The OCC’s Tragic Response to the Frontline expose: The Untouchables

By William K. Black

On January 25, 2013, I made this comment on Frontline’s web site discussing its documentary: “The Untouchables” and an accompanying (January 22, 2013) article by Jason Breslow entitled: Were Bankers Jailed In Past Financial Crises?

I addressed two statements in that article.  The first statement reads:

“Equally important in the S&L crisis was a much tougher framework of banking laws, according to Black, who is critical of the deregulation that began during the Clinton administration.

‘Deregulation was bound to produce widespread fraud,’ he said. ‘We know better. If we learn the lessons from this, we need not have these fraud epidemics.’”

I responded in my comment that:

“The quotation at the end that the reporter attributes to me was actually me quoting the famous concluding paragraph of George Akerlof and Paul Romer’s 1993 article entitled ‘Looting: the Economic Underworld of Bankruptcy for Profit.’”

[Here is the full quotation from Akerlof & Romer.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer.1993: 60).]

The second statement in the Frontline article that I commented reads:

“One key tool used during the S&L crisis was criminal referrals from regulators to government prosecutors, explained William Black, who served as the government’s point man for litigation in the S&L crisis. Such referrals ‘are absolutely essential,’ said Black, because they provide a road map for a Justice Department already short-staffed in the area of white-collar crime. According to Black, criminal referrals have been missing in the response to the 2008 crisis.

Black, now a professor of law at the University of Missouri at Kansas City, said the Federal Home Loan Bank Board — the predecessor to the Office of Thrift Supervision (OTS) — passed along thousands of referrals to prosecutors.  ‘Flash forward in the current crisis, the same agency made zero,’ he said.

In a statement, a spokesman for the Office of the Comptroller of the Currency, which merged with OTS in 2011, said that referrals are a ‘poor indicator of the quality of supervision’ because they ignore the Suspicious Activity Report process, in which banks are required to report known or suspected criminal offenses.

The statement said that ‘using the number of referrals to compare the crisis of the 1980s to the most recent economic crisis is comparing apples to oranges.’ It continued:  ‘A significant number of thrifts failed in the 1980s because of fraud and insider abuse. That has not been the major factor behind the most recent crisis.’”

[I actually told the reporter that we made over 30,000 criminal referrals as an agency during the S&L debacle.  The remainder of this document is the comment I posted on the Frontline web site discussing the OCC claims in their statement to Frontline.]

“The OCC statement about SARs (the technical jargon for “criminal referrals”), is sad. Banks virtually never make criminal referrals against their senior officers, so the number of SARs filed by banks is not relevant to the subject being discussed. The OTS made over 30,000 criminal referrals during the peak years of the S&L debacle. It made zero in this crisis — a crisis in which the losses and the frauds by senior managers were roughly 70 times larger than during the debacle. Apparently, the OTS and the OCC are trying to excuse their failure to examine, supervise, regulate, and investigate, much less make referrals on the claim that this is the first Virgin Crisis.

Readers are invited to read my testimony before the FCIC and the Senate. The ultra brief version is (1) by 2006 roughly 40% of total mortgage loans originated were “liar’s loans”, (fyi, roughly half of all loans called “subprime” were also liar’s loans — the categories are not mutually exclusive, (2) the incidence of fraud among liar’s loans is 90%, (3) an honest real estate lender would not make pervasively fraudulent loans because doing so would inevitably cause the firm to fail (absent a bailout), (4) liar’s loans, however, are optimal “ammunition” for “accounting control fraud”, (5) investigations (and logic) have confirmed that it was overwhelmingly lenders and their agents who put the lies in liar’s loans, (6) no lender was ever required or encouraged by the government to make or purchase liar’s loans — the opposite was true, the government discouraged such loans and industry documents confirm this fact, (7) liar’s loans make an excellent “natural experiment” because even Fannie and Freddie were not encouraged to make these loans — because they did not aid them in meeting the “affordable housing goals”, (8) Fannie and Freddie, eventually, purchased enormous amounts of liar’s loans for the same reason that the investment banks (not subject to the CRA or any affordable housing goals did) they created massive (albeit fictional) short-term accounting income, which flowed through to the bonuses of many Fannie and Freddie executives. Let me put these data in another format — by 2006, lenders were making over two million fraudulent liar’s loans annually. Fraudulent liar’s loans grew massively because lenders (and purchasers) created perverse incentives to make and purchase massive amounts of these fraudulent loans.

