William K. Black

It’s early, but Salon has published on January 30, 2013 either the funniest or saddest column of the year to date: “Are Banks Too Big To Prosecute?”


The column is attributed to Matthew Yglesias, a blogger who studied philosophy as an undergraduate.  It could be a brilliantly ironic satire of the Geithner, Holder and Breuer doctrine of immunity for banksters (which I am dubbing “GHB” for short).   GHB is the “roofie” that the Obama administration gave us so the banksters could screw us repeatedly with impunity.  Alternatively, and far more likely, Yglesias has written the saddest and most immoral apologia for elite white-collar crime that has yet made it into electronic bits.  It takes a rerouted beginning student of philosophy, posing as a commentator on finance, to replace what should be a discussion that includes virtue ethics with a virtue-free, criminology-free, and economics-free apologia for the felons who became wealthy by costing the Nation $20 trillion and 10 million jobs.

Matthew Yglesias wrote a similar column on April 14, 2011 embracing the Geithner immunity doctrine.   He titled it: “The Fraud Free Financial Crisis” – and it proves our family’s rule that it is impossible to compete with unintentional self-parody.  In 2011, Yglesias thought we might be experiencing the first “Virgin Financial Crisis” – conceived without sin.


Here was how Yglesias stated his position in 2011:

[T]he key sentiment underlying the whole thing is that the Obama administration felt it was important to restabilize the global financial system. That meant, at the margin, shying away from anxiety-producing fraud prosecutions. And faced with a logistically difficult task, that kind of pressure at the margin seems to have made a huge difference. There simply was no appetite for the kind of intensive work that would have been necessary.

Tim Geithner’s judgment was probably correct.

I replied to Yglesias’ column on April 16, 2007, in an article entitled: “Fiat Justitia Ruat Caelum (Let Justice be done, though the Heavens Fall).”  The article explained why the best means to prevent the financial heavens from falling was to insist on that the rule of law apply to even the most powerful elites.

I find it strange that neither of Yglesias’ columns on a subject that has a vital ethical component discusses the ethics of his support for giving elite bank frauds immunity from the criminal laws.  Yglesias’ relevant expertise on this subject was in ethics.

The context of the excerpt quoted below is that Yglesias is disturbed that “the populists”, as exemplified by Frontline’s documentary, “The Untouchables,” are winning the debate as to whether the elite bank frauds should be prosecuted.  Here is his reasoning:

“So the populists win that round. But I think that returns us to the real policy question. Would prosecution of major banks have been a good idea? Luigi Zingales is mighty breezy on this subject.

Here’s the counterpoint. When I first moved to D.C., I opened an account at Riggs Bank since Riggs was close to my house. The next year, Riggs ended up in tons of legal trouble since it turned out to have been complicit in a lot of illegal money laundering. That’s shifting frozen funds to indicted war criminal Augusto Pinochet, helping the dictator of Equatorial Guinea conceal funds stolen from his population, and the financing of al-Qaida terrorists. Serious stuff. Serious investigation. Serious penalties. The upshot was to make the bank nonviable, and it got taken over by PNC Bank out of Pittsburgh. A midsized regional bank facing prosecution and being taken over by a larger regional bank from a geographically adjacent region is bank regulation as it’s supposed to be done. But what if the DOJ had prosecuted Bank of America or Citigroup into nonviability in 2009? Who was going to buy them? Nobody! That was the whole point of TARP and all the rest.

Had you secured criminal convictions against these megabanks, you’d have had to nationalize them and assume their liabilities or else face an economic catastrophe. But if the Obama administration wanted to nationalize the banks, it could have secured that outcome without the bother of criminal prosecution. They decided nationalization was bad public policy. Others disagree. That was an interesting debate in 2009, and I think it remains an interesting debate today. At the time I was an ardent nationalizer. In retrospect I’m not so sure.

But either way, implementing a non-nationalization approach to bank recapitalization and then prosecuting the banks into a renewed state of insolvency and then nationalizing them would have been nuts. If saving the banks was a mistake, then the error had nothing in particular to do with prosecutions, and if saving the banks was the right thing to do, then curtailing prosecutions was the only way to execute the strategy.”

