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William Black, author of “Best way to rob a bank is to own one” talks about deliberate fraud on Wall St.

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, DC. And joining us now from Amherst, Massachusetts, is Bill Black. William K. Black is associate professor of economics and law at the University of Missouri–Kansas City, he’s a former financial regulator, and he wrote a book in 2005 titled The Best Way to Rob a Bank Is to Own One. Thanks for joining us, Bill.


JAY: And, Bill, maybe a sequel to your book could be: The Best Way to Rob the People of the Earth Is to Own a Bank and Control the Government.

BLACK: That is the key.

JAY: In your book and in recent interviews, you’ve talked about the current financial crisis as being one of a deliberate fraud, not just some systemic anomaly or mistakes. Talk a bit about why you say this is deliberate, conscious fraud.

BLACK: Well, first because the FBI has long said that that’s what it is. The FBI began publicly warning in September 2004 that there was an epidemic of mortgage fraud, and predicting that it would cause a financial crisis if it were not contained. And obviously it was not contained. The FBI also has numbers out on this. There are over 63,000 criminal referrals per year for mortgage fraud, and only regulated entities filed those criminal referrals, and regulated entities only made one fifth of the non-prime loans. So you have to multiply times five—that’s over 300,000 already. But you could only do that if we spotted all the frauds in the regulated entities and if the regulated entities consistently made criminal referrals, as they’re required to by law. But, of course, if the fraud is going on at the senior levels, you’re kind of reluctant to make criminal referrals. So, in fact, the true number of these mortgage frauds appears to be, at a barest minimum, a half a million a year, and more likely a million per year. We also know from people that have looked at samples of these loans that back up the toxic financial derivatives—these things called CDOs, collateralized debt obligations—that they find nearly universal fraud in those underlying mortgages.

JAY: And these are mortgages that were given AAA ratings by the rating agencies.

BLACK: It was these CDOs that were given triple-A ratings. That’s supposed to mean that they have next to no credit risk, and in fact these are the things that are suffering $0.62 to $0.85 on the dollar losses. And most critically, we know from the FBI that 80 percent of the fraud losses occur when lender personnel are involved. So these are frauds coming from the lenders, overwhelmingly, not the borrowers. And indeed that understates the problem with the lenders, because the only reason the other 20 percent, the frauds induced by borrowers, are possible is because the lenders deliberately gutted the underwriting standards, because the way you optimize accounting control fraud is to deliberately make bad loans. And when you gut your underwriting, you have absolutely no protection against fraud by outsiders either. And so that’s what’s happened.

JAY: So if I understand it correctly, in the boardrooms of some of the biggest New York and global investment banks, leaders of these companies sat down and deliberately decided to create these packages of mortgages. They knew that someone in California borrowing money to buy this house would never be able to pay, but they knew if they packaged these all together and resold them to their client investors, they would make killings in their bonuses and they would create layer on layer of investment packages that got more and more complex, and that it’s a very deliberate scheme. And if I understand you correctly, the reason it’s a fraud is ’cause they know someday this is all going to crash, but they’re going to have cashed out before the crash, and they’re, I guess, expecting the government to come in and bail them out when it happens. Have I more or less understood your argument?

BLACK: Well, you don’t even have to bail them out. Even if they’re not bailed out, the senior officers walk away rich. So the failure of the firm is not a failure of the fraud scheme. And to quote Nobel Prize winner in economics George Akerlof, who wrote with Paul Romer in 1993 about this kind of fraud scheme in the savings and loan debacle, this kind of accounting fraud is a “sure thing”. And that’s the point. It’s a four-part recipe, and if you listen to this recipe and then you apply it to the facts, you’ll see it describes exactly what went on in this crisis as well. But not just this crisis: in the savings and loan crisis, in Enron and WorldCom as well. Here it is. Grow like crazy—exceptional growth rate. Second, make deliberately bad loans that aren’t going to be repaid, because you can charge a higher interest rate for those. Third, have extraordinary leverage. That means you borrow a lot and have very little capital. And fourth—and this one makes it fraud all by itself—don’t put on loss reserves in your accounting books; and that means it shows up as massive profit. If you appropriately created loss reserves for the losses inherent in making this kind of loans, you would have had to show, of course, as a lender that you were losing money every time you made these loans, and, obviously, that wouldn’t have been good for business. So instead, loss reserves fell to all-time record lows, even as they made these massive bad loans, and that’s why we have the catastrophic losses we do.

JAY: Now, just for the sake of our viewers, on our webpage you will find some previous interviews with Bill Black. You’ll be able to get much more detail of how this whole—what he describes as systemic Ponzi scheme worked. So I invite you to read those interviews. We’re going to push ahead now to today. And, William, tell me, has anything changed? Have we seen either any level of accountability for the people that committed this systemic fraud? Or is there any actual real legislation that will be passed that will stop this all from happening again?

BLACK: Things have changed, and they’ve changed overwhelmingly for the worse. One of the reforms that we have in place, after the savings and loan crisis, was specifically designed to stop some of the perverse things that are going on now. In particular, there’s something called the Prompt Corrective Action Law that mandated that the regulators shut down these insolvent banks so that they couldn’t be bailed out by the public. That law has been systematically evaded and violated by first the Bush administration and now the Obama administration. In particular, the banks had the political juice to go to Congress and to get Congress to extort the [Financial] Accounting Standards Board, which is called FASBI, to change the rules so that the banks no longer have to recognize the losses on these toxic loans they make, unless and until they actually sell them. That means that they don’t have to recognize, currently, over $1 trillion in losses. So think if they had to recognize over $1 trillion in losses, what would happen to all these reported profits? And you can’t pay the bonuses without the reported profits. So this has been done for the sole purpose of allowing us to pretend that there’s been a huge recovery in the banks and to allow the banks to pay these bonuses that President Obama has said are outrageous. Well, they are outrageous, but they are possible only because the rules were gimmicked for the benefit of the bankers. And, by the way, the person who gave the wink and the nod that this was something that should be done is Ben Bernanke, who the administration just used its political capital to reappoint to be chairman of the Federal Reserve. And before that, of course, he’d been a disastrous failure as a regulator and one of the architects of this crisis. So, no, we have negative accountability: if you were an important contributor to this crisis, you are promoted and reappointed and given massive bonuses.

JAY: As opposed to being arrested.

BLACK: That’s correct. There has not been a single arrest, a single indictment, a single conviction of one of the senior insiders at these major non-prime lenders. None. And in the savings and loan crisis we got over 1,000 [of] what were referred to by the Justice Department as priority felony convictions of senior insiders. It’s as if you took your kids when they were teenagers, and when they did something outrageous that hurt other people you tripled their allowance instead of punishing them—you turn out psychopaths and sociopaths. And we now have sociopaths in control of our major financial institutions, and, as you said, important levers of government as well.

JAY: Well, in the next segment of our interview let’s talk about what President Obama said when he sold these measures to the American public, which essentially was: we’re not doing this for Wall Street; we’re doing this for Main Street. So in the next segment of the interview, let’s discuss whether or not Main Street needs psychopaths running its financial system. Please join us for the next segment of our interview on The Real News Network.

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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.