“Bill Black’s Top Ten Ways to Crack Down on Corporate Financial Crime”
Control fraud is when the CEO of a company uses the corporation as a weapon to commit fraud.
Bill Black is a lawyer and former federal bank regulator.
He’s the author of the corporate crime classic – The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry (University of Texas Press, 2005.)
Black says there are steps we can take as a society to control corporate crime – in particular financial crime.
In an interview with Corporate Crime Reporter last week, Black laid out his top ten.
Number ten: Hire 1,000 FBI agents.
Pass legislation (HR 3995) introduced by Congresswoman Marcy Kaptur that would fund the hiring of 1,000 FBI agents to investigate white collar crime.
Number nine: Appoint a chief criminologist at each of the financial regulatory agencies.
“Each agency needs someone who understands white collar crime,” Black said. “If you don’t understand fraud schemes, if you don’t understand how accounting is used to run these scams, you will always have a disaster in the making.”
Number eight: Fix executive compensation.
Black would tie executive bonuses to long term corporate performance.
Number seven: Target the top 100 corporate criminals.
“We need to do a top 100 priority list – the way it was done in the savings and loan crisis,” Black said. “The FBI, the Justice Department and the regulatory agencies got together and put together a list of top 100 companies to target. There was a recognition that these were control frauds. The top executives were using seemingly legitimate savings and loans as their weapons of fraud. And that is why any serious look will tell you the same thing about this most recent crisis as well. The criminal justice referral process has collapsed at the agencies.”
Number six: Regulate first.
“When you desupervise or deregulate an industry, in fact you are decriminalizing control fraud. The regulators are the ones who make the bulk of these cases. I’m not saying they can do it alone. In the current crisis, the FBI had no meaningful support from the regulators. You have regulators denying they were regulators and saying that there could be no fraud because the rating agencies were handing out high ratings. That kind of naivete is ideologically driven. You will not have effective prosecution with that kind of regulatory regime.”
Number five: Bust up the FBI partnership with the Mortgage Bankers Association.
“Now we have the FBI standing with what it calls its partners – the Mortgage Bankers Association,” Black said. “But the Mortgage Bankers Association – that’s the trade association of the perps. So, the FBI is partnering with the perps.”
“The result is – we have seen zero prosecutions of the specialty non-prime lenders that caused the crisis,” Black said. “The mortgage bankers are going to position themselves as the victims. This has been so successful that the FBI now has a mantra. They are saying there are two kinds of mortgage fraud. Fraud for profit and fraud for housing. And neither of them is control fraud. They have effectively said – control fraud is impossible. Even though it was the entire story behind the savings and loan crisis, the Enron wave, and the creation of the most recent housing bubble.”
Number four: Get rid of Ben Bernanke as chair of the Fed. Replace him with Nobel prize winner Joseph Stiglitz.
“Ben Bernanke should not have been reappointed as head of the Fed,” Black said. “He was the most senior regulator. And he was an utter failure. Under President Bush, he was President of the Council of Economic Advisors. So, he was a failure as a regulator. And he was a failure as an economist.”
Number three: Get rid of too big to fail.
There are about 20 banks that have assets of $100 billion or more. They are considered too big to fail. “You do three things,” Black says. “First, you stop them from growing. Second, you shrink them (to below $20 billion in assets.) You create the tax and regulatory incentives where they have to shrink below the level where they pose a systemic risk. And third, you regulate them much more intensively while they are in the process of moving from a systemically dangerous institution to a more leaner, smaller, more efficient, less dangerous institution.”
Number two: Create a consumer financial protection agency headed by Harvard Law School professor Elizabeth Warren.
“The sine qua non for success as a regulator is independence,” Black says. “So, it’s a very bad sign that Congress is moving away from an independent regulator.”
