Author Archives: William Black

Meet Citi’s Ethical Underwriters That Tried to Save It and America: Sherry Hunt

By William K. Black
Quito: March 26, 2015

This is the fourth and final column in my series that began by focusing on Richard M. Bowen, III.  Bowen blew the whistle on Citi’s sale of scores of billions of dollars in toxic mortgages, primarily to Fannie and Freddie, through fraudulent reps and warranties.  After Bowen protested and blew the whistle within Citi to its senior management (including Robert Rubin) – Citi’s senior officers’ classic accounting control fraud strategy expanded both in terms of the volume of sales and the incidence of fraudulent reps and warranties – which rose to 80 percent.

I have explained how Bowen and his boss’ banking careers were destroyed by the retaliation of Citi’s senior managers and how the SEC, the Department of Justice (DOJ), and the Financial Crisis Inquiry Commission (FCIC) have followed the disgraceful policy of trying to keep Bowen’s detailed disclosures from becoming public and being used to bring Citi’s criminal controlling officers to justice.

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How FCIC Spurned Its One Chance at Greatness

By William K. Black
Quito: March 25, 2015

This is the third column in what I intended to be my three-part series about Citi’s most famous whistleblower, Richard M. Bowen, III.  In this column I discuss Bowen and Citi’s senior (but not controlling) officers’ presentations before the Financial Crisis Inquiry Commission (FCIC).  Upon further research I realize that a fourth column is required to bring in the related story of Bowen’s estimable colleague and fellow-whistleblower, Sherry Hunt.  Hunt’s story is not simply important and necessary to understand the scandals of the Department of Justice (DOJ) and the SEC and Citi’s top managers the FCIC’s spurning its one chance at greatness – it also deserving of a movie.  It’s too complex and rich to add it to this column.  Hunt also deserves full length treatment devoted to her attempted service to Citi, her service to the Nation, and to DOJ’s and the SEC’s failure to act against any of Citi’s fraudulent officers despite her offering them up tied with a bow.

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The DOJ and the SEC Spurn their Ace in the Hole: Richard Bowen

By William K. Black
Quito: March 24, 2015

In this second column about Richard M. Bowen, III, I discuss the failure of the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to make use of his expertise and testimony.  Bowen was the Citi SVP who blew the whistle on Citi’s senior managers’ strategy of knowingly buying massive amounts of fraudulently originated loans sold to Citi through fraudulent reps and warranties and then reselling those toxic mortgages (primarily to Fannie and Freddie) through false reps and warranties.  My first column described that strategy and the failures of the Financial Crisis Inquiry Commission (FCIC) to understand how damning Bowen and Clayton’s testimony was.  Clayton was the dominant “due diligence” firm for secondary market mortgage sales and was designed to be an easy grader.  The two great epidemics of mortgage origination fraud (appraisal fraud and liar’s loans) were so endemic and so crude that even Clayton found a 46% incidence of false reps and warranties by the sellers to the secondary market who fraudulently originated the loans.  That incidence grew to 54% by the second quarter of 2007.

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The Lessons Richard Bowen’s FCIC Testimony Should Have Taught the Nation

By William K. Black
Quito: March 20, 2015

This is the first of three columns prompted by Richard Bowen’s interview this morning on Bloomberg.  Richard Bowen, a Citi SVP, blew the whistle within Citi on Citi’s massive fraudulent sales of fraudulently originated mortgages, primarily to Fannie and Freddie.  Even Attorney General Eric Holder now repeatedly labels these mortgages “toxic.”  Had Citi’s leadership been honest, Bowen’s warnings could have substantially reduced the three fraud epidemics driving the financial crisis and Bowen would be one of Citi’s most senior leaders.  No spoiler alert is required because even my readers who know anything about Bowen know how the story actually ended.  Citi’s senior managers did not ignore Bowen’s warnings – they actively made the frauds he documented worse and they destroyed Bowen’s distinguished career in banking.  Citi, Fannie and Freddie, and Treasury lost billions of dollars and Citi’s senior officers were made wealthy by the “sure thing” of the accounting control fraud “recipe.”