This level of fraud is massively greater than during the S&L debacle, where accounting control fraud never became a dominant national lending strategy. Liar’s loans grew so rapidly, and became such a large share of the market that they constituted the loans “on the margin” that hyper-inflated the financial bubble, which drove the Great Recession.

The S&L debacle was halted by vigorous reregulation that was successful precisely because we targeted the accounting control frauds as our top priority to shut down, remove their senior managers, and prosecute those managers. The liar’s loans “crisis” of 1990-1992 in Orange County, California was stopped in its tracks without any expensive failures because we (the OTS West Region) realized that such loans inherently would lead to endemic fraud and losses. We drove entities like Long Beach out of the industry (it became a mortgage banker, and gave up its federal depositi insurance) for the sole purpose of escaping OTS jurisdiction). The OCC and the OTS not only failed to regulate the accounting control frauds they had jurisdiction over — they engaged in a vigorous “competition in laxity” with each other that included a heavy focus on which agency could most aggressively “preempt” state efforts to stop the fraudulent lenders.

Beginning with Federal Home Loan Bank Board Chairman Gray in 1984 (through 1993), the S&L regulatory agency made one of its top priorities the prosecution of fraudulent senior officers who led the accounting control frauds. The agency did so because it understood that criminal prosecutions were the only remedy that CEOs really fear. The OCC’s head, Mr. Curry, has a very different view:

“Curry said bank regulators were more focused on getting problems corrected rather than criminal penalties. ‘From our standpoint, as a bank regulatory agency, our job is to, one, identify the problems and then mandate that they get fixed,’ he said. ‘I don’t think it’s our role to avenge or to punish per se.'”

We secured over 1,000 felony convictions in cases designated as “major” by the Justice Department. We worked with the FBI and DOJ to prioritize the 100 worst fraud schemes. Those schemes involved roughly 300 S&Ls and over 600 elite targets for prosecution. Virtually all of them were prosecuted. We secured over a 90% conviction rate — against the best criminal defense lawyers in the world.

One of our mantras in white-collar criminology is: “if you don’t look, you won’t find.” The Frontline documentary begins the process of explaining what those of us who are aware of what a real investigation is and what it requires have been saying for years — neither the Bush nor the Obama administration has been willing to conduct a real investigation of the elite banksters whose frauds made them wealthy and drove the financial crisis and the Great Recession. This is one of the hallmarks of crony capitalism. It cripples our economy, our democracy, and our integrity. The statue of Lady Justice is blindfolded to symbolize that justice is blind to power. No one is above the law. The Department of Justice is now, officially, an oxymoron given its senior officials’ admissions that they deliberately refuse to hold accountable (or even investigate) the systemically dangerous institutions (SDIs) and their senior officers because of fears of causing a global financial crisis. As a former senior regulator, an effective regulator, I am astounded that anyone believes that the route to financial stability is leaving elite frauds in charge of many of our banks. Any bank that is too big to fail and to prosecute is a clear and present danger that should be promptly shrunk to the point that it can no longer hold the global economy hostage in order to extort immunity from the criminal laws for the controlling officers who became wealthy by being what Akerlof and Romer aptly described as “looters.”

Congratulations to everyone at Frontline involved in producing the documentary. I urge Frontline to revisit this issue because it is one of defining matters that will decide whether our Nation will restore the rule of law and return to greatness.

William K. Black

Associate Professor of Economics and Law

University of Missouri-Kansas City”


7 responses to “The OCC’s Tragic Response to the Frontline expose: The Untouchables

  1. One of the things going on in the mortgage business, before it crashed to earth, was that mortgage brokers, lenders and banks were collecting huge origination fees from the borrower and then they were selling on the mortgage as prime to Freddie Mac and Fanny Mae, who then assumed the risk.

