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Bill Black Finance and Fraud Report: Goldman and MF Global avoid criminal charges and Romney
accuses of Obama of being a “European”

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore. And now joining us for this week’s version of The Bill Black Finance and Fraud Report and joining us from Kansas City, Missouri, is Bill Black, where he’s an associate professor of economics at the University of Missouri–Kansas City. He’s also the author of The Best Way to Rob a Bank Is to Own One and often-contributor to The Real News. Thanks very much for joining us, Bill.


JAY: So what have you got for us this week?

BLACK: Well, we have the one that we love so much, the continuing absolute impunity of elites from criminal prosecution. So we have the Justice Department saying that it’s not going to prosecute anyone, apparently, at Goldman Sachs, and the SEC apparently saying it’s not going to take any, even, enforcement action against Goldman Sachs personnel out of their immense participation in fraudulent mortgages. And the sale of fraudulent [unintel.] these derivatives called collateralized debt obligations or CDOs, followed pretty close on the heels of that announcement with the announcement that they’re not going to prosecute anyone senior out of the MF Global failure. Now, that’s the one where over $1 billion of client money went missing as the firm got into trouble. And this is, you know, run by former governor Corzine, former head of Goldman Sachs. So in a way it’s the second iteration of the Goldman Sachs [crosstalk]

JAY: I don’t understand. How can there not be a criminal prosecution? And, frankly, on Goldman as well. But if you look at MF Global, I mean, if I understand it correctly, Corzine, you know, misused funds. There were funds that were supposed to be sequestered, which investors had given him to invest, and he used them for other purposes. Isn’t that illegal? How can you not do something about that?

BLACK: Well, the press report says that the Justice Department and the regulators conclude that MF Global was so completely out of control, its controls, internal controls were so bad, that senior management, they can’t show, knew that the money was being taken from the customer.

JAY: So can people then use this defense for drunken driving now?

BLACK: Oh, no, of course not. Only if you’re an elite white-collar criminal can you use this defense. Yeah, it’s—your question gets to exactly the point.

And it misses the key point—you know, the Justice Department misses the key point that criminologists have been telling them for a very long time. And that is, you deliberately, when you’re the CEO, gut your internal controls, because you want people to do the wrong thing while maintaining deniability. And so when you see this complete failure of internal controls at a place run by somebody who ran Goldman Sachs and knows all about internal controls, it’s preposterous to believe that the absolute breakdown in internal controls was unknown to senior management.

JAY: And this is—negligence is a defense, then.

BLACK: Well, negligence isn’t a crime in the great bulk of settings, so that’s part of what’s going on. But, of course, negligence would establish liability, and Corzine almost certainly will be sued—well, he has actually already been sued, but even the government and even the bankruptcy trustee are likely to sue Corzine.

JAY: Okay. But your point here is that this can’t be negligence; this has to be done far more consciously.

BLACK: Yes. You can’t have this kind of total breakdown of internal controls without senior management knowing about it and, in this context, wanting that breakdown, because it gives them precisely what proves so valuable here, and that is deniability: “What?” It’s the Sergeant Klink I know nothing defense, and, you know, the Justice Department fell for it, hook, line, and sinker.

In the case of Goldman Sachs it’s actually even worse, because we have the complaints by the Federal Housing Finance Administration—that’s the regulator of Fannie and Freddie. In this context, they’re bringing the suit as conservator for Fannie and Freddie, which means they get to the assert legal rights. And if you read the complaint, while it isn’t using the word fraud, because why take on a greater burden than you need in a civil case, it pleads (in other words, it says), the following facts establish that there was a knowing, massive series of false representations for financial gain and that people relied on these representations. In other words, they’ve alleged that Goldman Sachs had every single element required to prosecute them for fraud. So either the Federal Housing Finance Administration is wrong or the Justice Department is wrong, and the only entity that’s really done an investigation is the Federal Housing Finance Administration.

Indeed, what came out in—. I was on, you know, CNBC’s Closing Bell in a debate with Bethany McLean. Both the anchor for that show and Bethany McLean said, well, you couldn’t prosecute Goldman Sachs and its officials, because Goldman Sachs lost money from the purchase and sale of fraudulent mortgages. And, again, that’s just terrible criminology, because that’s of course what happens when you engage in accounting control fraud.

The four-part recipe for that kind of fraud is make or purchase really crappy loans at a premium yield, while growing enormously, using extreme leverage (that means debt), and setting aside virtually no loss reserves. If you do those four things, you’re mathematically guaranteed to report fictional profits, pay your senior officers very large bonuses, and then suffer catastrophic losses.

And that’s exactly what Goldman did at first, Bear Stearns, Merrill Lynch. The only difference is that Goldman Sachs eventually figured out, “Whoa, the crash is coming, we’d better dump all of our crappy loans and derivatives,” and they sold them to their customers wherever possible. That exacerbates their fraud. That doesn’t make them less culpable.

JAY: So this is just a case that the Obama administration doesn’t want to take on finance, especially during an election year.

