These are just diktats that he comes up with. They don’t come from theory. They don’t come from any real experience. He just doesn’t much like anybody who worries about fraud.

And his—there was a second guy at the meeting, and this guy got made a major leader in reinvention as well by Al Gore at the end of this meeting on the strength of the following statement, which again is in Bob Stone’s book. And the statement was, to Gore, that the United States of America was the last bastion of communism, the U.S. government was. Right? So this is the land—.

JAY: What is that supposed to mean?

BLACK: Well, that was supposed to mean that the U.S. government still had monopolies. Right? So there were some things that only the U.S. government did, and that supposedly made us Bolsheviks. It’s the bizarrest thing you can imagine.

JAY: Okay. Well, let me ask you this, ’cause, I mean, that’s pretty nutty. This idea that you shouldn’t spend one second going after fraud and the big banks, there seemed to have been a bit of a theory to it (I’ve heard, at any rate), which is that you need this ability—if you crack down on fraud, you’ll limit innovation in the finance field, and for the American banks to be competitive and deal with this global, complex structure, they need to be innovative, so live with fraud. So if I have that rationale right, how much is that still the rationale of the Obama administration?

BLACK: Well, it isn’t—they actually don’t make that rationale. He does launch an attack on the inspector generals using that ground, and he says, you know, they worry about fraud within the government, and that’s very bad, because they imperil innovation. And you are correct that that remains, in the Obama administration, one of the excuses for why we shouldn’t take fraud seriously.

But this is the intellectual history, and this is where much of the damage was done that the Bush administration then compounded, and produced the most criminogenic environment in history for this widescale fraud. And that’s only the Clinton side of it, and then eventually some Bush.

But simultaneously what’s happening on the Republican side is that Alan Greenspan is going around giving his favorite stump speech as a chairman of the Federal Reserve, which the lesson of it is also don’t worry about fraud, fraud takes care of itself. And that comes from Chicago school economists—or, actually, law and econ folks, who actually didn’t have degrees in economics, Easterbook and Fischel. Fischel eventually becomes dean of the UChicago Law School; Easterbrook, Seventh Circuit jurist, former UChicago law professor. And their famous line is a rule against fraud is not necessary or even particularly important in the securities context.

Now, they’re coming from the side that the markets instantly and reliably remove all fraud. And that, by the way, if there was any intellectual input at all to the Clinton administration’s thing on fraud, that’s probably the same thing, because you see from these readings, this detective work I did, they are just in thrall to the private industry. They assume—in fact, they’re nastier by far than President Reagan in describing the federal government, and they just love the private sector, and in particular they love all the things about the private sector that were building up to produce one fraud epidemic after another.

JAY: And has that changed at all in the current administration?

BLACK: No. In particular what they loved was performance pay, which of course is not really tied to performance and creates both the incentive to loot and the method to loot through a seemingly normal corporate mechanism that makes it far harder to prosecute. And so their big recommendation inside the government was to bring performance pay within the government. And their rationale for how to use that was then that you should—and this is a quotation from the granddaddy of all of this, who, by the way, is a journalist, Mr. Osborn—you should not ever, quote, “tolerate resistance,” unquote.

JAY: And let me just—again, in terms of the Obama administration, any change in this culture?

BLACK: A strong embrace of the culture, even after the Enron-era frauds, even after the current level of frauds. And by the way, the book that I’ve been quoting from in substantial part, Mr. Stone’s book, was published, hardcover, in 2002, soft cover in 2004, and has no mea culpas about, you know, we missed all of this, and doesn’t even, for example, mention Enron’s failure, so just does not take into account the disasters that occurred when they used this so-called performance pay.

But, again, that’s—as a social scientist, that’s the big motif. This is consistently written as propaganda, as journalistic stories. And this is not data-driven, it’s not theory-driven. It was a bunch of just-so stories. And it was dishonest just-so stories, where all the contrary stories, you know, that disproved it and were vastly larger were simply ignored.

JAY: Alright. Thanks for joining us, Bill.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network.


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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.