    Many of these loans were inflated way above the actual value of the property by fraudulent Appraisers, who used identity theft to accomplish their aims.


    What do I know. Just a guitar player.

    But, a long-time Bill Black fan as well.

  3. Mr. Black, as always, I am better informed that before I read your article. Just two days ago I watched the Frontline program on their website, having missed the broadcast. It, of course, hurt my eyes and ears, although I have followed this closely along with watching what the Holder Justice Department hasn’t done with the encouragement of POTUS and the SecTreas. We both know that, in a plutocracy, those who made key political contributions aren’t prosecuted, ever. I am mostly through Neil Barofsky’s book Bailout. What a story!!! He was met with continual resistance in his attempts to investigate the recipients of the TARP handouts. It was nothing short of absurd, and an absolute disgrace of massive proportions. Nothing like putting 700 billion dollars up to grab and find out who is willing to lie for a piece of the pie. The Treasury and FED continually violated even the language of the hastily constructed TARP statute. Very ugly. A rival for the evil non-prosecution of the Wall Street criminal class.

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  5. Thank you for pounding away at this, Dr. Black. Thank you.

  6. The point that Prof. Black and other jimini crickets miss or at least do not mention explicitly is very very simple.

    When going against the interests of rich and powerful fraudsters it is essential to have strong political cover, where “civil society” and at least a significant percentage of voters are ready to protect the investigators and the whistleblowers.

    In the 1990s such political cover was available, in part, more recently the majority of voters are complicit in or don’t see anything wrong in financial fraud, as they think it benefits their own little speculations.

    Financial fraudsters have learned from the S&L debacle that they risk jail unless they create a mass attitude that supports control fraud by compromising many voters with the dream of massive tax free capital gains.

    My usual Norquist quote:

    «And that is, in 2002, on the investor class stuff … you could have said, just drop $7 trillion in stock market value with the collapse of the bubble … $7 trillion, trillions with a T … Americans had $7 trillion less than they used to have, you can expect them to be very irritated and in trouble.
    [ … ]
    They were mad at having lower stock prices and 401(k)s, but they didn’t say Bush did this and that caused this. Secondly, the Democratic solution was to sic the trial lawyers on Enron and finish it off. No no no no no.

    We want our market caps to go back up, not low. The 1930s rhetoric was bash business — only a handful of bankers thought that meant them.

    Now if you say we’re going to smash the big corporations, 60-plus percent of voters say “That’s my retirement you’re messing with. I don’t appreciate that”. And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher.

    And in 2002, voters said, “We’re sorry about the seals and everything but we really got to get the stock market up.”»

    Or among many quotes from Galbraith’s “The Great Crash 1929”:

    «Since 1929 we have enacted numerous laws designed to make securities speculation more honest and, it is hoped, more readily restrained. None of these is a perfect safeguard. The signal feature of the mass escape from reality that occurred in 1929 and before — and which has characterized every previous speculative outburst from the South Sea Bubble to the Florida land boom — was that it carried Authority with it.

    Governments were either bemused as the speculators or they deemed it unwise to be sane at a time when sanity exposed one to ridicule, condemnation for spoiling the game, or the threat of severe political retribution.»

    «One thing in the twenties should have been visible even to Coolidge. It concerned the American people of whose character he had spoken so well.

    Along with the sterling qualities he praised, there also displaying an inordinate desire to get rich quickly with a minimum of physical effort.»

    «The Florida boom was the first indication of the mood of the twenties and the conviction that God has intended the American middle class to be rich. [ … ] Even as the Florida boom collapsed, the faith of Americans in quick, effortless enrichment in the stock market was becoming every day more evident»

    «Yet, in some respects, the chances for a recurrence of a speculative orgy are rather good. No one can doubt that the American people remain susceptible to the speculative mood — to the conviction that enterprise can be attended by unlimited rewards, which they, individually, were meant to share.»