Obama Administration continues Bush tradition of free market fundamentalism

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?

Continue ReadingObama Administration continues Bush tradition of free market fundamentalism

AIG secured our (bleak) financial future

While looking through some older articles, I happened across a November 2005 edition of Natural Science. An AIG ad decorates the back cover. Note the AIG claim that "You can count on us." Also note the claim that "50 million customers know the strength and experience of the AIG companies can help secure your financial future." AIG ad - 2005 None of this fluff was technically untrue. It turned out to be true in terrible way that will rob Americans of tax revenue for decades to come. AIG has helped to secure a bleak financial future for most Americans, while securing a windfall for a well-connected group of elite executives. But perhaps this tragedy and this should-be-crime needs to be quantified to be appreciated. The AIG bailout followed AIG's calculated decisions to gamble in a dangerous way in search of obscene profits, rather than to be content with its honest business of selling insurance. Then, when the house of cards came crashing down, AIG somehow convinced our lawmakers to divert our precious tax dollars to preserve AIG, which responded by trying to pay out $165 million in bonuses to its employees for a job well done. How much federal tax money has gone to AIG to date? The latest count is $30 billion dollars. To put that in perspective, note that there are approximately 112,000,000 American households. If each American household were to each bear the same share of this $30B bailout of AIG, they would each pay more than $250. $250 is considerably more than the price of a Nintendo Wii. Can you imagine the outcry if Congress had approved buying a Wii for every household in America? What a horrific and irresponsible waste of money that would have been, especially when that money is desperately needed for education, infrastructure and alternative energy, to name only a few things. AIG is the poster boy of why we cannot have "too big to fail," yet it is not on President Obama's agenda to break up the big financial corporations that still sit there like huge ticking time bombs. It turns out that in the process of "saving" AIG, Treasury Secretary Tim Geithner (then acting as president of the New York Fed) hammered American taxpayers. If you Google "AIG criminal," you'll find almost nothing of note in recent months. Apparently, intentionally threatening the entire American economy in the pursuit of greed is not a criminal issue. Ruining the national economy is not as serious as stealing bread from a grocery store or smoking a joint.

Continue ReadingAIG secured our (bleak) financial future

Dylan Ratigan asks why Tim Geithner still has a job

In a succinct and powerful video, Dylan Ratigan wonders why Tim Geithner still is our Treasury Secretary. Senator Maria Cantwell, who makes an appearance on this video, wonders this too, calling Geithner's job performance "appalling." I agree. It's time for Obama to start fresh while we are not in crisis mode. He can do this without starting a panic by saying something like, "We thank Mr. Geithner for his service getting us through this crisis." But then, by all means, throw the bum out and let's pick an honest outsider (not another Goldman Sachs alum) to lead the way. Am I being harsh when I say "bum"? Nope . . . I'm being restrained. Geithner should be taking the time to use the mass media to teach common people what went wrong, how we can avoid it happening again, and explaining exactly where our public tax dollars have gone. Because he refuses to do any of this, and he refuses to be an powerful advocate for taxpayers, he should step aside. It is clear that he doesn't understand who he is supposed to represent. If I were to speak more bluntly, I would say that Tim Geithner is committing a fraud on the U.S. public. Here are the words of Robert Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee

[Geithner] speaks as though they’re doing very comprehensive reform. Unfortunately, in the United States, one of the reasons we had the bubble and the crisis was because we have a broken political system, where campaign money, lobbying influence of the financial sector is enormous, and it created bad regulations, bad laws. I’m going back into the Reagan period, Bush the senior, particularly the Clinton era. We’ve made a mess, and now we come back from a crisis where the population knows darn well what a mess we’ve made. But the problem is, at this point, the people in power, the moneyed interests are still in power. And a large portion of these reforms are either cosmetic or designed by the industry and quite ineffective. . . Ground Zero, the San Andreas Fault of our financial system, where it blew up last time, was in the intersection between “too big to fail” firms and over-the-counter derivatives and that these derivatives need to be put on exchanges, because they’re too complex, and when they’re combined with the “too big to fail” firms, which have a 95 percent market share in OTC derivatives, five banks, that it can create a situation, like we were talking about moments ago, where Citibank could not be restructured. The spider web of positions in derivatives is so complex and so entangled that it deters policy officials from being able to put them through restructuring, because they’re afraid of what kind of spin-offs and consequences will happen. I spoke about the credit default swap market and the illusion of safety that those credit default swap contracts created when they’re unregulated, because everybody thought AIG was going to be able to pay the bill, but they weren’t, and then the taxpayer got to provide that capital.
It's also time for Cantwell and her Senate colleagues to quit blaming Treasury for failing to lead the way. Congress has the power to make laws; it should should pass the necessary laws to close the "loopholes" she finds so appalling.

Continue ReadingDylan Ratigan asks why Tim Geithner still has a job

How to really reform the SEC

Dan Smolin asks a good question: Why should we assume that the SEC's Mary Schapiro will make a U-turn in 2009, given that Schapiro has spent her entire career inviting brokerages to "self-regulate" and doing everything in her power to keep consumers at bay when they are ripped off and kept in the dark by brokerages? The easy answer is that we shouldn't assume that Schapiro will all of a sudden go to bat for the consumers. After all, Schapiro "has been at the very center of a failed regulatory process for the past two decades." We know where her loyalties lie, just like we know that Tim Geithner will never turn hard against Wall Street to clean up the corruption (see here for more details on Geithner--and here). Truly, years of actions speak much more loudly than months of words for both Schapiro and Geithner. I am convinced that Obama doesn't have the horses he needs to clean up Wall Street corruption. It's a typical modern conundrum where you need a highly motivated powerful outsider to get the job down, but there simply aren't enough highly motivated powerful outsiders. If Mary Schapiro had even an iota of interest in protecting consumers, Smolin wouldn't be needing to advocate for the following changes he is now pushing--they would have been a reality years ago:

1. Abolish the mandatory arbitration system and give investors back their constitutional rights;

2. Abolish "self regulation" by FINRA, which is a sham. The brokerage industry should be regulated by a governmental authority with the power to do so effectively. The SEC would be the likely agency to do so, with the right leadership;

3. Require brokerage statements to:

(a) Disclose the risk of every portfolio, as measured by standard deviation; (b) Compare the returns of every portfolio to a portfolio indexed to benchmarks of comparable risk; and (c) Disclose the "cost equity" of the portfolio, which is the amount the investor must make to break even, after payment of commissions, fees and margin interest. Common sense, right? Why aren't these reforms a reality? Good question. And why is a terribly motivated person like Mary Schapiro still sitting there pretending to be a reformer?

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Bank Regulator William K. Black: The best way to rob a bank is to own one.

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. 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. 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 for anyone who is convinced that we are not getting the straight scoop from the corporate media or from our government.

Continue ReadingBank Regulator William K. Black: The best way to rob a bank is to own one.