De-Regulation, De-Supervision, and De-Criminalization Set the Stage for the 2008 Financial Crisis (Pt. 2/3)
White collar criminologist Bill Black analyzes how the U.S. got into the 2008 financial crisis and what it means that we have not learnt the lessons from that crisis 10 years later, on the anniversary of the Lehman Brothers collapse
MARC STEINER: So welcome back, folks, here to Real News. I’m Marc Steiner with Bill Black. We continue our conversation and try to get into the bottom of this. And Bill, I was just fascinated, because you said you were there just feet away from all this happening when that testimony took place. You just told us that nobody had any followup questions. And already people watching this from across America are saying, look, the fix is in, because Wall Street is tied to the White House, it’s tied to Congress. They’re all part of one. Of course they weren’t going to ask those questions like they had to do 30, or 40, or 50 years ago. It wasn’t going to happen again. So what is the reality here?
BILL BLACK: Well, the reality is complex and depends on the particular circumstances. I mean they’re obviously- first, I was, of course, invited to testify at this hearing. So you know, you’ve got to give them points for that. Second, people can look at the YouTube of me testifying, and you’ll see the chairman trying to gavel me down for the last four minutes of me presenting.
MARC STEINER: Why am I not surprised?
BILL BLACK: Yes. But you know, in another way, they know how to stop you if they really want to stop you. So I think he was allowing it to happen, as well. And that’s the kind of complex thing that isn’t an easy story about people are either, you know, totally wonderful or are totally awful. But neither party wants to get into the fraud from what is among the leading contributors, or the leading contributors.
And this, by the way, was the same thing that happened in the Savings and Loan debacle, and let me tell you what changed it. What changed it there was that we prosecuted, and we brought suits, and we brought civil enforcement actions, and we put into the public record where journalists could quote it without any fear of slander or libel actions exactly how the fraud schemes worked. And what happened after about a year and a half of this, when we started to get the successful prosecutions and such, is as soon as we would make the public charge, and show how the fraud scheme worked, members of Congress would rush to return the political contributions, or donate them to charity. So this thing that was our greatest problem, the ability to basically buy congressional influence- and remember, we had five U.S. senators come down on us. We had the speaker of the House tried very hard to fire us. That didn’t happen in the most recent crisis, because it didn’t have to happen. There were no real regulators left, right, who are going to have to be run over by the political opposition.
As I say, we transformed it with our lawsuits. That could have been done by the Obama administration. In fact, it could have been done far more easily than in our case. But they absolutely refused to do that. That was what creates this political dynamic that creates the Tea Party. As we are taping this, just yesterday, Gary Cohn, the supposed adult in the room who resigned eventually because he couldn’t take Trump anymore, was his chief economic guy, he said in an interview yesterday that the problem- there were no frauds by the CEOs. That the frauds were by the hairdressers. Who got the loans. The hairdresser types, who supposedly, to him, got ten loans, and such. So it is this absolute lie that is just total, you know, right-wing laissez-faire dogma that the problems always arise because the government acts, as opposed to the problem arises because the government doesn’t stop the frauds.
But good economics has a long said, and I mean since 1970 this has been the literature, that the key thing regulators need to do, and only regulators and the law can do effectively, is stop what is called a Gresham’s dynamic in economics and criminology. And that’s this: In a Gresham’s dynamic, the cheater gains a competitive advantage. If that’s true, then market forces become perverse, and they drive the ethical people out of business. Now, the obvious victim from these frauds is us, the consumer or the investor. But the less obvious victim is the honest competitor. And that’s exactly what these frauds do. So when I told you that the appraisers gave their warnings, began giving their warnings, in 1998, when we could’ve fixed this problem with zero losses, zero recession, zero failures, that’s what they said, that the lenders were deliberately creating a Gresham’s dynamic. They were blacklisting honest appraisers and sending all the work to appraisers that would inflate the value. Well, that makes no sense for an honest businessman, because the appraisal, of course, is your great protection against loss.
Similarly, you asked me about who failed. Well, the Federal Reserve failed. In 1994, Congress actually did something, people need to know this, something very positive. It passed the Home Ownership and Equity Protection Act. And that statute was meant to deal with exactly the problem I was talking about earlier, when we forced the last fraud out of the savings and loan industry who was doing liar’s loans. And it voluntarily left solely to escape our jurisdiction. Changed his name for Ameriquest, and became, you know, the thing that spread the evil. Well, that institution we couldn’t do anything about because they had no deposit insurance.
But Congress passes this act in 1994, and says the Fed and only the Fed, regardless of whether the institution has deposit insurance or not, can stop all kinds of loans, including liar’s loans. And the Federal Reserve, for purely ideological reasons, even when it knew from the industry’s own antifraud experts that liar’s loans were 90 percent of the time fraudulent, the Fed absolutely refused to use the authority to stop those frauds. You want the- that’s those two things. The refusal to act on the appraiser’s warning, their refusal to act on everybody’s warnings about liar’s loans. That’s why we had a financial crisis and that occurs all the dirt under both Clinton and the Bush administration.