“As we speak, news is breaking that they are moving away from housing the regulator at the Treasury Department. Now they are talking about putting it at the Federal Reserve. The Fed is an independent regulator. Unfortunately, it’s an independent anti-regulator. I called putting it at the Treasury a sick joke. Putting it at the Fed is also a sick joke. They are both recipes for failure.”
Number one: Fire Treasury Secretary Timothy Geithner, Office of Thrift Supervision chief John Bowman, Fed chief regulator Patrick Parkinson, and Office of the Comptroller of the Currency Chief John Dugan.
“Tim Geithner was testifying before Congress a couple of years ago,” Black said. “And in response to a question from Ron Paul (R-Texas), Geithner said – ‘I have to stop you right there – I’ve never been a regulator.’ Well, that’s true. But you are not supposed to admit it.”
“Can you imagine. This is the President of the New York Fed, testifying about the greatest failure in banking in the history of the nation. And he is so completely out of it – the mindset of capture is so complete, that he says – I’ve never been a regulator. This is the ultimate capture. You don’t even think of yourself as a regulator.”
“Ben Bernanke in October 2009 appointed Patrick Parkinson as the top supervisor at the Fed,” Black said. “He’s the guy who, under Alan Greenspan, led the Fed charge against Brooksley Born when she wanted to regulate credit default swaps.”
“Patrick Parkinson, on behalf of the Fed, testified that credit default swaps should be left completely deregulated.”
“The reasons? If we regulate them, they will flee to the city of London. We should be so lucky, of course.”
“And two, fraud can’t happen in credit default swaps, because the participants are so sophisticated. This is the most astonishingly naive model of white collar crime by people who know nothing about white collar crime and don’t study it at all.”
“John Dugan’s sole priority and all of his passion as OCC director has been pre-empting state efforts to protect us from predatory lenders,” Black said.
“And John Bowman should be fired,” Black said. “The OTS got in bed with the industry most openly.”
*This article originally appeared on CommonDreams.org
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We’re joined again by William K. Black from Amherst, Massachusetts. He’s at the PERI institute and he’s a professor of economics and law at the University of Missouri-Kansas City. He is a former financial regulator, white-collar criminologist, author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.
WILLIAM K. BLACK, PROF. ECONOMICS AND LAW, UNIV. MISSOURI-KANSAS CITY: Thank you.
JAY: So if you got, I would guess, a surprising phone call from President Obama and he asked you, “Okay, enough, Bill. What should I do? Enough of this criticism,” what would you tell him?
BLACK: Well, first, you know, they did have me do a campaign video for them.
JAY: “Them” being the Obama campaign.
BLACK: Attacking Senator McCain’s role in the Keating Five and his failure to learn the appropriate lessons. But ever since they’ve gotten elected, they haven’t called me or anyone like me (because I’ve checked) who actually was part of the successful reregulation of an industry in crisis, which you might think would be a relevant skill set; nor have any of these people been appointed.
JAY: Bill, in that, just for our viewers, you’re talking about the savings and loans crisis in the early ’80s.