I do not know what Yglesias intended to convey by the use of the word “breezy.”  The article by Zingales that Yglisias criticizes discusses an econometric study that adds another confirmation that fraud by mortgage lenders was “endemic.”  Yglesias makes no effort to refute or even question the econometric study, so under normal uses I would describe Zingales’ discussion as “thoughtful” and Yglesias’ ad hominem dismissal of Zingales’ analysis as “breezy.”

Yglesias then discusses Riggs Bank, a particularly destructive and dishonest bank run by the Allbritton family.  Yglesias cites the Wikipedia article on Riggs as his source.  The article can be found at this link:


Yglesias’ summary of Riggs activities and the governmental response is:

“Serious stuff. Serious investigation. Serious penalties. The upshot was to make the bank nonviable, and it got taken over by PNC Bank out of Pittsburgh.”

Riggs’ actions were beyond “serious.”  They were criminal and they helped murderous national leaders commit murder, loot their Nations, and hide their crimes and the money they looted from U.S. and international prosecutors.  Were there “serious investigations”?  Not so much according to the article Yglesias relies on.  The Office of the Comptroller of the Currency (OCC) failed to investigate competently for many years.  Its examiner-in-chief of examining Riggs left the government and took a job with Riggs.

There were no “serious penalties” – in large part due to the weakness of the investigations.  The senior officers who directed and were enriched by Riggs’ crimes were not prosecuted.  Riggs became richer and more powerful through its crimes and its senior managers’ reputations were made by those illegal profits.  Joseph Allbritton was inducted into the Washington Business Hall of Fame in 2002.  A lower level Riggs officer was criminally investigated – but he was alleged to have embezzled from the bank.

The so-called “serious penalties” were a $25 million OCC penalty and a $16 million penalty for money laundering.  At those low levels of penalties crime paid.  It paid very well.  The amount of funds Riggs was able to manage because it aided the looting of Equatorial Guinea was massive:  $360 million.  Riggs had $6.4 billion in total assets.

The same article described Riggs’ profits as “anemic” even with the benefit of Riggs’ many crimes.  That was because of Riggs’ expenses – generous compensation, expensive branches, and glorious perks.


The high profits that Riggs made through its crimes were the only thing that kept Riggs profitable despite being bled by its senior officers.

Yglesias claims that the minor penalties made Riggs “nonviable” and that the regulators saved it by arranging an acquisition by PNC Bank.

“The upshot was to make the bank nonviable, and it got taken over by PNC Bank out of Pittsburgh. A midsized regional bank facing prosecution and being taken over by a larger regional bank from a geographically adjacent region is bank regulation as it’s supposed to be done.”

The reality is that Riggs was not made non-viable by the small penalties but by the requirement that it cease its highly profitable crimes.  PNC did not acquire Riggs with the aid of FDIC insurance.  It paid money to acquire Riggs.  The regulators did not pick an acquirer with a strong reputation for integrity in order to clean up the Riggs cesspool.

“In June 2003, PNC Bank agreed to pay $115 million to settle federal securities fraud charges after one of its subsidiaries fraudulently transferred $762 million in bad loans and other venture-capital investments to an AIG entity in order to conceal them from investors.”


Yglesias claims that this travesty of failing to regulate, prosecute, and appropriately resolve a criminal bank enterprise (Riggs) represents “bank regulation as it’s supposed to be done.”  That phrase is either irony of such subtlety that it represents genius or unintentional self-parody that is so embarrassing that it makes the reader cringe.  I can assure Yglesias that the regulation of Riggs violated virtually every principle by which we judged regulators.

I don’t expect Yglesias to understand regulation or regulators, but even without relevant expertise about regulation he should have been able to see the total lack of integrity his preferred system of immunity for elite bankster frauds would create.  I cannot think of any philosophical basis for believing that the senior officers of a large bank should be allowed to become wealthy by causing their bank, unlawfully, to aid murderous Dictators loot “their” Nations.  The senior officers’ actions are profoundly unethical and they set the “tone at the top” that determine a bank’s ethical culture.  Yglesias’ anti-regulatory/anti-prosecution system would eliminate deterrence.  Most importantly, it would create a devastating “Gresham’s” dynamic.