MARC STEINER: So let me play this clip. This is the president, President Obama, speaking at Cooper Union University in New York in 2010 when he was talking about the need for reform two years earlier. And he tells Wall Street and Republicans to support the common sense reforms to end bailouts, and close loopholes, and protect consumers. But I want you to listen to this from it, all of us watch this for a moment, and think about what you said. And let’s talk about the reality.
BARACK OBAMA: It is essential that we learn the lessons from this crisis, so we don’t doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass. And that’s an outcome that is unacceptable to me, and it’s unacceptable to you, the American people. For without action, we’ll continue to see what amounts to highly-leveraged loosely-monitored gambling in our financial system, putting taxpayers and the economy in jeopardy. And the only people who ought to fear the kind of oversight and transparency that we’re proposing are those whose conduct will fail.
MARC STEINER: So Bill, I want you to comment here. This is something that I’ve covered before. And let me just throw this proposition out to you on the heels of what we just heard former President Obama speaking about. That this, in some part, is at the root of the political crisis we face today, because we did not take on the banks or put in new regulations that made sense for the 21st century. As some have said to me before, that we needed a Glass-Steagall for the 21st century, and we never got it. That it was the fox guarding the henhouse. That people were calling the shots from the industry, as opposed to having a real mix and discussion about what was supposed to happen to ensure this can’t happen again.
So talk a bit about it about from your perspective what that reality is, and what was missing there. And even though, slowly, the economy started to return, and Obama- you have to give him some credit for it- pulling us out of the morass. But it didn’t go far enough.
BILL BLACK: So what we just heard was the great lie. And it’s been the great lie for something like 35 years. And that is that, well, you know, bankers wouldn’t actually commit fraud. They would just gamble. And gambling’s, you know, a legal thing. It may not be a good thing, but it’s a legal thing. And so they were just unlucky. No. Appraisal fraud is not a matter of luck. You have to extort appraisers to inflate the appraisal. Right? And you blacklist them. That’s not a mistake. That’s not gambling.
Fraud is a sure thing. And bankers don’t want to gamble. They want a sure thing. Liar’s loans are a sure thing. It is absolutely mathematically guaranteed that for in the short term, which can be up to 14 years, as we’ve seen, the bank will report record profits, even though it’s actually suffering enormous losses. And that means under modern executive compensation, the bankers know that’s a 100 percent probability that they will end up making a fortune in these things.
So more fundamentally, why did we end up with an effective reform in the Great Depression, and completely ineffective reform in Dodd-Frank? And also after the Savings and Loan debacle. The answer is after, in the Great Depression we had the Pecora Commission. And the Pecora Commission was a real investigation, not one of these congressional things that you just heard the excerpts from, where the poor member of Congress is trying to ask the question and she only has five minutes, if she’s lucky. Sometimes it’s only three minutes. And then anybody can simply dodge, stall, and refuse to answer the question. Then it’s onto the next congressperson who is from another party, because they flip flop. And so there’s absolutely no continuity. There’s no professional questioning.
In the Pecora Commission there was professional questioning by a single person who had been a prosecutor and then a judge. And you couldn’t evade things. And I know it seems obscure to Americans, but right now there is what is called in Australia a Royal Commission, where that’s exactly what they’re doing, Pecora-style, where you have professional folks doing the questioning. And in one of these cases what happened is that the top banker actually collapsed on the stand under the questioning, and had to be taken away in an ambulance, because they’re so unused to actually happening having to deal with real questioning. They can’t stand it if you do the investigation correctly. And that, by the way, is what’s happening with Mueller, right. Now you’re actually seeing, as Americans, how you really investigate something, how you get the experts, how you do all the hard work. And then you cut through all of these aspects of equivocating, and such.
In fact, I will tell you, the favorite ruling from the Australian inquiry is the judge ordered the witness to stop obfuscating. Can you imagine Dick Fuld being told, stop obfuscating? And then the judge gave a second order, and the second order was, answere the question asked. We are so unused to that, because we have not seen that for literally 70 years. We don’t have effective investigations, therefore we don’t have effective answers.
MARC STEINER: I remember some of that in 2008-2010. We covered this intensely. And we were pushing at that point with other people for another Pecora Commission in this century. And I’m glad you raise that. I think it’s a really critical, of critical importance.
We’re here talking with Bill Black on The Real News, once again. And don’t go away, folks, because we’re going to have another segment with Bill Black to close out. We’re going to hear from a woman still suffering 10 years later. And what does that mean for the future? Where do we go? We’re about to tackle that next with Bill Black here on The Real News Network. I’m Marc Steiner. Stay with us.