BLACK: Yeah. And, indeed, we’ve got another strong indication of that in the handling of Standard Chartered, which we talked about in a prior discussion. This is the one that is alleged by the New York State banking regulators to have engaged in a whole series of illegal money-laundering transactions, in particular with Iran. And what has come out—subsequently there’s been a significant settlement, but again one of these settlements where it’s just money and nothing much is going to change. But there was incredible outrage at the State of New York banking regulator. And in particular the outrage was: what if you had caused, quote-unquote, the failure of Standard Chartered by making public its fraud? Now, of course you don’t cause the failure of an institution by making public its fraud; the fraud causes the failure of the institution.

JAY: Well, clearly there’s an entirely different set of rules when you’re talking about big banks.

Alright. What else have you got for this week? You were looking at something—I saw you wrote something about Romney’s comments on Obama trying to be European.

BLACK: Yeah. Romney has a whole theme based on Obama’s terrible because he follows European policies. But it’s actually Romney, and now Ryan, who are the strong supporters of not just European policies, but European policies that are being used and have failed catastrophically, and they want us in the United States to follow the same strategy.

So a few examples of those. One is austerity. And this has been Berlin’s demand, that the European Union use it. And just this week the evidence came out that overall the entire Eurozone has been, as an aggregate, pushed back into recession.

Now, this is a completely gratuitous recession. Didn’t have to happen at all. It’s not a question of regulatory failure and fraud like the first one. This one is incredibly stupid economic policies that instead of being countercyclical (in other words, countering/reducing the severity of the business cycle), these are procyclical, which means they make the recession worse. And that’s exactly what Berlin has insisted upon. It has pushed not only the Eurozone back into recession but several nations of the periphery of Europe into Great Depression levels of unemployment—over 25 percent.

And as we’re filming this today, the news has just broken of, you know, the latest statistics from Spain showing just devastation throughout their financial sector. They already have youth unemployment—so this is up to age 25—of roughly 50 percent. If you have two kids in Spain, one of them is highly likely to be unemployed, as a statistical matter. And that of course means that when the kids get their college degrees, they often leave Spain and emigrate.

JAY: Right. Now, when Romney, as you say, is in fact advocating the policies of right-wing governments in Europe and the consequences are rather obvious—mass unemployment, deeper recession—and then he picks Paul Ryan as vice president, which is almost to go another step further than the Europeans are going. So what do you make of this choice?

BLACK: Yeah, he has doubled down. It shows how much power the Tea Party wing of the Republican Party has and how deeply suspicious that wing was of Romney. You know, he was clearly not one of their own. And so this is designed to buy off that wing of the party and try to get them enthusiastic and showing up. But it’s going to bring with it the worst possible policies for a nation that is trying to recover from a great recession.

And it’s not just that. Romney also—his key economic advisers have explicitly said that we have to win a competition in laxity with the City of London, the major financial center in Europe, on financial regulation. Now, of course, you can’t win a race to the bottom in which you destroy regulation—that’s precisely how you create these criminogenic environments, produce the epidemics of fraud that caused the Great Recession. And if you don’t like deficits, you should hate great recessions. This great recession just in the household sector caused $11 trillion in losses—a trillion is a thousand billion—so that the mean new homeowner lost 25 percent of their net worth and such. Just devastation. And they want more of the same.

JAY: So the Romney calculation must be, then (they talk about this Wisconsin model), that if you just throw enough money at television, you can sell this stuff.

BLACK: Right, because, of course, Wisconsin is one of the states that’s done most poorly in the United States because of the austerity policies at the state level as well. So on both state level, national level, international level, all of this comes together disastrously.

And so I did a column in which I looked at this game, which, you know, is premised in some fair bit on Romney’s and now most particularly Ryan’s budget. It’s called budget hero. And it has multiple strategies, but it turns out there’s only one strategy. So you could have a stimulus strategy, but your stimulus cannot work, because the game doesn’t allow it to work. Right? The rules of the game are if you use stimulus, it fails. And you can’t use simply tax increases and budget cuts, say, in defense, because the game doesn’t allow you to make really significant tax increases, particularly on the wealthy. It’s not legal under the game. And so you become a budget hero under this game if you adopt aspects of the Ryan budget, you cut Social Security, you cut Medicare. That makes you a hero. Note, you don’t undertake any sacrifice.

JAY: But it’s an interesting duo. Ryan and Romney are an interesting pair, because Ryan tries to look like a libertarian in terms of his cuts, except he’s vice president to president Romney wannabe, who wants to increase spending on the military side, which real libertarians are against, increased military spending. Most libertarians want massive cuts to military spending. But they have kind of the worst of both worlds here.

BLACK: Well, also, also there’s a track record, and representative Ryan voted for all of the Bush things that are inconsistent with libertarian ideas and are inconsistent with being, you know, a fiscal hawk. So when it was a Republican president, he gave them everything he wanted. And the Republican president, of course, created very substantial deficits. Now, deficits are supposedly the demon, and the way you become a hero again—now, what a bizarre definition of hero—.

JAY: Right. Okay, Bill, we’re out of time, but thanks for joining us. And please join us next week for Bill Black’s finance and fraud report on The Real News Network.

BLACK: Thank you.


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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.