Those Who Betrayed Got Rich
by TRNN
There is a bit of progress on derivatives trading, but it is easily
evaded, and they've left loopholes that the lobbyists that she was
talking about—those 300 lobbyists were active. And while aspects of the
bill strengthened over time, other aspects of the bill created loopholes
over time. And so, yes, it is a good idea.
You shouldn't be doing
non-exchange traded derivatives, and this bill encourages
exchange-traded derivatives. But it has loopholes that allow people to
evade it, so it's probably not going to be terribly effective.
William K. Black,
author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, 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.
He has taught previously at the LBJ School of Public Affairs at the
University of Texas at Austin and at Santa Clara University, where he
was also the distinguished scholar in residence for insurance law and a
visiting scholar at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board,
deputy director of the FSLIC, SVP and general counsel of the Federal
Home Loan Bank of San Francisco, and senior deputy chief counsel, Office
of Thrift Supervision. He was deputy director of the National
Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" — frauds in which the CEO
or head of state uses the entity as a "weapon." Control frauds cause
greater financial losses than all other forms of property crime
combined. He recently helped the World Bank develop anti-corruption
initiatives and served as an expert for OFHEO in its enforcement action
against Fannie Mae's former senior management.
PAUL JAY, SENIOR
EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in
Washington. The finance reform bill has passed both houses. President
Obama is expected to sign it soon. Now joining us for his take on the
finance reform bill is Bill Black. He's an associate professor of
economics at the law school at the University of Missouri–Kansas City,
specialist on white-collar crime, and he's the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill. WILLIAM K. BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.
JAY:
Now, they say in the bill—one of the defenders of the bill are saying
there's real progress on derivatives trading. Do you think so?
BLACK:
There is a bit of progress on derivatives trading, but it is easily
evaded, and they've left loopholes that the lobbyists that she was
talking about—those 300 lobbyists were active. And while aspects of the
bill strengthened over time, other aspects of the bill created loopholes
over time. And so, yes, it is a good idea. You shouldn't be doing
non-exchange traded derivatives, and this bill encourages
exchange-traded derivatives. But it has loopholes that allow people to
evade it, so it's probably not going to be terribly effective.
Clearinghouses are a good idea, and this bill wants clearinghouses for
financial derivatives, so that's a positive. The difficulty is—and when I
testified in front of the Senate about this, the very conservative
panel member agreed with me when I said this—clearinghouses wouldn't
have prevented this crisis. And the problem is the AAA ratings and the
fact that losses were being deferred on this toxic waste, because as
long as the bubble expands, you simply refinance the bad loans, and they
don't have huge loss exposure. And that means the clearinghouses would
not have required remotely adequate collateral, and they wouldn't in the
future, either. In other words, bubbles defeat clearinghouses, and
bubbles cause crises. So we have a fix, a clearinghouse, that, while a
good thing, won't work against precisely the dynamic that causes these
really severe crises. What else do we know created perverse incentives?
Professional compensation. And here I just mention the rating agencies.
They're a classic example. And, again, we have really good evidence on
this. We know that the Goldmans of the world deliberately put the rating
agencies in competition with each other in what in economics we call a
"competition in laxity". In other words, whoever is willing to give the
most absurdly inflated rating is who will get my business.
JAY: And there's no—nothing in the current bill will change this?
BLACK:
No. And indeed, more generally, there's nothing to fix rating agencies.
And everybody from every political perspective (with the exception of
Warren Buffett, who is the leading owner of Moody's) agrees that this is
insane. Everybody agrees that—again, with Warren Buffett being the
exception—that the rating agencies were a disaster. And, again, people
have to understand the scope of this disaster.
Ratings run from down in
the range of a single-C up to a triple-A, and there are roughly—it
depends on the agency—25 levels of ratings. Every single time the top
what's called "tranche" of these toxic waste derivatives that have
losses running that range from $0.50 to $0.85 on the dollar, these
always got AAA ratings, which is the best conceivable ratings. It's the
ratings that US treasuries, backed by the full faith and credit of the
United States and are considered in finance to be risk-free, have. These
toxic crud—and they were called in the trade "toxic", they were called
in the trade "liar's loans"—weren't even C. So when we say the rating
agencies screwed up, we don't mean that they took something that, you
know, should've been a single-A and they call it a triple-A. No, we're
talking about something that should have been 25 levels lower, and they
called it AAA.
