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What is the truth behind the 2008 Financial Collapse, why was no one prosecuted and how did Obama’s not prosecuting the “banksters” and strengthening Glass Steagal lead to Trump in the White House? Economist Bill Black joins us bring clarity to this mystery

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MARC STEINER: Welcome to The Real News, folks. This is Marc Steiner. Good to have you with us. Joining us from Bloomington, Minnesota is Bill Black. Bill is an associate professor of economics and law at the University of Missouri Kansas City. He’s Distinguished Scholar in Residence for financial regulation at the University of Minnesota School of Law and he’s a white collar criminologist, formal financial regulator and author of The Best Way to Rob a Bank Is to Own One. And he’s a regular contributor here at The Real News. And Bill, welcome back. Good to have you with us.

BILL BLACK: Thank you.

MARC STEINER: You’ve written a lot the last little bit, so let me see if I can conflate these somehow. But let’s just start with 2008, the financial crisis America faced, because there’s a lot that happened then, between that and the whole question of deficits, that really plays into how the Democrats played it and where we are today. But let’s throw it back to 2008 and just give a sense of why what we commonly understand about the financial crisis of that year is completely misunderstood.

BILL BLACK: All right, so we’re nearing the tenth anniversary of Lehman’s collapse, and so we’re going to get the literally thousand stories looking back at the causes and retrospectives and such. And two things have come out within about the last week and nobody’s put them together but they need to be put together. One is Greg Mankiw, a Harvard economist, has a New York Times column and he’s also the biggest writer of economic textbooks in the world. So, he’s a really big deal and he used his column to highlight a friend’s work, Laurence Ball, a macroeconomist at John Hopkins, about lessons we should learn. And Ball’s claim is that this crisis occurred because the Fed blew it, the Federal Reserve. If the Federal Reserve had only been willing to make tens of billions of dollars in loans to Lehman Brothers, then Lehman Brothers wouldn’t have failed in a liquidity crisis for lack of cash, and then there would have been, it appears that Ball’s argument, no financial crisis.

Now, this is a remarkable thing that assumes that Lehman is a solvent, profitable entity with just a really temporary liquidity problem because the markets are overreacting. And so, you look through Ball’s extensive memorandum that he did that’s available online and it never even mentions the word fraud about Lehman Brothers. And it never mentions Lehman’s massive liabilities for fraud. And that’s what ties it together with this other event that I’ll describe in a bit about Wells Fargo that also goes to the true nature and causes of the 2008 financial crisis. So, Lehman, I testified in front of the House representatives about its extensive frauds and all cites that congressional investigation but completely ignores, of course, my testimony, and pointed out that Lehman was one of the leading sellers of fraudulent liar’s loans in the entire world.

MARC STEINER: Bill, let me interrupt for just one second, because I think these terms are incredibly interesting for people. “A liar’s loan,” so describe what that is, what do we mean by liar’s loan?

BILL BLACK: Okay, so first, that’s not a pejorative label put on it by people like me, the criminologist. That’s what the industry actually called these loans behind closed doors because they knew they were massively fraudulent. So, a liar’s loan is one of the two key types of non-prime loans in which the lender does not verify the borrower’s income. Whatever is put down on the loan application, they just accept that as if it were real, all right? So, that’s what a liar’s loan was. And Lehman Brothers bought liar’s loans and then resold them under what are called representations and warranties, or reps and warranties for short, that said that the income was basically real.

And the industry’s own anti-fraud experts did a study, because it’s really easy to do a study because you can get these folks’ tax returns for essentially free and you can check the income on the tax return against the income that on the loan application. And here’s a surprise, the liar’s loans are enormously lies. In fact, the industry’s own experts found that ninety percent of the supposed income, that income was inflated. And of course, you don’t inflate your income on your tax return for obvious reasons because if you do you pay higher taxes. So, it’s a really good check on these things, right?

So, check against the tax forms and for virtually no cost. And it turns out when they did, they showed massive fraud. Now, the industry’s own experts, this was sent to every lender, major mortgage lender, in America by the Mortgage Bankers Association, the trade association. So, and this is an early 2006. So, every one of these lenders was on absolute notice no later than then that these things were massively fraudulent. Plus, we know from state investigations that it was overwhelmingly the lenders and their agents, the loan brokers, who put the lies in liar’s loans, compared to, say, the borrower. And then they resold these loans which they knew to be fraudulent under what are called reps and warranties to the buyers that said, “There’s no fraud here, it’s all great.” So, these are really easy to prosecute cases that you could bring against the most senior people.