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”  George Akerlof (1970) (his seminal article on markets for “lemons”).

Fraud is a dynamic process and elite frauds are not random.  Control frauds beget other control frauds.  They are strongly criminogenic.  Control frauds exist in all three major sectors – private enterprise, NGOs, and government.  Government control frauds (“kleptocrats”) loot “their” Nations.  Kleptocrats create and seek out other control frauds, such as Riggs Bank, that will aid their looting.  Riggs Bank’s aid to the Dictators of Chile and Equatorial Guinea helped them murder and torture thousands of people.  Control frauds are weapons of mass economic destruction, but many control frauds also maim and kill large numbers of people.  Yglesias thinks a $46 million penalty assessed to a bank with $6.4 billion in assets – not the controlling officers – represents a “serious penalty” for hundreds of crimes that continued for over a decade and produced considerably greater income for the bank than the penalties and helped make the controlling officers wealthy.

Yglesias’ article deteriorates sharply when he moves from discussing Riggs to the current crisis.

But what if the DOJ had prosecuted Bank of America or Citigroup into nonviability in 2009? Who was going to buy them? Nobody! That was the whole point of TARP and all the rest.

Had you secured criminal convictions against these megabanks, you’d have had to nationalize them and assume their liabilities or else face an economic catastrophe.

Consider the phrase “prosecuted [the bank] into nonviability.”   I will discuss only three of the obvious problems with Yglesias’ reasoning.  First, a prosecutor can avoid the entire supposed dilemma by prosecuting the senior officers who directed the fraud rather than the bank.

Second, a bank is not “prosecuted … into nonviability.”  A bank is nonviable because of its crimes and having senior managers who are criminals.  There are two variants (though both can happen at very large banks).  In an accounting control fraud the senior managers loot the bank, as George Akerlof and Paul Romer explained in their famous article – “Looting: the Economic Underworld of Bankruptcy for Profit.  It is essential that the officers who control an accounting control fraud be removed and prosecuted as soon as possible.  Doing so is the only rational way of restoring the bank’s viability.  Other forms of control fraud produce real, but grossly unethical profits.  Examples of such frauds include aiding tax evasion, money laundering, evading governmental restrictions on funding terrorists, illegally foreclosing on lenders, selling grossly inappropriate investment products to seniors, and evading governmental restrictions on funding rogue Nations.  Allowing such a fraud to continue can cause great harm to society and produce a powerful Gresham’s dynamic that can cause endemic fraud – precisely what Zingales was warning about.  If a bank is nonviable without profits it earns from fraud or if its crimes cause such massive losses to society that if it paid damages to its victims it would fail – then the bank is nonviable.  The bank’s officers’ crimes made the bank nonviable – not the prosecutors.

Third, consider the alternative of providing de facto immunity to systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks).  The SDIs already have competitive advantages over smaller banks that the conservative economic authors of Guaranteed to Fail describe as being equivalent to “bringing a gun to a knife fight.”  The Geithner, Holder, and Breuer (GHB) immunity plan for SDIs would enshrine crony capitalism and imperil our economy, our democracy, and our National integrity.

Then there’s Yglesias’ use of the word “nationalize” to describe placing a failed bank into a “pass-through” receivership.  We placed over a hundred S&Ls into receivership under President Reagan and hundreds under the first President Bush and I never heard the term “nationalize” used to describe the process.  The term was never used for a good reason.  We used “pass through” receiverships to place an S&L in receivership on Friday and reopen it on Monday (the ATMs were available even more quickly).  The new, federally chartered bank is placed under the direction of a CEO who was a contractor, not a government employee.  The CEO was an experienced bank manager with a strong reputation for integrity.  He or she had the responsibility to detect frauds and unethical behavior by the bank and its agents, remove such people and end the abuses promptly, make criminal referrals, and assist the FBI and the Justice Department in investigating and prosecuting the officers who engaged in fraud.  The CEO’s other major responsibility was to put the bank in shape to be acquired.  Bank of America and Citicorp could, and should, have been split up into far smaller banks that would no longer pose a systemic risk and would be far more efficient.  The receiver would have begun this planning.  There would have been many acquirers once the initial shock of the crisis was broken by the Federal Reserve’s provision of massive amounts of liquidity (a program that vastly exceeded TARP).