If they're willing to do that, then they're going to be
willing to bless the next insane thing, as long as the competition and
laxity is allowed to exist. So the failure of this bill to address
professional compensation, and that's just one example.
The same story
exists for the top-tier audit firms, the big four accounting firms; the
same thing exists for appraisers. Americans don't know that over 10
percent of all appraisers in America have signed a petition calling for
the government to step in and regulate and enforce because of this
Gresham's dynamic. A Gresham's dynamic is where cheaters and the least
moral people prosper, and they drive the honest, moral people out of the
marketplace. And that's what the appraisal industry was telling us. And
the regulators refused to any do anything.
And now, after a crisis
measured in trillions of dollars of losses—and a trillion dollars is a
thousand billion—we have, supposedly, the greatest reform bill since the
Great Depression, and it completely ignores this causality. And, of
course, bottom line, all of these things are what the FBI aptly term the
"epidemic" in mortgage fraud and warned in September 2004, in open
congressional testimony, would cause a financial crisis if it were not
dealt with. And we see again, we look at the bill, and it essentially
ignores white-collar prosecutions. It's a travesty of a bill if it was
supposed to be designed to fix the problems that cause crises. The
consumer bill was the other thing you asked me about.
That is a good
thing. But you can tell somebody has a really malicious sense of humor,
because they put the new consumer agency into the Federal Reserve—the
leading opponent of protecting consumers.
This is the agency that under
the HOEPA law [Home Ownership and Equity Protection Act], which goes way
back to the '90s, had unique authority to protect us from otherwise
unregulated mortgage bankers and anyone else who made mortgage loans.
And even board members at the Federal Reserve went to Alan Greenspan and
asked him to take action against these enormous abuses in the liar's
loans and subprime, and Greenspan refused to act. And virtually every
study ever published by the Federal Reserve about consumers is hostile
to any regulation to protect consumers. And that's where the bill put
the bureau that's supposed to protect consumers.
And then the bill makes
a big deal about the fact that they're creating independence from the
Federal Reserve, so that the head of this bureau won't be unduly
influenced. Well, why put someone into an agency hostile to the purpose
of your bureau and then try to protect them? You know, why not just
create an independent agency?
And the answer is: they don't want this
agency to really be any kind of fundamental departure from business as
usual. Now, if Elizabeth Warren is appointed as head of this bureau, we
might get some really important things.
But you have to remember the
people who stuck this in the Fed not only don't want it to succeed; they
just don't think protecting consumers is all that important, and they
think that it's actually potentially bad for the safety of the financial
system. And so there is this group of folks, the regulatory heads, who,
again, have been historically very hostile to protecting consumers, who
get to override this bureau if it does too much. And, again, that is
insane in terms of a response to what we should have learned helped
cause this crisis, because protecting consumers would have been one of
the best ways to protect banks. What you have to understand about this
crisis is—you know, we teach in economics that the wonderful thing about
voluntary market transactions is that both parties are made better off,
right?
I go into the restaurant, I give them money, they prefer my
money, and they give me a really good meal, and I prefer that meal.
We're both better off. That's a win-win. That's a really good thing in
life. But in nonprime mortgages it was a lose-lose. And my book The Best Way to Rob a Bank Is to Own One,
and the classic article by a Nobel prize-winning economist, George
Akerlof, and Paul Romer, a wonderful economist, in 1993—their title says
it all: "Looting: [The Economic Underworld of] Bankruptcy for Profit".
So the banks, the lenders, often failed because of these frauds. The
consumers were hurt, the people who bought the homes, because they were
brought into homes at the absolute peak of the bubble. And that's why
this crisis is the greatest loss of wealth of the working class in
America in 80 years. It's a financial holocaust. And that's even more
true, of course, of minorities. So we had the exact opposite of what
economics predicts: both parties to the transaction were made worse off.
Well, why? Because the agents were made better off. Who were the
winners? The rating agencies, the senior officers who walked away rich,
the least moral appraisers, the least moral of the outside auditors at
the big accounting firms. They were all the winners. They got rich by
betraying their responsibilities. And so if you had had an Elizabeth
Warren and if she had banned this nonprime product to protect consumers,
now, that would enormously reduce this financial crisis.
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