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Finance bill will not prevent crisis- Pt.3. Bill Black: Many Bush regulators still in place

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. The finance reform bill has passed both houses. Now joining us for his take on the finance reform bill is Bill Black. He’s an associate professor of economics at the law school at the University of Missouri–Kansas City, he’s a specialist on white-collar crime, and he’s the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.


JAY: So much depends on who’s going to be in charge of the regulators, who’s going to have the lobbying power around the regulators, instead of hard laws that actually create real barriers to this.

BLACK: Well, no, it’s worse than that, ’cause you didn’t—. My punchline is this. So, assume Elizabeth Warren by some miracle had been put in charge of this bureau, and assume by some miracle that the bureau had been created in 2000, and Elizabeth Warren proposed to ban subprime and liar’s loans. What do you think the council of regulators that gets to veto any of her decisions would have done? They would have vetoed her decision in a heartbeat. Remember, Bush appointed “Chainsaw” [James] Gilleran and people like that to run the Office of Thrift Supervision. This is the guy that so hated regulation that he came to the press conference with a chainsaw to stand over a pile of regulations—next to, mind you, the three leading bank lobbyists in America—to show that the regulators who are supposed to protect us were actively working with the bank lobbyists to destroy all the protections against the banks. Now, do you think that people like Chainsaw Gilleran would have allowed Elizabeth Warren’s rules to go into effect? Of course not.

JAY: That was sort of my point is that the way the bill is established, everything depends so much on regulators. And given how powerful Wall Street is in lobbying and appointing regulators, even under a Democratic Party regime, if you get to a Republican regime with another Cheney who gets to influence the appointments, you wind up with very little in this bill. Am I reading it correctly?

BLACK: You end up with nothing. Indeed, you end up with, potentially, two very bad things. One, you end up with complacency. After all, everybody said this is going to prevent all future crises, so we don’t have to worry about future crises. The second thing that you end up [with] is that there are actually provisions in the bill which make the world worse. Well, for example—. Now, this one, I have to confirm that it ended up in the final bill—we’re talking about a 2,300-page bill. But last we knew, it had a provision that was going to add to the gimmickry of accounting to delay any recognition of losses. So insolvent banks would be allowed to stay open and under the control of the bankers that rendered them insolvent. That’s a terrible idea, and it will help produce the next crisis and make that crisis deeper. But your question also raises the more fundamental point. If Obama and his economic team really wanted to regulate banks more intensively, well, you know, we’re a long way into the administration at this point. You can instantly transform regulation by putting in vigorous regulatory leaders. Now, look what was actually done. Obama left in charge the absolutely disastrous leader who was supposed to regulate Fannie and Freddie, a guy who, by the way, had been a personal friend of Bush for 40 years—you know, he was a high school buddy of his. Obama simply left him in charge and made no effort to ask him to leave. He eventually left on his own and was replaced by his failed deputy. And the administration simply left. You know. And Fannie and Freddie are catastrophic disasters because of their executive compensation practices, which were—Fannie and Freddie were privatized, and they have the enormous bonuses dependent on short-term earnings. And this is not the first but at least the second time that they’ve engaged in massive accounting fraud in order to maximize their bonuses within the last ten years. Look at the Office of Thrift Supervision. They left people who were running an outright criminal agency in charge. They left the worst regulator in the history of the Office of the Comptroller of Currency. This is a guy that not only didn’t protect us from frauds; he ran a holy war against state regulators who tried to crack down on predatory lending—it’s called “preemption”. So they said, no, no, no, we’re not going to protect consumers, but it’s unlawful for the states to protect consumers from these predators as well. That guy is still in charge under the Obama administration. They appointed to run the SEC someone who had been a leading proponent of voluntary regulation, that the industry could be counted on to prevent any securities fraud. This is significantly insane. None of this has—tracks with any reality. If the Obama administration really wanted to regulate, to protect us, it had ample authority under the existing laws, without any passage, to revolutionize the protection. And instead—you know, there’ve been some improvements. How could you not fail to improve over the Bush administration? But the pace of protection is pathetic, and it’s because they’ve left the people who were selected because they were anti-regulators in charge. And then, of course, they’ve reappointed [Ben] Bernanke, who was a lifelong opponent of effective regulation; and they have [Lawrence] Summers and [Timothy] Geithner, who are lifelong opponents of effective regulation, running their economic policies.

JAY: Bill, when they ran the health-care legislation, the argument of the Obama administration was there needed to be a vigorous public option or you couldn’t have effective regulation of the insurance business; there had to be some alternative to keep them in line. Now, they didn’t follow through on that. But does the logic hold for the finance sector as well, especially when you have such powerful lobbyists on the regulatory side? Should people simply be demanding some kind of public alternative for credit and for financing?

BLACK: Yes, they should. But the broader logic also applies, and that was you’ve got to change the incentive structures. If you leave the private insurers in place, the incentive structure is inherently anti-public. And, by the way, it’s terrible on cost containment as well. So you get the worst of all worlds: you don’t help poor Americans get better health care, and you continue to spend twice, as a percentage of GDP, what other developed nations pay for health care. You know, there’s just rampant long-term inflation in health care because of the insane way we do it. So, yes, we have to change the fundamental incentive structures. And, again, this bill, the dominant fact about it is it doesn’t even examine, much less attempt to fix, the perverse incentives that are causing not just this crisis. Look around the world. The Western world that is most influenced by US economic thought, right, the Brits, the Spanish, the Greeks, the Latvians, the Icelanders, they all had their own versions of this crisis, not driven by the US crisis, but driven by these perverse incentives that I’ve talked about and this belief that you didn’t need to regulate or supervise.

JAY: Thanks very much for joining us, Bill.

BLACK: Thank you.

JAY: And thank you for joining us 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.