William Black was a guest on Bill Moyers Journal yesterday. The conversation was lively and informative, including detailed discussion regarding “liar’s loans” (In a liar’s loan, the mortgage company doesn’t require any verified information from the borrower about the borrower’s income, employment, job history or assets).
Black indicates that even after all that has come to light regarding the financial collapse, our politicians refuse to use the “F word,” fraud. Why? Because too many politicians (and businesses) simply don’t believe in fraud. That is the hallmark of free market fundamentalism. To make matters worse, Barack Obama refuses to utter the word “fraud” from his bully pulpit. Nor does Eric Holder or anyone from the Obama Administration:
WILLIAM K. BLACK They can’t even get themselves to use the word “fraud.”
There’s a huge part that is economic ideology. And neoclassical economists don’t believe that fraud can exist. I mean, they just flat out — the leading textbook in corporate law from law and economics perspective by Easterbrook and Fischel, says — I’ll get pretty close to exact quotation. “A rule against fraud is neither necessary nor particularly important.” Right?
Notice how extreme that statement is. We don’t need laws. We don’t need an FBI. We don’t need a justice department. We don’t even need rules like the SEC. The markets cleanse themselves automatically and prevent all frauds. This is a spectacularly naïve thing. There is enormous ideological content. And it fits with class. And it fits with political contributions.
Do you want to look at these seemingly respectable huge financial institutions, which are your leading political contributors as crooks?
But can’t we insist that suspect businesses be audited to determining whether they are committing fraud? Not based on a long sordid track record regarding prestigious accounting firms:
BILL MOYERS: Isn’t the accounting firm supposed to report this, once they learn from somebody like him that there’s fraud going on?
WILLIAM K. BLACK Yes, they’re supposed to be the most important gatekeeper. They’re supposed to be independent. They’re supposed to be ultra-professional. But they have an enormous problem, and it’s compensation. And that is, the way you rise to power within one of these big four accounting firms is by being a rainmaker, bringing in the big clients.
And so, every single one of these major frauds we call control frauds in the financial sphere has been– their weapon of choice has been accounting. And every single one, for many years, was able to get what we call clean opinions from one of the most prestigious audit firms in the world, while they were massively fraudulent and deeply insolvent.
BILL MOYERS: I read an essay last night where you describe what you call a criminogenic environment. What is a criminogenic environment?
WILLIAM K. BLACK A criminogenic environment is a steal from pathology, a pathogenic environment, an environment that spreads disease. In this case, it’s an environment that spreads fraud. And there are two key elements. One we talked about. If you don’t regulate, you create a criminogenic environment because you can get away with the frauds. The second is compensation. And that has two elements. One is the executive compensation that people have talked about that creates the perverse incentives. But the second is for these professionals. And for the lower level employees, to give the bonuses. And it creates what we call a Gresham’s dynamic. And that just means cheaters prosper. And when cheaters prosper, markets become perverse and they drive honesty out of the market.
Black also put on his criminologist hat and opined about what should happen to corporations guilty of crimes in light of the recent opinion of Citizens United:
WILLIAM K. BLACK So let me — in terms of that Supreme Court decision, if corporations are going to be just like people, let me tell you my criminologist hat. Then let’s use the three strike laws against them. Three strike laws, you go to prison for life, if you have three felonies. How many of these major corporations would still be allowed to exist, if we were to use the three strike laws, given what they’ve been convicted of in the past?
And in most states, they remove your civil rights when you’re convicted of a felony. Well, let’s take away their right to make political contributions that they’re found guilty of a violation.
If you’d like to know why you shouldn’t trust Timothy Geithner, or the Obama Administration (which continues to support Geithner) regarding financial reform, check out the discussion (and video testimony) of Timothy Geithner at the 12-15 minute range.
But wait! The federal government is now, finally, actively investigating this massive Wall Street fraud, right? Nope.
WILLIAM K. BLACK In the last three weeks, we have finally done a half-baked investigation, mind you. Not — nothing like we did in the Savings & Loan days — of Washington Mutual (WaMu), Citicorp, Lehman, and Goldman. And we have found strong evidence of fraud at all four places.
And we have looked previously at Fannie and Freddie and found the same thing. So the only six places we’ve looked, at really elite institutions, we’ve found strong evidence of fraud. So where are the other investigations? Why are there no arrests? Why are there no convictions?
How do we fix the problem long term? The problem is deeply rooted, and the prospects appear to be bleak.
BILL MOYERS: Bill, are you describing a political culture, that is criminogenic?
WILLIAM K. BLACK It’s deeply criminogenic. And this ideology that both parties are dominated by that says, “No, big corporations wouldn’t cheat. Fraud can’t happen. Market’s automatically excluded,” is insane. We now have the entitlement generation as CEOs. They just plain feel entitled to being wealthy as Croesus with no responsibility, no accountability. They have become literal sociopaths. So one of the things is, you clean up business schools, which right now are fraud factories at the senior levels, right?
They create the new monsters that take control and destroy massive enterprises and cause global economic crises, cause the great recession. And very, very close to causing the second Great Depression.