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Stanford Exposes Rodgin Cohen’s Myth of the Myth of Regulatory Capture

By William K. Black
Quito: March 19, 2015

Sometimes the fates conspire to bring together two stories that when considered together bring that lightbulb moment.  The first story, dated March 18, 2015, is from the Wall Street Journal.  It overwhelmingly conveys the opinion of Rodgin Cohen, the super-lawyer to the super-fraudulent bank CEOs.  He was a leader of the financial regulation wrecking crew that produced the criminogenic environments that drove our recurrent, intensifying financial crises.  As I will explain in a future column, Cohen basically has one speech, which he has repeated with minor variants for decades.  The latest Cohen variant claims that:

“[T]he regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career.

Cohen says the strained relations between government regulators and bank officials stems from ‘the myth of regulatory capture.’

‘The consequences of such as approach are likely to be less effective examinations, not more,’ he said. ‘Unless we deal with the canard of regulatory capture, we will inevitably be placing pressure on examiners to disprove this charge.’”

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What If Holder and Obama Listened to DOJ’s Cartel Prosecutors?

By William K. Black
Quito: March 11, 2015

This is how Belinda A Barnett, Senior Counsel to the Deputy Assistant Attorney General for Criminal Enforcement, Antitrust Division, U.S. Department of Justice began her speech entitled “Criminalization of Cartel Conduct” on April 3, 2009.  This was, of course, early in President Obama’s first term.

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EU Decides Not to Target Investments to Help Nations It Forced into Great Depressions

By William K. Black
Quito:  March 10, 2015

Sometimes there’s a news story that captures the madness perfectly.  The latest is by Rebecca Christie and Rainer Buergin in Bloomberg entitled “EU Backs Investment Plan With Pushback on Help for Hardest Hit.”

“European Union finance ministers agreed to press ahead with a proposed 315 billion-euro ($338 billion) investment plan, while reminding crisis-hit nations that it won’t offer them special assistance.”

The numbers in the EU’s supposed “investment plan” are a grossly inflated public relations effort.  At first blush, the plan is simply a way of subsidizing huge, private firms to increase their profits.  When we look more closely we can see it is actually malignant.  The public funding, relative to the EU’s overall need for investment is deliberately trivial.  Relative to the private firms that the EU will subsidize with those funds, however, the EU public funds represents a 6.67% subsidy.  That is a material addition to corporate profits.

“[EU Commission President Jean-Claude] Juncker’s plan envisages using 21 billion euros of EU seed money to mobilize 15 times as much investment in cooperation with private investors. To gain financing help, projects must show private-sector backing and evidence that they will offer a return on investment.”

Juncker is notorious for his long-standing role in turning Luxembourg into the “magical fairyland” by implicitly creating enormous subsidies for large foreign corporations through secret deals to dramatically reduce their taxes.  He is ultra-conservative, one of the most virulent of the troika’s austerity supporters, and a fierce proponent of the troika’s war on EU workers.  His selection as head of the EU Commission demonstrates the ultra-conservative domination of that body.

At one level, Juncker’s plan is only a modestly clever propaganda gambit.  The EU spends virtually nothing but is credited, e.g., in the first sentence of the Bloomberg article, with a “315 billion-euro investment plan.”  This makes it sound as if the plan, while grossly inadequate, is at least not a farce.

The initial obvious question is why the EU does not give direct aid to those in the greatest need, which would provide them with the ability to increase their expenditures to purchase the goods and services they most need.  This would raise effective demand and cause manufacturers to increase production, which would lead them to hire workers and reduce unemployment.  It is more costly, more inefficient, and more unjust to subsidize for-profit firms to make “investments.”   Major corporations are sitting on piles of cash in an amazingly low interest rate environment in which (under Juncker’s own economic theories) the “hurdle” rate to make a productive investment should be at a modern low and new productive investments as a percentage of GDP should be at an all-time high.  The troika implicitly created a massive subsidy for the liability-side of corporate balance sheet – by reducing the interest rates corporations must pay to borrow funds nearly to zero.  Juncker’s plan adds a material (6.67%) subsidy to the asset-side of corporations’ balance sheets.

On its face, the Juncker plan, therefore, is a disgrace.  It expands the troika’s shameful corporate welfare policy while refusing to aid the 100 million EU citizens in Spain, Greece, and Italy (roughly one-third of the EU’s total population) who live in nations unnecessarily forced into Great Depression levels of unemployment by the troika’s insistence of inflicting austerity on economies already suffering from inadequate demand.  It is also designed to be a stealth privatization program.  Private companies will end up with majority ownership of vital infrastructure such as roads, tunnels, and bridges.

