Sunday, December 18, 2011

William Black on financial crime

I recently became aware of William Black's work at the blog New Economic Perspectives. His latest interview with Taryn Hart is a must see if you want to understand the guts of the last financial crisis, why nothing was done to prevent it, why nothing has been done to correct it and why it is inevitable that something like it, or worse, is bound to happen again. The level of this criminal behavior is astounding, and even more so that Obama is an apologist for it. This article at the blog discusses why no one went to jail for these crimes:


"You played a critical role during the S&L crisis in exposing congressional corruption. During that period of time, a lot of corruption was exposed; a lot of people in the financial sector went to jail, including Charles Keating. I wonder if you would contrast that to the last credit crisis, let us say from 2007 to 2009 where a lot of money was lost, a lot of things went wrong, but nobody went to jail. Instead of going to jail, they walked out instead with multi-million dollar bonuses. What was the difference, what was behind this in your opinion?"


"[In] the Savings & Loan crisis...our agency filed well over 10,000 criminal referrals that resulted in over 1,000 felony convictions and cases designated as nature.

"In the current crisis, of course they appointed anti-regulators.... The FBI warned in open testimony in the House of Representatives, in September 2004—we are now talking seven years ago—that there was an epidemic of mortgage fraud, their words, and they predicted that it would cause a financial crisis, crisis being their word, if it were not contained.

"Well the answer is zero. They completely shut down making criminal referrals and whichever administration you hate the most, you can hate because while most of this certainly occurred in the Bush Administration, the Obama Administration has obviously not changed it.

"Control fraud is when the person who controls a seemingly legitimate entity, uses it as a weapon to fraud. In the financial sphere, the weapon of choice is accounting. So here are the four ingredients of the recipe that produce a sure thing of record accounting income.

  1. Grow like crazy
  2. Make preposterously bad loans but at a premium yield.
  3. Have extreme leverage. That means you have a ton on debt.
  4. Put aside only ridiculously low allowances for future loan losses.
"You do those four things, you are mathematically guaranteed to report record, albeit fictional, profits in the short term. You are also guaranteed with modern executive compensation, to make the Senior Executives wealthy.

"So your question is, so why, this is the greatest financial crime in the history of the world and no one senior, at any of the major places that drove the crisis, has gone to jail?.... And the answer, the first answer is it all has to start with the regulators.... As recently as fiscal year 2007, there were nationwide, only 120 FBI agents working all mortgage fraud cases. To give you a comparison, at the peak of the Savings and Loan Crisis, there were 1,000 FBI agents working the cases.... Eight times more FBI agents than were working the cases in fiscal year 2007. And this crisis is forty times bigger and worse than the Savings and Loan Crisis. So you would have required massively more people.

"That means they cannot investigate anything substantial. So they were put on relatively smaller cases.... So the FBI says we got to start going after the big guys at which point Bush’s Attorney General Mukasey says no, he refuses to even create a National Task Force against mortgage fraud.... Well of course he has assigned the FBI to only look at little cases and they report back, hey we’re finding little cases. And the Mukasey interprets from that, hey only little cases exist."

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