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Bill Black: Even though many on Wall St. understand need for regulation, most want a free-for-all and damn the consequences

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. And welcome to this week’s segment of the Bill Black Financial and Fraud Report.

And now joining us from Kansas City is Bill Black, where he’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, and the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.


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

BLACK: Well, today I looked at what you would learn, if you read The Wall Street Journal, about finance, our premiere business reportage. And what you’d learn is something really quite extraordinary. You would learn that money had shifted dramatically in this election. Whereas in the first time the then-senator Obama ran for the presidency, he received 57 percent, or the Democrats received 57 percent of the funding, now the Republicans received 63 percent. And in this news report, mind you, not an op-ed, not an editorial, the reporters said that this was due to the fact that President Obama had demonized the industry. So, again, this is supposedly a straight news report that President Obama had demonized banking in the United States, and as a result, the banking industry had turned on him.

So this is just an extraordinary invention, because President Obama has actually bailed out the financial industry and indeed has protected the financial industry from criticism and from meaningful transition.

Now, fit that same thought into where would you go next if you were The Wall Street Journal—again, in their straight news section, not the op-eds, not their editorial section. And where they went next was to claim that in addition to Obama’s demonization of banking, there was a competition in fierceness in the regulatory ranks, to say, we have a race (that was their word, “race”) to prosecute banks and hold them accountable for the economic crisis, with the implication in the article that of course that was absurd, that the banks didn’t have anything to do with causing the crisis, particularly through any criminal conduct.

And again, this is an absolutely alternate universe that they’re inhabiting, where the reality is that there has been not a single prosecution of any elite Wall Street player that actually caused the crisis, only two Bear Stearns midlevel folks indicted about a tangential matter. And we are now years after the crisis—we are eight years, roughly, in fact, almost exactly eight years after the first warning from the FBI that there was an epidemic of mortgage fraud and the prediction that it would cause a crisis.

And so this is brought—who’s, you know, spinning this story? Well, it turns out there are two obvious folks spinning the story. The folks being quoted are the Chamber of Commerce, and in particular their competitiveness group. And what is it that their competitiveness group wants to do? Its claim to fame is that we need to win a competition in laxity, a race to the bottom with the City of London.

Now, you may have noticed that the City of London did win that race to the bottom of the weakest regulation in the world of any major financial center, and the result has been just a disastrous collection of frauds from the most elite institutions in that nation. But the Chamber of Commerce isn’t writing to warn us about the results of winning a competition in laxity, that it produces widespread fraud. Quite the opposite. They are writing to say that we must defeat President Obama, we must elect President Romney, because President Romney and his economic advisers have expressly stated that they would seek to win the competition in laxity with the City of London and bring the frauds home to the United States. So we have a complete reversal of reality.

JAY: So explain to me the logic, if there is one, of the people on Wall Street who would like to see a President Romney. If Romney actually follows through on what he’s talking about, the kind of austerity and cutting of social programs and such, there’s no reason why one wouldn’t see in the United States what we’re seeing in Europe, which is deeper recession, potential depression—on the other hand, I understand, a completely no-regulatory environment, which is virtually what Romney seems to be promising. In the official Republican 2012 platform they attacked Dodd–Frank, and Romney’s made comments to this extent, that he would want to undo most of Dodd–Frank. So what is it? The short-term gain of no regulation or little regulation is worth the long-term potential of deep recession and another financial mess?

BLACK: The holy grail is to get rid of regulation and to ensure that they can do anything here in New York, and more things in New York than they can do, their rivals can do, in the City of London. And if that’s true, then they will become much bigger than the banks in doing business in the City of London. If you get much bigger, then you ensure that you become a systemically dangerous institution that gets treated as too big to fail. That creates an enormous implicit subsidy.

So the explicit subsidy is federal deposit insurance, which all the big folks have now, including what used to be the investment banks. But the implicit subsidy that will bail out your general predators and creditors in full means that you can borrow money much more cheaply than any competitor. So if you get much, much, much bigger and your subsidy gets ever bigger, then you can beat anyone, not because you’re a better bank, but because you have the bigger federal subsidy. And so that essence of crony capitalism drives everything in terms of the overall strategy of the systemically dangerous institutions.

JAY: Wonderful. So what else you got for us this week?

BLACK: Well, the guy that Standard & Poor’s hired to try to restore some credibility to their ratings has left Standard & Poor’s. But he had already been taken out of primary responsibility months ago, because the new CEO came in and said, we’re losing too much business to our competitors.

So this brings us to another variant of the competition in laxity: the competition in laxity among the credit rating agencies, in this case, where Moody’s, for example, had an internal briefing where they said, you know, we tried to hold the line (in other words, to be honest about the ratings in a particular category, about collateralized debt obligations, for a while) and we lost 40 percent of our business within a few months.

So this is also called the Gresham’s law, in which bad ethics drives good ethics out of the marketplace and it leads to the weakest possible regulation in the private sector. So simultaneously we have an assault on regulation in the public sector and any quasi regulation by the private sector, such as the credit rating agencies. So their effort to get tougher lasted all of about a year and a half.

JAY: And, of course, this unreliability of the credit rating agencies, lack of regulation, it’s what gave rise—or certainly one of the major factors that gave rise to the ’08 crash in the first place. But they’ve found out how to make money out of these crashes and afterwards, so they don’t really care about another crash.

BLACK: Credit rating agencies, historically, the people at the investment banks look down at them as being populated by the C students out of business schools. And the credit rating agency’s where the employees were never paid anywhere near as well as the folks on Wall Street.

What the credit rating agencies discovered, though, was that they were the key to making Wall Street possible to make their fortunes. And so they learned to negotiate, and they became not just credit rating agencies; they became advisers on the same deal that they were rating, despite the obvious conflict of interest. And so they would structure the deal to ensure that it would get a AAA rating and it would get a AAA rating even though the great bulk of the loans backing it were fraudulent liars’ loans. And so a chart of income for the rating agencies looks like, you know, an incredibly steep ascending hill, and they made an absolute fortune.

They got embarrassed, but you’ll note that they didn’t get sued successfully, and, of course, they didn’t even get threatened with prosecution. So that embarrassment period where they supposedly tried to toughen up their act only lasted around a year. And what they found was whoever was toughest lost business to whoever was weak—again, this race to the bottom or Gresham’s dynamic, in which bad ethics drives good ethics out of the professions. And the result is that they’ve pitched, you know, thrown to the curb the only guy at Standard & Poor’s—which is the biggest of the rating agencies—who was their symbol of trying to be tougher.

JAY: And this—all of this, of course, will make America more competitive.

BLACK: Yes. If you want to—again, our mantra is: the only way to win a race to the bottom is to refuse to race.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: And thank you. And join us next week for Bill Black’s report. And thanks for joining us on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

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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.