The EU leadership’s continuing, stunning indifference to the citizens of the EU suffering from the troika’s economically illiterate “bleeding” of already sick economies is triply exposed by the Juncker plan.  First, the plan is yet another provision by the EU of corporate welfare to for-profit corporations through public subsidies rather than the EU’s citizens who are suffering the most.  Second, the firms that are the recipients of this corporate welfare will not be targeted so as to help the EU citizens most in need.  Third, the recipients of the corporate welfare are allowed to increase unemployment instead of reducing it.  They are free to use the public subsidy to help fund investments that will result in the corporation firing large numbers of workers even if those workers are in nations already suffering Great Depression levels of unemployment.  .

The express decision, over the protests of many of the EU’s smaller nations with the greatest needs for increased infrastructure investments, to refuse to target the investment to the nations with the greatest need tells you nearly all you need to know about what Germany and its ultra-conservative allies’ oxymoronic definition of the word “union” when they conceive of the “EU.”  The other thing you need to know is that the EU has been the most aggressive and economically illiterate member of the troika It takes stunning economic malpractice to gratuitously force Spain, Italy, and Greece into Great Depression levels of unemployment – nearly seven years after Lehman’s bankruptcy triggered the initial collapse.

It isn’t simply that Juncker deliberately crafted his plan to ensure that investment funds were not made available wherever possible where they were most needed.  As the Bloomberg authors report, the EU’s hard-right leadership expects the overwhelming bulk of the public funds to (1) go to subsidies for wealthy, large corporations in the wealthiest EU nations and (2) expects the infrastructure projects funded to be disproportionately built in the wealthiest EU nations.

Juncker’s Plan Opens a New Front in the Troika’s War on Workers

Read carefully the EU leadership’s own words explaining why and how it deliberately designed the “investment plan” to ensure that it would not direct aid to the citizens of the EU who are suffering the most from the EU’s infliction of self-destructive austerity.

“EU Commission Vice President Jyrki Katainen said the plan must resist pressure to steer help to needy regions or nations. Such quotas are ‘exactly what we have wanted to avoid’ when designing how the plan could offer loans or guarantees to spur private investors, he said.

‘It’s up to the member states to create the right certainty and surrounding for investment,’ Katainen said. ‘No one can co-finance investment if there is no private company who would like to invest in some particular country.’”

The quoted passage constitutes an admission by the EU leadership that their “investment plan” isn’t a public investment plan.  Indeed, they admit that their paramount priority in designing the Juncker plan.  It was drafted “exactly” to ensure that it did not “steer help to needy regions or nations.”

We must decode the phrase “no one can co-finance investment if there is no private company who would like to invest in some particular country.”  The EU “investment plan” is the “carrot” designed to induce right-wing political leaders of the EU periphery, in league with corporate allies, to use a bigger “stick” against their workers.  If, and only if, the nations of the EU periphery makes it far easier to fire workers without cause, to slash their pay and benefits, and to increase their taxes will they find “private companies” who will take the EU subsidies and invest in the nation that “wins” the race to the bottom of workers’ wages and rights.  The Juncker plan is only the latest in a long line of troika demands that, cumulatively, were crafted to extort EU workers to engage in a competitive race to cut wages in order to attract investors and expand exports.

But the Juncker plan has related, subtle advantages in pursuing the troika’s war on the workers.  Consider the arguments that the ultra-conservative coalition dominating the European Commission made in favor of Juncker’s latest corporate welfare plan.

“Germany, the Netherlands and the U.K. led calls for the plan to resist political influence so the fund could seek out projects that are most deserving of help.”

The return to dominant power of the (oh so aptly named) modern “Juncker” class of wealthy, landed aristocrats, is so advanced that Juncker and his allies publicly deride the concept that EU decisions might be made by democratic means – “political influence” over public expenditures must be “resist[ed].”  And they control the European Commission, the place where that “political influence” would have to be successful!  Even in a chamber in which they are dominant the Junckers fear having to defend in the European Commission their corporate welfare plan designed (1) to ensure that it did not go to the EU citizens most in need, and (2) to intensify the war on workers.