Lehman had two of the largest sellers of liar’s loans in the world, Aurora and what was called BNC. And worse, you probably believe that this is called, well, I mean you read it all the time, the subprime crisis. Subprime means your credit rating and it means either you have a bad credit rating or you have no credit history, okay, but you can do both. You can make a loan to someone who has a bad credit history and you could also not verify the income. These are not mutually exclusive. So, by 2006, half of all the loans called subprime by the industry were also liar’s loans. Lehman specialized in making both, simultaneously, liar’s loans to people who had terrible credit histories and then selling them to the world to the tune of over a hundred billion dollars a year under false reps and warranties that say, “These are really very nice and safe things.”

MARC STEINER: So, the question for me, and you raise this question in your article, in your blog, why the regulators did not take the bankers to court, Lehman Brothers and the others. What what was the dynamic that allowed them to get away with this?

BILL BLACK: So, the first dynamic is that liar’s loans were not new. The 2008 crisis is actually a continuation of the savings and loan debacle. And here’s what happened. Liar’s loans begin, like all good financial frauds in America, in Orange County, California.

MARC STEINER: Any particular reason why they begin in Orange County, California?

BILL BLACK: It is the financial fraud capital of America, seriously.

MARC STEINER: I believe you.

BILL BLACK: And indeed, I did my grad work there in part because of this. So, this is 1988, basically, right? Back in the savings and loan crisis. And our examiners realized that- or the regulators- so, these are our bank examiners, federal employees, recognize that there is- or agents in this case- a problem, that these loans make no sense unless they’re being used for fraudulent purposes to inflate income by the CEOs running the savings and loans. We’re kind of busy with the overall savings and loan crisis at this time but we listen to our examiners and we break out a small team and we drive liar’s loans out of the savings and loan industry by 1994. 1994 there’s really only one big lender that makes liar’s loans left in the savings and loan industry in Orange County, and it’s called Long Beach savings.

For the sole purpose of escaping our jurisdiction and our sanctions, they gave up federal deposit insurance, they gave up their savings and loan charter, they converted what’s called a mortgage bank because if they’re not federally insured, we no longer have any jurisdiction over them. We can no longer regulate them. And mortgage banks are essentially unregulated. In other words, they joined what is now called the shadow financial sector to seek sanctuary. This is where the regulators can’t go and that’s your answer to your question, Lehman Brothers. Essentially, Lehman Brothers and the then four other big investment banks were in the shadow sector.

There was some fake regulation that we should talk about some time by the SEC that was literally ginned up by the industry as voluntary “regulation” for the sole purpose of escaping real regulation by the EU. But anyway, the answer is, there was essentially zero regulation in the shadow financial sector of liar’s loans. And that brings us to Alan Greenspan. Remember I told you, in 1994, that Long Beach savings changes its charter, drops federal deposit insurance, becomes a mortgage bank and changes its name to Ameriquest, which becomes the biggest vector spreading this epidemic of fraud in the shadow financial sector. A vector is like an anopheles mosquito, spreads malaria.

And in the same year, Congress actually did something right. It passes in 1994 the Home Ownership and Equity Protection Act, HOEPA. And HOEPA gives the Federal Reserve and only the Federal Reserve the exclusive authority to ban liar’s loans, and a bunch of other things, regardless of whether the lender has deposit insurance. So, the Fed could have acted against Ameriquest, which began growing fifty percent a year and spreading this poison throughout the system. But the Fed chairman was Alan Greenspan, an Ayn Rand groupie who hated regulation, who didn’t believe fraud could exist among people that wore nice suits. And so, he refused to use that authority as did Ben Bernanke.

They finally used the authority after liar’s loans had ceased to exist, essentially, for a year and a half. And even then, Bernanke delayed the effective date of the rule by fifteen months, lest he inconvenienced the last fraud in America. So, that’s the short answer to what turns out to be a long question, why there’s no regulation. In any event, Lehman Brothers specializes in the worst of the worst then sells these things fraudulently. So, if Lehman had been bailed out with a federal reserve loan, it would have had hundreds of billions of dollars in liability for these fraudulent sales. And we, the taxpayers, would have then been on the hook for all these bad loans we’d be making. So, it is nonsense to claim that if we had just given loans to Lehman Brothers, we would avoid the crisis.