The term “nationalize” was used only in this crisis – to delegitimize placing failed banks into receivership.  Fox Business News once tried to grill me on my support for placing fraudulent banks in receivership.  They demanded that I acknowledge that it was “socialistic.”  I responded that if that were true they had just established that Reagan was a secret Communist.

The truly bizarre aspect of this misuse of the term “nationalization” is that the Obama administration embraced it.  By discouraging actions to clean up fraudulent SDIs, the administration enhanced its twin goals of granting the SDIs immunity and minimizing criticism of that practice.  The Treasury is already on the hook for SDI’s liabilities.  Placing a fraudulent SDI in receivership adds greatly to the stability and integrity of a financial system and reduces ultimate losses to the Treasury.  As I have explained many times, the idea that one produces financial stability by leaving fraudulent senior officers in charge of SDIs is beyond delusional.

Note that Yglesias adopts the SDIs’ and GHB’s doctrine of immunity – the view that the SDIs hold the global economy hostage to their (and their senior officers’) ability to commit felonies with impunity.  If one grants that premise, then the global economic priority would have to be the elimination of all SDIs by mandated shrinkage to the point where they no longer created a systemic danger and could no longer extort the ability to defraud with impunity.  But Yglesias has never joined our call for regulations that would take even that most minimal of steps necessary to reestablish the rule of law and restore our Nation’s democracy and financial stability.  The GHB doctrine enshrines deliberate injustice as a National policy and it is a National disgrace.

Yglesias’ final paragraph attempts to use logic to claim that it follows ineluctably that:

“But either way, implementing a non-nationalization approach to bank recapitalization and then prosecuting the banks into a renewed state of insolvency and then nationalizing them would have been nuts. If saving the banks was a mistake, then the error had nothing in particular to do with prosecutions, and if saving the banks was the right thing to do, then curtailing prosecutions was the only way to execute the strategy.”

For the reasons I have explained, this “logic” is unworthy of anyone who has ever received even an introduction to the study of logic.  It ignores the ready, and highly desirable, alternative of prosecuting the senior officers who directed the crimes and grew wealthy through the SDIs’ crimes.  Criminologists, regulators, and prosecutors all agree that this is the superior strategy – yet it disappears as an option because Yglesias realized he had to stack the deck if he were to give his claim even a patina of apparent logic.

Yglesias also knows nothing about “insolvency.”  We changed the accounting rules – under intense political pressure from the SDIs, working in an odd (but revealing) lobbying coalition that included the Chamber of Commerce, Federal Reserve Chairman Bernanke, and the Obama administration for the express purpose of allowing the SDIs to fail to recognize their losses.  Accounting fraud, however, does not make an SDI solvent; it simply allows it to pretend it is insolvent and it allows Geithner to claim that he is a genius who restored the SDIs to health (other than Fannie and Freddie).

Yglesias does not understand that as long as you leave the fraudulent senior officers in control they have an overwhelming interest in continuing to lie about the SDIs’ financial condition.  It is absolutely essential to find the true facts about the SDIs losses – an action that the Bush and Obama administration prevented at every key stage.  The stress tests, for example, are carefully designed not to find existing losses on bad assets.  Two factors are essential to determine the real losses.  First, one must ensure that the controlling officers have strong incentives to identify the losses instead of covering them up.  “Pass through” receiverships do this superbly well.  Second, one must investigate problem assets.  Vigorous criminal investigations greatly aid in the detection of losses that were being covered up by the fraudulent managers.  Our mantra in criminology with respect to sophisticated financial frauds is that if you don’t look; you don’t find.

Yglesias writes as if “insolvency” were some purely scientific measurement that was conducted by the regulators and that we know that the SDIs were insolvent in 2008 but are solvent now.  We know no such thing.  Yglesias has no concept of how to conduct a rigorous financial investigation.  Think about Geithner’s incentives under Yglesias’ take on “solvency.”  If Geithner ordered a rigorous investigation of the SDIs’ solvency and found that several SDIs were insolvent or even badly undercapitalized, then he (1) would be transformed into a failure and (2) he would “cause” a global crisis by triggering a “catastrophe.”  Under Yglesias’ own framing of Geithner’s incentives we can only conclude that Geithner’s (and the regulators’) claims that all is well at the SDIs have no credibility because of a powerful bias by the SDIs and the regulators to hide losses.

