Tag Archives: accounting control fraud

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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Remember When Carmen Segarra Exposed the NY Fed’s Refusal to Stop Goldman Sachs and Banco Santander’s Scam to Inflate Santander’s Capital? How’d that Work Out?

By William K. Black

On September 30, 2014 I wrote an article to explain the true significance (and horrific analysis by the NY Fed and much of the media) of Carmen Segarra’s key disclosure. My title was “A ‘Perfectly Legal’ Scam is Perfectly Unacceptable to Real Bank Supervisors.” Segarra was the NY Fed examiner who was fired for her criticisms of Goldman Sachs. Segarra was part of the group of new examiners hired as a result of the NY Fed’s admission that it had failed utterly under Timothy Geithner and that the failure had helped make possible the financial crisis. Segarra was part of the new crew that was supposed to radically vitalize the NY Fed’s broken supervisory arm. (Notice that I did not say “revitalize” – the NY Fed has always been Wall Street’s Fed bank, not America’s. It has never been an effective supervisor.)

The point I made was how similar the scam that Goldman crafted to reduce Banco Santander’s capital requirement was to the scam that Lehman used to reduce its capital requirement and pretend that it was healthy when it was deeply insolvent. The key thing that Segarra disclosed was that Mike Silva, her NY Fed boss, claimed that Lehman’s failure caused a “Road to Damascus” conversion that transformed him from a regulatory weakling into the big banks’ worst nightmare – a tough bank supervisor. I showed that, in reality, he did nothing when he learned of Goldman’s scam. The pathetic scope of his conversion is that he now understood that what Goldman and Santander were doing was unethical and endangered the global financial system, but remained unwilling to stop, try to stop, or even criticize Goldman and Santander’s scam.

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The Study that Foreshadowed the Three Fraud Epidemics that Drove the Crisis

By William K. Black
Bloomington, MN: February 15, 2015

I will be writing a series of articles concerning the three mortgage fraud epidemics that hyper-inflated the bubble and drove the financial crisis prompted by four recent economic studies of mortgage fraud. My goal is to integrate the results of those studies with the work of criminologists, investigators, and data from other sources such as Clayton.

In economics and white-collar criminology, we teach our students the very useful concept of “revealed preferences.” We take what potential perpetrators say they would do and why they claim they took an action with cartons of salt. Their actions generally speak far louder and more candidly than do their words. I will show in this series how valuable revealed preferences are in analyzing the data and testing rival research hypotheses. (I will explain why I feel the recurrent failure to state these hypotheses expressly leads to serious error.)

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Bank Leaders Condemn Themselves

By William K. Black
Bloomington, MN: Valentine’s Day 2015

If you inhabit the reality-based universe you know that finance has become a parasite that is a leading threat to our economies and democracies. A series of financial regulators – each of them infamous for their slavish apologias for bankers and banking – now admit that our most elite banks and bankers have created corrupt cultures that have turned the world’s largest banks into the world’s largest criminal enterprises.

How have top bank leaders reacted to this corruption? There is a new report out that asked bank leaders that question.

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Geithner: “The End of Capitalism as We Know It”

By William K. Black
Bloomington, MN: February 10, 2015

Timothy Geithner’s penchant for speaking about things he does not care enough about to get right has led to him uttering many of the most cringe-worthy phrases about the economic crisis. The latest example is in David Axelrod’s new book about the Obama administration’s response to the financial crisis. This column was prompted by Sam Stein’s piece in the Huffington Post about Axelrod’s key points.

“Axelrod was ‘livid’ when he found out that Geithner and [Larry] Summers ‘had quietly lobbied’ against an amendment to the stimulus that would have restricted the payment of bonuses at firms that received bailout funds. Those bonuses had become a huge political sore point for the administration, but the finance guys argued that retroactive steps to claw back the money would have violated existing contracts.

‘This would be the end of capitalism as we know it’ Geithner told Axelrod, to which Axelrod says he responded: ‘I hate to break the news, Mr. Secretary, but capitalism isn’t trading very high right now.’”

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Hensarling Loves Clinton’s Worst Deregulatory Blunders

By William K. Black
Bloomington, MN: February 9, 2015

This the second in a series of columns about Jeb Hensarling and Peter Wallison – the Nation’s chief myth makers about the causes of our financial crisis. Hensarling is the Chairman of the House Financial Services Committee and a leader in the effort to gut the Dodd-Frank Act’s few effective provisions. Wallison is one of the primary architects of the three “de’s” (deregulation, desupervision, and de facto decriminalization) that made the banking environment so criminogenic that it caused the fraud epidemics that hyper-inflated the bubble and drove the financial crisis.

