I’ve often had the thought that our massive meltdown could be figured out if we could only recruit some intelligent and well-motivated people to gather and analyze the evidence. But who would those people be? Who could serve as the template the type of character we seek out in such people?
Too bad we don’t have 1,000 people like William K. Black. Black is the former senior regulator who cracked down on financial institutions during the savings and loan crisis of the 1980s, pointing fingers at five congressmen including John McCain. Black went about his work with such vigor that he even drew a death threat from Charles Keating.
[1]Have you ever gotten excited listening to anyone talking about the economy? In this breath-taking interview with Bill Moyers, Black offers his own carefully studied analysis regarding the “bailout.” This is not the intentionally abstruse financial jargon that you usually hear when pundits discuss the meltdown. The theme of the Black’s interview is this: “The best way to rob a bank is to own one,” which is also the title to a book he wrote in 2005 [2]. Black 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.
This video is required viewing [3] for anyone who is convinced that we are not getting the straight scoop from the corporate media or from our government. After viewing this interview, I found myself uttering: “Obama desperately needs someone like this to advise him instead of Geithner and Summers.” I even wrote an email to the White House website, urging Obama to view this interview (as though he would actually read my email).
I took notes as I watched the 30-minute video. Here are some of the highlights:
The meltdown has been driven by fraud committed by the banks. This is a case of rampant fraud being committed by our “top elites.” Under George W. Bush, what remained of bank regulations was entirely gutted. By getting rid of all regulation, George W. Bush “guaranteed massive bank fraud.”
The banks intentionally made huge numbers of bad loans; they engaged in an elaborate Ponzi scheme. These were high profit loans early on, even though there was inevitably was going to be a disaster.
Why didn’t the accounting department catch the problems at the bank? Because all checks and balances are supervised by the CEOs, and the CEOs were determined to rob their own banks and cover it all up. How did they cover it up so far? They have manipulated salaries and bonus programs to suborn widespread acquiescence in the fraud.
Who committed the fraud? Consider specialty lenders such as IndyMac [4], which made $80 billion worth of loans in 2006. These were not just subprime loans, but prime loans as well.
Huge percentages of the loans made by the specialty lenders were “liars loans.” Those making these loans did not check on the jobs, the income or the assets of the borrowers. These are also referred to as “ninja loans.” By the way . . . I’ve personally seen this in my law practice with regard to a huge company called Ameriquest that jammed all kinds of high risk borrowers into loans that were promptly securitized. A few years ago, Ameriquest was so big that it sponsored the half-time show at the Superbowl. Ameriquest is now completely out of business, leaving in its wake 15 class actions against it, including one class action by virtually all of the Attorneys General.
These known shaky loans were loans that were deliberately created to swindle. They were loans with palpable toxic risk yet, due to additional fraud by the rating companies, they were somehow getting AAA ratings. Terrible loans getting great ratings, over and over. These Wall Street loan-rating could have stopped the fraud in its tracks, but they never actually looked at loan files, at least not until our economic meltdown. The appearance of fraud can be found in almost every loan file, according to Black. The story gets worse. The investment bankers that pooled these loans into derivatives were engaged in yet another layer of fraud.
Our entire finance system is a “huge Ponzi scheme.” Everyone is buying a “pig in the poke,” a pig wrapped “with a pretty pink ribbon.”
In September 2004, there was palpable evidence of widespread mortgage fraud. At that time, George Bush arranged for 500 FBI agents who were accounting forensics to be transferred to Homeland Security. These agents were desperately needed to investigate the mortgage fraud, and they were never replaced. The result was entirely predictable.
The current crisis is 100 (or maybe 1000) times bigger than the Savings and Loan Scandal, yet we have only 1/5 the number of FBI agents investigating this systemic fraud.
AIG guaranteed huge numbers of these clearly inappropriate loans and received enormous bonuses as a result. These “liars loans” that are now causing huge losses.
Why are the bankers still calling the shots? Because Congress is too close to the bankers. We need to put honest people in charge of the banks, but there is great resistance to doing this. We need to get rid of the people that caused all of these problems, because they are currently actively hiding the losses instead of exposing the extent of the problem. Timothy Geithner is actively covering up by allowing the banks to report that they are solvent and fully capitalized at the same time that he is asking for $2 trillion to fix the problem. This is an absurd contradiction. Geithner and his friends are scared to death of a bank collapse. Further on Geithner: he was a top regulator (even though he denies it) during the entire period of the fraud. Geithner is a “failed legacy regulator.” The taxpayers are “playing the fool” under Timothy Geithner and Hank Paulson. AIG is secretly being used to bail out UBS and Goldman Sachs.
Are there any heroes in Black’s story? There’s one female regulator that stands out:
[T]here was a very good regulator, Brooksley Born, that everybody should know about and probably doesn’t. She tried to do the right thing to regulate one of these exotic derivatives that you’re talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can’t regulate. And it’s this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.
But mostly, the story is one about fraud and disappointment. According to Black, Barack Obama’s economic policy lack’s any integrity (Note: Black publicly supported Obama during the Presidential campaign). After all, Obama’s current plan was devised by people who got us into this mess in the first place. Our current policy is much like the Japanese approach to its economic bubble in the early 90’s [5], which led to many years of terrible economic consequences, not yet resolved. Obama’s current policy is not only ill-advised, it is also illegal, because the law requires us (not allows, but requires) to put these insolvent banks into receivership. Black reminds us that “Ronald Reagan did receiverships. Nobody called it nationalization.”
According to Black, we need to treat our economic system like we treat our aviation system. We need to regulate our banks carefully (just like we regulate aircraft) and we need to investigate the hell out of them thoroughly when there is an incident. We are not actively investigating the problem at all right now.
If the banks successfully keep the necessary information from us in the months to come, we will have an increasingly absurd number of treasury giveaways. We need to have intelligent people in place to conduct thorough hearings to “blast this out.”
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