The revived Juncker-class has brought back the concept of the “deserving” poor and unemployed, as distinct from the undeserving.  And what a convenient concept it is, for the “deserving” nations will be chosen by the private, for-profit recipients of Juncker’s latest corporate welfare.  (Pause to recall that Juncker does not require the firms receiving his latest form of corporate welfare to be “deserving.”)  The corporate welfare recipients will (under the Junckers’ own theories) invest in the nations whose war on their workers is most successful in driving down wages, for that will maximize their profits.  The corporate welfare recipients’ political cronies will have great deniability.  They, after all, did not decide that the subsidized investments would go to those least in need.  If the investments do not go to Greece, for example, the revived Junckers are asserting in advance that this will prove that the Greeks are “[un]deserving.”  To become “deserving” a nation must be a leader in the intensity of its war on its own workers.  The EU leadership has made this clear:  “It’s up to the member states to create the right certainty and surrounding for investment.”  That “right certainty and surrounding” is code for winning the war against the workers’ wages and rights.

And the EU Adds a Lagniappe to the Corporate Welfare Queens

There is a tradition in New Orleans restaurants to add an unexpected treat to the diners’ meals, a lagniappe.  Juncker knew the perfect little something extra that corporate welfare queens would most appreciate – relaxing those pesky laws against cartels that so upset criminal CEOs.

“The Brussels-based commission will aim for a ‘light touch’ when it considers how to apply the competition rules, Katainen said.”

“Light touch” is an EU euphemism for allowing elite white-collar criminals to commit their crimes with impunity.  The phrase was made infamous in the run-up to the financial crisis.  The infamous three “de’s” – deregulation, desupervision, and de facto decriminalization became so extreme due to the regulatory race to the bottom that finance became an exceptionally criminogenic environment.  “Light touch” was a major factor creating the most destructive financial fraud epidemics in history – the epidemics that drove the financial crisis in America and the eurozone.  The Juncker plan, of course, is being promoted as a (sloth like) response to the crisis made possible by “light touch” invitations for corporations to commit crimes with impunity.  Naturally, Juncker decided that the solution was to gut enforcement of the anti-trust laws and invite (via “light touch”) publicly-subsidized for-profit corporations to conspire together to form cartels.  To Juncker, corporations are “deserving” of public subsidies, government wars on workers’ wages, and the ability to commit crimes with impunity.  The unemployed are undeserving parasites.

Why are Top Tier Audit Failures so Common?

By William K. Black
Quito: March 10, 2015

The Wall Street Journal recently provided one of those stories that are invaluable and frustrating.  In fairness, it was a brief blog entry entitled “Almost Half of Global Audits Have Problems” and was based on the release of a study by the International Forum of Independent Audit Regulators.  The blog also noted that the rate of deficient audits was nearly as high for top tier firms’ audits conducted in the U.S.

“The study follows one released late last year by the U.S. audit regulator, the Public Company Accounting Oversight Board, which found nearly 40% of studied 2013 audits performed by the four largest U.S. firms weren’t up to snuff.”

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McCloskey Wants the U.S. to Repeal the Foreign Corrupt Practices Act

By William K. Black
Quito: March 8, 2015

This is the fourth column in my series of articles critiquing Deirdre McCloskey’s book review in the Wall Street Journal entitled “Two Cheers for Corruption.”  McCloskey has subsequently written to New Economic Perspectives – but apparently not the WSJ – to complain that the title was authored by the WSJ and is contrary to her views.  As I mentioned, in my third column, the title is also innumerate in that McCloskey’s book review actually endorsed three types of corruption – and corruption is inherently a composite of bribery, extortion, and fraud.  She claimed that these three types of corruption exemplified why corruption can be desirable because it makes society more “efficient and just.”  I addressed in my second column in this series the first form of corruption that she endorsed – secret bribery, fraud, and corruption by firms in order to violate building safety codes with impunity.

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McCloskey Wants to Change the Title and the Substance of Her Article on Corruption

By William K. Black
Quito: March 8, 2015

Deirdre McCloskey has responded with two comments (to date) to my series of articles critiquing her book review in the Wall Street Journal of two new books about corruption. We welcome her to the pages of New Economic Perspectives and invite her to provide an article or series of articles presenting her views on elite white-collar crimes such as fraud and corruption of whatever length she thinks best. The harm done by these crimes is so severe that these topics well warrant extended discussion and debate. NEP is one of the rare economic blogs that devotes considerable space to these topics.

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