In this second column I focus on Hensarling’s embrace of Bill Clinton and Al Gore’s worst anti-regulatory blunders. Their overall blunder was “Reinventing Government,” a broad assault on regulation and government effectiveness. In the financial sphere, Clinton and Gore embraced a fatal concept (the regulatory “race to the bottom”), two specific legislative acts of deregulation, and the growth of systemically dangerous institutions (SDIs) that were “too big to fail.” Each of these blunders contributed to the most recent crisis and unless corrected will contribute to future crises. Hensarling celebrates each of these anti-regulatory blunders as superb policies.

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Hensarling: Regulations (and Condoms) Don’t Work if You Don’t Use Them

By William K. Black
Bloomington, MN: February 8, 2015

I am writing a series of columns about the Republican fantasy team of apologists for the elite banksters. Jeb Hensarling (R, TX), chair of the House banking committee that is taking the lead in trying to further deregulate banking and Peter Wallison, one of the chief architects of the most recent banking crisis, are teaming up to flog Wallison’s book. The book attempts to convince its readers that Wallison’s leadership of the effort to push the three “de’s” – deregulation, desupervision, and de facto decriminalization – played no role in creating the criminogenic environment that produced the three most destructive epidemics of financial fraud in history. Hensarling is hosting Wallison’s book unveiling.

They are the perfect fantasy team because they inhabit a fantasy world of their own construction that rests on a foundation of non-facts with appalling logical leaps. This first column begins with a brief introduction to how crazy Hensarling is – and recall that he is the Republican Party’s leader on financial issues. George Akerlof and Paul Romer, in their classic 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit,” explained that the 1982 federal deregulation law was “bound to produce looting.”

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It Would be Well if Economics Were Modest for it has Much to be Modest About

By William K. Black
Bloomington, MN: January 13, 2015

One of the many quips ascribed to Winston Churchill is that it was well that Clement Atlee were modest for he had much to be modest about. This article comments on a remarkable article dated September 19, 2009 by the French economist Gilles Saint-Paul that embodies why economics is the only field that purports to be a science that has gotten worse for decades, which actively makes the world worse in its supposed area of expertise, and that is proud of it. I learned of the article through the worthy blog site Unlearning Economics. That site has a special category for theoclasscial sermons, including Saint-Paul’s, that exemplify our family rule that it is impossible to compete with unintentional self-parody.

Saint-Paul’s title is “A ‘modest’ intellectual discipline.” Saint-Paul is one of the economists who was an architect of the ongoing disaster, so one could hope that writing in 2009 would have led him to conduct a thorough re-examination of his field’s catastrophic failures. He should have begun with a personal and professional mea culpa and a series of frank admissions as to what caused him and his discipline to fail yet again and cause such great harm to the world. That’s what a representative of a “modest” field that has so very much to be modest about would do.

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The WSJ Is Outraged That Someone Would “Loot a Company”

By William K. Black
Washington, DC: January 4, 2015

George Akerlof and Paul Romer’s famous 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” introduced what criminologists call “accounting control fraud” to the economics literature. The people who control the firm (typically the CEOs) use its seeming legitimacy as a “weapon” to loot shareholders, creditors, and, if the resultant losses are large enough, the U.S. Treasury. Their article discussed several examples of such fraud epidemics, including the savings and loan debacle. Criminologists, the S&L regulators, and over 1,000 successful felony prosecutions of the S&L looters confirmed Akerlof & Romer’s insights.

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Holder and Obama Never Miss an Opportunity to Miss an Opportunity v the Banksters

By William K. Black
Bloomington, MN: December 18, 2014

Holiday greetings! Today’s semi-sermon considers verses from tracts many consider sacred.

John 3:20 (KJV) For every one that doeth evil hateth the light, neither cometh to the light, lest his deeds should be reproved.

Talmud: Here I will simply summarize the Miracle of the Lights. When the temple was restored to Jewish control its sanctified olive oil for the lamps had been profaned. Only one portion, enough to last one night was still pure. That portion, however, miraculously continued to light the temple for over a week until new sanctified oil could arrive.

The common theme, of course, is the blessings that light brings in making it much easier for good to prevail over evil. In the financial world we use a related concept – transparency. In finance, we implicitly assume that transparency also involves providing light. (Anyone who has walked into a glass door on a very dark night knows that transparency without light is no great protection.) John 3:20 is also about accountability – the desire of the evil to use darkness to avoid having their evil “deeds” “reproved.” A related verse, from our semi-sacred secular texts, was doubtless influenced by these religious themes – Supreme Court Justice Louis Brandeis’ famous phrase was that “Sunlight is the best disinfectant.”

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