But the other thing, as I said, that happened in the same week is the disclosure about Wells Fargo’s liar’s loans. And this is the absolute proof that the Department of Justice under Bush, under Obama and under Trump will not prosecute elite bankers regardless of having them absolutely dead to rights in what should have sent the senior executives of Wells Fargo to prison for decades. Here’s what they came out with. Remember, I told you that the industry’s own anti fraud experts in early 2006 do a study of liar’s loans and they find they’re massively fraudulent. And I told you the state attorney generals, their investigations show the lies come from the lenders and their agents. Well, Wells does a study too using the tax returns and lo and behold, they find massive fraud in their liar’s loans.

BILL BLACK: So, what do they do? They do it the Wells Fargo way. They lie. The Wells Fargo folks lie to other Wells Fargo folks and say, “No no no, we found no problem with these things.” And what they do, instead of stopping liars loans, which- remember, their own study finds they are massively fraudulent, that on average, the average liar’s loan is inflated the income by sixty-five percent.

MARC STEINER: Sixty-five percent.

BILL BLACK: It’s the average. And the regulators are saying, “Don’t make these loans.” These are Bush regulators, which is to say anti-regulators. They’re the weakest people in existence. Even they get this right. Wells, with all the facts, says, “You know what we ought to do? We ought to massively expand our use of liar’s loans.” And you know what they call it? Courageous lending. You can’t make these things up, it’s like reading the worst novel in an airport bookstore where you’re only going to be able to use fifteen percent of your mind because you’re so exhausted. And even then, you know this is too flaky to believe. No, reality transcends the worst addiction. And they refused to prosecute.

MARC STEINER: So, let me ask you a question for argument’s sake. Supposing what could have happened in 2008 is that the Obama administration could, through the attorney general’s office, have prosecuted bankers if they chose to, A. And B, that it was a prime time, I think, with Democrats in control of Congress, could have also instituted a twenty-first century version, a latter version of Glass-Steagall, which they didn’t do either, to continue the regulation. I mean, there were a lot of missteps along here that affects us today, it seems.

BILL BLACK: Yes. And they could have had a modern day Pecora Hearing. The Pecora Hearing in the Great Depression created the groundwork, the factual basis and the discrediting of the elite bankers that allowed the political space for things like the passage of the Glass-Steagall Act during the Great Depression. So, we desperately needed that. There was a little bit of that with Carl Levin, to his credit. But as you said, the Democrats controlled the House and the Senate, they could have had devastating hearings that would have brought the truth out of the things that I’ve been talking about. It would have been impossible for Holder not to prosecute in those circumstances.

And of course, President Obama, instead of constantly minimizing the role of any misconduct, could have said, obviously, this is a crisis brought to us through elite fraud. And then, what we need to go back to is the savings and loan crisis because it was the criminal prosecutions in the savings and loan crisis that absolutely created the political space for the only significant reform in financial laws, things that are much more significant than the Dodd Frank bill. Those were possible only because we get over a thousand successful felony prosecutions. Now, each one of those puts facts in the public record that journalists can cite without fear of being sued for libel or slander.

And it makes clear to the public what the facts are. And very quickly, it makes clear because we’re so successful, we win more than ninety percent of the time against the best criminal defense lawyers in the world, that we’re right. And people quickly see there’s a pattern. These are not random events. There is, what we called basically, the fraud recipe that’s being repeated over and over again. Had Obama done that, the Democrats would have been vastly more successful in the congressional election.

MARC STEINER: I agree completely.

BILL BLACK: And there would be no President Trump.

MARC STEINER: That’s why I asked you the question. Because that’s exactly what we’ve posited, I’ve posited on other programs before. Just what you just said. And I think this says a lot about the relationship between those who regulate and those who are regulated and where that takes us. Because we’re now looking at what we’ve seen in the Trump era. We’re sitting here talking with Bill Black, who you hear many times here on Real News, and we’re about to take a look at what that means for 2018. But if you want to hear that, you have to stay with us for the next segment.

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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.