Consider the errors in this phrase:  “If saving the banks was a mistake, then the error had nothing in particular to do with prosecutions….”  We don’t need to “sav[e] banks.”  This argument only arises as to SDIs – the Bush and Obama administrations decided not to “save” hundreds of smaller banks.  SDIs are far too large to be efficient and they create systemic crises such as the Great Recession that cost this Nation $20 trillion in lost wealth and 10 million jobs.  Eliminating SDIs is, logically, our second highest economic priority (after ending our terrible current unemployment crisis).  Even regulators who believe that SDIs are “too big to fail” (TBTF) do not mean that they are too large to place in pass through receiverships.  TBTF has always been a misleading phrase.  It actually means that we save the SDIs’ general creditors – not the SDIs.  The fear is that if the general creditors (who are often banks) of an SDI were to suffer severe losses it might produce “cascade” failures that would cause a wave of failures by creditors, including many banks and cause a global financial crisis.

The “mistake” in refusing to place fraudulent banks in pass through receiverships had a great deal “to do with prosecutions.”  The fact that the senior officers controlling many of our SDIs were directing “control frauds” was a prime reason why it was vital to place the SDIs in pass through receiverships and appoint new CEOs who would find the SDIs’ true financial condition and detect, fire, and help prosecute the fraudulent officers.  Only someone like Yglesias who was “Roofied” could believe that adopting GHB’s doctrine of immunity for SDIs – keeping fraudulent officers in charge at our Nation’s largest financial institutions – had “nothing in particular to do” with whether it was a mistake not to place the fraudulent SDIs in pass through receiverships.

Yglesias ends his attempt at logic by repeating his false framing of the policy options and employing euphemisms:  “if saving the banks was the right thing to do, then curtailing prosecutions was the only way to execute the strategy.”  I begin with the euphemism – GHB’s doctrine did not “curtail prosecutions” of SDIs and their managers for the frauds that drove the financial crisis.  They prevented virtually all prosecutions of elite bank fraudsters and fraudulent banks.  Indeed, they prevented virtually all prosecutions of senior officers of even non-elite banks.  Worse, as we have been saying for years and as “The Untouchables” confirmed – GHB’s immunity doctrine prevented even vigorous criminal investigations of the SDIs.  That denied us the facts about fraud, including how much the senior officers gained in wealth through fraud, how large were the losses their frauds caused, and how deeply did the losses drive the SDIs into insolvency.  The failure to investigate and prosecute also minimized any reputational injury to the frauds – maximizing their ability to defraud us in the future.  I’ve already pointed the deliberate abuse of logic exemplified by Yglesias’ false claim that preventing “prosecutions” was “the only way” of “saving the banks.”  We can prosecute the SDI officers who directed the control frauds and grew wealthy through those frauds without having to prosecute the banks.

But perhaps I am being too fair to Yglesias.  Perhaps he is saying that if we successfully prosecuted the SDIs’ controlling officers for using the SDIs as “weapons” to defraud the SDIs’ customers, creditors, and shareholders then we would inherently establish that the SDIs were liable through civil suits for the massive damages their frauds caused.  (A corporation is normally liable for the wrongs of its officers committed in their capacity as officers.)  Indeed, successful prosecutions and guilty pleas could establish “collateral estoppel” and allow the victims to easily win their civil cases against the SDIs.  The damages in these civil suits should be extraordinary because fraud allows the recovery of punitive damages and the SDIs committed so many crimes that treble damages are available against the SDIs through civil RICO suits.  Perhaps Yglesias, like GHB, believes that it is essential that we not be allowed to hold the officers accountable criminally and that we must act to prevent the victims of the SDIs’ frauds from receiving more than token recompense from the SDIs lest we fail to “save the banks” (by which he really means “save the SDIs”).  Does Yglesias want the U.S. to add to the injury to the victims and to provide further aid and comfort to the elite fraudsters by declaring immunity from prosecution for the officers who grew rich through fraud?

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