Daily Archives: January 14, 2012

Bill Black Chats with Dylan Ratigan: Firedoglake Book Salon This Afternoon

Don’t miss William K. Black on today’s Firedoglake book salon.  Professor Black will be chatting with Dylan Ratigan about his new book, Greedy Bastards:  How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry.  The chat begins at 5:00 p.m. (EST).  Click here to watch the chat.

In the meantime, you can read Professor Black’s review of Dylan’s book below.

Dylan Ratigan is well positioned to author a book,designed to be an enjoyable and informative read by normal humans, on theongoing financial crisis.  He is the wunderkind who became Global Managing Editor for Corporate Finance ofBloomberg, the premier news service that specializes in finance, at anexceptionally young age.  He was at CNBCwhile that network was hyping the housing bubble as a non-bubble offeringfantastic investment opportunities.

Now an anchor forMSNBC, Ratigan is a fierce critic of prominent politicians in both parties forwhat he views as their destructive policies and slavish efforts to aid thewealthiest and most politically powerful at the expense of the best interestsof America and its people.  He ispassionate about these subjects and far less predictable than many of his peersbecause he is not a political partisan.      

In finance, the most important question is why wesuffer recurrent, intensifying financial crises.  That question is really two questions.  Answering it requires that we determine whatcauses our crises and why we fail to learn from these crises, but instead makethe incentive structure ever more perverse after each crisis.  Anyone from a finance background is likely toconclude that perverse incentives cause financial crises, so I was surprised byRatigan’s choice of book title (“Greedy Bastards”).  I think that greed is unlikelyto have changed greatly over the last quarter century in which the U.S. hassuffered three recurrent, intensifying financial crises. 

Idon’t call people bastards, even the self-made ones, because my mother reactedpoorly to Speaker Wright referring to me as the “red-headed SOB.” Ratigan’s view on these points turns out to be similar to mine.  He arguesthat the issue is not greed, but perverse incentives.  When CEOs haveincentives adverse to the public and their customers they tend to act on thoseincentives and harm the public and their customers.  This observation isone of those essential points so often overlooked by writers about this crisis. A CEOs’ principal function is creating, monitoring, and adjusting thecorporation’s incentive structures.  There is a massive businessliterature on this function and CEOs uniformly believe that incentivestructures for officers and employees are critical in shaping their behavior.
There is only one (disingenuous)exception to this rule – when officers and employees act criminally because theCEO has created perverse incentive structures.  Suddenly, the CEO isshocked that his officers and employees acted criminally in response to theCEO’s incentive structures that encourage criminal conduct.  Ratiganfocuses on precisely this exception.  Anyone that has had the misfortuneto listen to compulsory business ethics training by his or her employer willhave learned that the key is the “tone at the top” set by the CEO.  True,but that always ends the discussion.  No employee is going to be trainedby his employer as to what to do when the tone at the top set by the CEO ispro-fraud.
As Ratigan demonstrates,our most elite financial CEOs typically created and maintained grotesquelyperverse incentive structures that encouraged their officers and employees aswell as “independent” professionals to act criminally in a manner that harmedcustomers, the public, and shareholders – but made the controlling officerswealthy.  Is there any CEO of a lender incapable of understanding that whenthe loan officers and brokers’ compensation depends on volume and yield – notquality – the result will be catastrophic?  Is there any CEO of a lenderincapable of understanding that if the loan brokers’ fees depend as well on thereported debt-to-income and loan-to-value ratios and the broker ispermitted to make liar’s loans the result will be that the brokers will engagein endemic, severe inflation of the borrowers’ incomes and their homes’appraised values?  Is there any reader that doubts that the CEOs intendedto produce precisely what their perverse incentives were certain toproduce?  A CEO cannot send a memo to 50,000 loan brokers instructing themto inflate appraisals and use liar’s loans to inflate the borrowers incomes’but he can, and does, send the same message through his compensationsystem.  Each of these perverse incentives produces precisely the resultthat the CEOs expected and desired. 
Ratigan gets right twoof the essentials to understanding why we suffer recurrent, intensifyingfinancial crises.  First, cheating has become the dominant strategy infinance.  Second, cheating is dominant because finance CEOs create suchintensely perverse incentives that fraud becomes endemic.  The BusinessRoundtable (the largest100 U.S. corporations), had to react to the Enron erafrauds.  It chose as its spokesperson a CEO who embodied the best ofAmerican big business.  This was the response he gave to Business Week whentheir reporter asked why so many top corporations engaged in accounting controlfraud:
“Don’t just say: “If you hit this revenuenumber, your bonus is going to be this.” It sets up an incentive that’soverwhelming. You wave enough money in front of people, and good people will dobad things.”
How did the CEO knowabout the “overwhelming” effect of creating incentives so perverse that theywould routinely cause “good people [to] do bad things”?  He knew becausehe directed and administered such a perverse compensation system.  An SECcomplaint would soon identify that compensation system as driving accountingcontrol fraud at his firm.  His name was Franklin Raines, CEO of FannieMae.
What Ratigan does in this book that differs soimportantly, and accurately, from nearly every other account of the crisis by aprominent writer is to say in plain English that our most elite financialinstitutions caused the crisis, that they did so because their controllingofficers caused them to cheat, and that the senior officers cheated their ownshareholders for the purpose of becoming wealthy. 

Ratigan shows that theself-described “productive class” is actually a group dominated by “greedybastards” who win by cheating.  As GeorgeAkerlof and Paul Romer said in their famous 1993 article (“Looting: theEconomic Underworld of Bankruptcy for Profit”), accounting fraud is a “surething.”  Ratigan shows that while lootingbegins with accounting fraud it ends with tax fraud, political domination andscandal by the wealthy frauds, and crony capitalism.  Indeed, Ratigan shows how far we have fallensince 1993.  Fraudulent CEOs who controlsystemically dangerous institutions (SDIs) can now become wealthy by looting,cause the SDI to become insolvent, get bailed out by their political lackeys,resume looting, pay virtually no federal income tax, and do so with nearlycomplete immunity from prosecution.  Heshows that rather than being “productive”, the greedy bastards are destroyingAmerica’s middle and working classes, hollowing out our economy, and destroyingwealth and employment. 

Marshall Auerback discusses the Euro on the Lang and O’Leary Exchange.  Watch it here.

Bill Moyers Essay: Occupying a Cause

The first episode of Bill Moyers’ new TV, Moyers & Company, features our own William K. Black and the Occupy Wall Street movement.  Click here for local listings.