BLACK: That’s correct. And so that was, you know, a real-world experience from which lots of important and painful lessons were learned, and they aren’t interested in it at all, because they’re not interested in a real substantive reregulation of this industry. They want to paper it over and declare success, you know, and go on. I have recently put on, in an interview, on the Web, the top ten priorities that I would do, so your listeners can take a look at those. But the types of things that you need to do are as follows—and you can do most of these in parallel; in other words, you can do them simultaneously. You have to fix the too-big-to-fail problem. These are systemically dangerous institutions, where what the administration is telling us is, if a single one of them fails, they will produce a global crisis. And the way they’re handling them maximizes the risk that they will in fact fail. So here are the things we should do on systemically dangerous institutions. (A) Don’t let them grow any more, because right now—and this is truly insane—we’re saying that these institutions that are already massively dangerous because they’re so big should get bigger. That’s crazed. (B) Shrink them. Give them the mandatory incentives through taxation and regulation where they have to think of the most rational way to shrink rapidly. (C) In the interim, regulate them far more intensively and make them recognize the losses. Segues into the second thing you need to do: stop lying about assets quality. Make them recognize their losses. Change the accounting rules to be honest again, instead of the lying, cheating system that we have now. That fits into the third thing: executive compensation drives these frauds. It is not tied to performance; it does not align the interests of managers with shareholders. It serves as a device for creating a nearly perfect crime of accounting control fraud. So clean up and dramatically reduce executive compensation. Make sure it is only earned if there is long-term effective performance, and that you have clawback provisions if that turns out to have been based on a lie. Fourth, change the regulators. We have Bush’s wrecking crew in charge. They don’t believe in regulation. And we have Clinton’s wrecking crew in charge. Get rid of them. Get rid of [Lawrence] Summers. Get rid of [Timothy] Geithner. You can’t get rid of [Ben] Bernanke, but appoint a new chairman and that will effectively get rid of Bernanke. Get rid of Patrick Parkinson, the head of supervision at the Fed. Get rid of [John] Dugan, the Office of the Comptroller of the Currency (OCC). Get rid of the head of the Office of Thrift Supervision. Put in people that believe in substantively re-regulating, so that we can fix these problems. And, by the way, this is what will allow you to have quick success. Everybody in America now knows exactly how dysfunctional Congress is. If you wait and try to get your reregulation through changing the law, you’re never going to get anywhere with this Congress, and after the midterm elections that’s probably going to be even harder.
JAY: So your point here is that this is all things that Obama can do without passing new laws.
BLACK: That is correct, and has—this is over a year into the administration, and he has left—in many cases he’s appointed no one, nominated no one. Right? These agencies are twisting slowly in the wind under the leadership of people who were the architects of the disaster, who hate regulation, who don’t believe regulation can work. Well, that creates a self-fulfilling prophecy of failure.
JAY: What do you make of the argument given in many quarters that the Fed is one of the pillars of the problem and that we need something other than the Fed, some kind of central bank with a public interest mandate of some sort?
BLACK: Well, the Fed, of course, is a big part of the problem, but easiest way to change the Fed is to change who’s running the Fed, and there are enough vacancies that Obama could do that and could do it within a short time period and force the Republicans to either filibuster and say that we’re not going to allow new appointees to the Fed, just leave them vacant, or push them through, make the Republicans stay and filibuster every night of the year for the next three months to prevent any changes in effective regulation. Well, you’ll have the American people turn on the Republicans at that point if they follow that political strategy, and they will turn with a vengeance. But Obama has to stand for something, in contrast to the Republicans, and right now he doesn’t stand for anything. Let me give you a perfect example. President Obama, on one day not very long ago, says he wasn’t elected to represent the fat cats, the fatcat bankers, and he says, quite rightly, that the executive bonuses are outrageous. About two days later, the Federal Deposit Insurance Corporation, which is the—through weird accident, is the only effective regulator. Sheila Bair proposes a rule to restrict executive compensation. That proposed rule only passes on a 3-2 vote, because both Treasury representatives—Dugan from the OCC, Bowman from the Office of Thrift Supervision—vote against cleaning up executive compensation two days after the president of America said executive compensation had become outrageous and that he would not represent the fat cats but would represent the American people. So who makes financial policy in America? President Obama or Treasury?
JAY: Well, it seems like President Obama makes speeches, but the policy coming from his administration seem to be something else, which leads to a kind of bigger question, which I think we need one more segment, if you’re game. Is the problem so systemic, which—and by that I mean not just systemic in terms of the financial sector but in terms of the integration in the Ponzi scheme of the political system, that measures, as you’re suggesting, would seem to be so rational and essentially no-brainers, they seem so obvious that they would be done in the short term, the fact that even these measures can’t be done, what does it suggest that people watching this should be demanding and what should they be doing? So in the next segment of our interview, let’s talk about the political malaise and what you think people should be doing about it. Please join us for one more segment on The Real News with with Bill Black.