Carter, Reagan, Clinton, the Bushes, Obama, and now Trump deregulated Wall Street and did nothing to help Black and Brown homeowners in America. White collar criminologist Bill Black discusses the social structure of mortgage discrimination. Part 2: The Effects
MARC STEINER: Folks, this is Marc Steiner.
We continue our conversation with Bill Black, of course the Associate Professor of Economics and Law at the University of Missouri Kansas City and author of the book, The Best Way to Rob a Bank Is to Own One. And Bill, thanks for staying with us. Always good to have you here.
BILL BLACK: Thank you.
MARC STEINER: So what you just said, concluded, was that neither one of those presidents, and others as well that you’re alluding to, have been honest about what we’re facing and honest about what they just said. Can you unwrap that for us just a little bit?
BILL BLACK: Yes. So let’s start with President Reagan in terms of time, is at a time of mass insolvency to greatly deregulate and de-supervise and have virtually no criminal sanctions. You create a massively criminogenic environment, and you’re going to produce something like, hey, the savings and loan debacle, which was widely described as the worst financial scandal in U.S. history at the time. So the bill didn’t do, the legislation he was talking about didn’t do the things he talked about, but it did do truly disastrous things. In terms of Bill Clinton, it’s not that Glass-Steagall had done some good things, Glass-Steagall had been a spectacular success.
The U.S. had not had any truly severe financial crisis or a recession in fifty years, and one of the reasons was Glass-Steagall, which deals with a very dangerous conflict of interest. It has nothing to do with whether you’re an industrial economy or info technology. That was just all nonsense that he put together. And why did it happen? Again, the point is all of these presidents were the same philosophy, they were exceptionally pro-Wall Street. Bill Clinton, Hillary Clinton, Al Gore, the vice president, and even President Obama went in front of the congressional caucus and said “I’m a New Democrat.” Well, a new Democrat, that is jargon for the Wall Street wing of the Democratic Party. They share the same fundamental, anti-regulatory philosophy with regard to regulation. And not just regulation, don’t just look at the laws or the rules, look at what they do to supervision.
So Bill Clinton, for example, cut the FDIC staff by more than three quarters. He cut the Office of Thrift Supervision staff by more than one half. As this massive predation and fraud scheme was allowed to build up, not just under Clinton but largely under Clinton, from 1994 through mid 2007, this surged, all of this fraud and predation. And it was never stopped by the regulators. Why? Because they appointed regulators, they being Reagan and Clinton and the second George Bush, they appointed regulators who did not believe in regulation. If you read the speeches from that era by Clinton and Gore about regulation, they sound just like Ronald Reagan.
MARC STEINER: We should do that one day. That would be an interesting experiment.
BILL BLACK: I did an article, “Who Said This,” that makes this point.
MARC STEINER: I’ll read that and we’ll put together something that seems designed to visually see and hear. Now what does all this have to do with this report and what the report shows that we didn’t already know.
BILL BLACK: OK. So the bizarre economics, this is conventional economics, said, “We don’t have to worry about the shadow sector, that will take care of itself because there’s no deposit insurance, and because there’s no deposit insurance, people stand to lose money if they make mistakes. If they stand ready to lose money if they make mistakes, then they’ll be very careful, and so fraud and predation basically can’t exist in that system.” This had no empirical basis. It’s not like they did studies. This was just pure laissez-faire theory extrapolated to insanity. Simultaneously, as I said, the industry was creating said incentives that were entirely based about creating fraud and predation in the shadow financial sector because there was no regulation.
And again, the most effective thing–and to economists, we don’t care what people say so much we care what they do. When Long Beach savings, the worst predator in fraud, still alive under fraudulent leadership as a savings and loan, voluntarily gives up deposit insurance, so is going to be hard to raise money, right, without deposit insurance, and forms a mortgage bank, that’s telling you that they don’t believe they can beat this rare episode when we’ve actually had real regulators that actually enforce the law, and that they know the shadow sector is not a place that’s governed by markets that produce magic, but is in fact a place where they can defraud and predate with no restraints at all.
And then it got worse. And it got worse under both Clinton and Bush II. Not only did the federal regulators not believe in regulating, they were so in the pocket of the bankers that they competed with each other, the federal regulators, on how aggressively they could preempt state enforcement actions. So the only game in town protecting us was the state attorney generals going after one of these predatory lenders after another. And the federal regulators literally sought to make it impossible for the states to protect us from the predators while doing nothing themselves to stop the predator.
The worst of these was the Fed. The Federal Reserve had the authority, and only the Federal Reserve had the authority under a law passed in 1994, which is when this whole big thing starts with predation–I mean it starts earlier, but it becomes a big problem around this time. All that time, from 1994 to 2008, the Fed and only the Fed could have passed a loan banning liar’s loans, regardless of whether the institution making it had deposit insurance. And Alan Greenspan, Ben Bernanke, what do we know about them? Laissez-faire guys to beyond. They absolutely refused to use their authority to stop the fraud and predation.
MARC STEINER: So how is the report itself, The social structure of mortgage discrimination, how is that connected to what you’re describing? What did they discover within that framework that leads us to some things we didn’t already understand?
BILL BLACK: OK. So what it has is really–it’s not done primarily by economists, but it’s consistent with economics, good economics, not this laissez faire crap. It says first, we create deliberately perverse financial incentives, and we do it both at our loan officer level, and more importantly, the vast bulk of these loans, predatory loans, are not made directly by the banks, but are made through loan brokers. And they give, they the bankers, create really big incentives to get people to overpay in terms of interest rates. So the loan broker has a direct contrary–it’s not like a conflict of interest, his interests are absolutely opposed to yours. The higher the rate he can convince you to pay, way above market, the higher his or her compensation is, and we’re talking by thousands of dollars.
The next thing you need to know–it’s not in this report, but it’s in other reports–is the quintessential loan broker. First, he was a kid. And second, his prior job was literally flipping burgers. So they went from flipping burgers to flipping homes. And in one really big deal, now this is an unusually large deal I’m going to describe, but one really big house, you could make, as a loan broker, just from your fees, about 20,000 bucks. Now, your entire income flipping burgers for a year was under 20,000 thousand bucks. So in a single deal, you could exceed your income, but here’s what you have to do. You have to A, get people who are eligible for prime loans to instead apply for subprime loans. And B, instead of giving them–remember, you’re literally looking at a term sheet, it’s a complicated thing that shows what your fee will be.
Guess what? You tend to tell people to do the thing that creates the highest fee for you. What a shock, right? But you have to get them to overpay. So it’s a whole sales thing on how you get to get people to overpay. And what we know from this report is some of the ways people figured out who to target. And how they decided that target was based on absolute stereotypes about race, ethnicity and gender. Like Charles Keating, they decided the weak the meek and the ignorant were the primary victims. For them, that meant Black, Latinos and the elderly. And in particular, the people they went after the absolute most was what we call the intersection of those three things, which is to say an elderly Black female, a widow.
MARC STEINER: That’s a really important piece here. So on that note, we’re going to stop this conversation just for a second. We have another segment here where we’re going to explore how they did that and could it happen again? What have we set up? One of the things that Bill Black said to me even before we started this conversation is the congressional fix is not really very good, didn’t do much. We’ll explore how all this is connected. So to learn that, you want to hit this next segment as we continue our conversation with Bill Black.
And I’m Marc Steiner here for The Real News Network.