Tag Archives: Control Fraud

What Banks Should Expect in the Future

By William K. Black

Bill talks with CCTV America about the future expectations for Banks.

The 11th Lesson We Need to Learn from Charles Keating’s Frauds: Bring back Glass-Steagall

By William K. Black

On April 2, 2014, as news broke of the death of Charles Keating, the most infamous savings and loan fraud, I posted an article entitled “Ten Lessons We Must Learn from Charles Keating.”   (The April 2 date was ironic, because it was the 27th anniversary of the meeting at which the senators who would become known as the “Keating Five” began to seek to intimidate the savings and loan regulators on Keating’s behalf.)

I failed to explain perhaps the most important lesson we should have learned from Keating and Lincoln Savings.  One of the subtle aspects of the savings and loan debacle that is often overlooked is that we ran a real world test of the importance of the provisions of the 1933 Banking Act known as the Glass-Steagall Act.  Glass-Steagall prohibited “commercial” banks that received federal deposit insurance (created by the same 1933 banking act) from owning equity positions in nearly all financial assets (“investment banking”).  With very limited exceptions, a commercial bank could not own real estate, companies, or stock in companies.  (Banking regulators, hostile to Glass-Steagall despite its immense success, would later add many exceptions.)  The ideas behind Glass-Steagall’s separation of “banking” from “commerce” always made eminent sense from conservative and progressive perspectives.  Commercial banks received a federal subsidy through deposit insurance, so it made no sense for them to be allowed to compete against regular businesses that lacked that subsidy.  It would distort markets to allow such a subsidy. 

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Nobel Schizophrenia over the Georges: Stigler and Akerlof

By William K. Black

In a recent column I focused on three brief passages from George Akerlof and Paul Romer’s 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) that had they been listened to would have prevented the fraud epidemics that drove our recent financial crises.

Here is one of those three passages.  Notice how unequivocal they were in their statements about causality.

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Three Passages From Akerlof & Romer’s 1993 Article That Should Have Prevented The Crisis

By William K. Black

This is the first installment of a series of articles about the media, finance industry, political, and Department of Justice (DOJ) reaction to Michael Lewis’ new book about high frequency trading (HFT).  The media ballyhooed the book as if it were an amazing revelation of a fact of surpassing importance.  The industry demonized the book and Lewis.  DOJ immediately announced it had begun a criminal investigation and the SEC it had multiple investigations pending.  Whether the industry or Lewis is correct about HFT practices (which he asserts are lawful) is unimportant for some purposes.  My series will focus on the difference between the frenzied DOJ, political, and media reaction to Lewis’ criticism of allegedly lawful HFT practices and the “yawn” reaction of these same groups to the vastly more damaging criminal frauds runs by our elite financial leaders that caused the financial crisis is astronomical, ludicrous, and disastrous.  Similarly, the reaction of these three groups to the finding by multiple investigations that 16 of the largest banks in the world committed crimes by setting LIBOR rates through frauds and cartels (the largest cartel, by several orders of magnitude, in history) was less than a yawn, as I described in prior articles.

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The Black Fraud and Finance Report

The Black Fraud and Finance Report on the Real News Network. Bill is discussing Charles Keating.

Ten Lessons We Must Learn from Charles Keating

By William K. Black

I knew Charles Keating, the head of Lincoln Savings, in my capacity as a financial regulator and as the subject of his wrath.  His fraud schemes and the manner in which they targeted our system’s vulnerabilities in an era before Citizens United made the corruption of politicians by fraudulent CEOs child’s play remain the play book for the world’s most destructive financial frauds.  Our failure to learn the ten lessons has caused immense suffering.  Keating’s life, and the great harm he caused, will not have been in vain if we step back and use the occasion of his death to reflect on the changes we need to make.

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Trying to Hold a Serious Discussion about Ethics and Control Fraud with Deal Book via Twitter

By William K. Black

Twitter allows one to spread certain concise statements exceptionally quickly, but it is a vain effort to hold a serious and nuanced discussion via Twitter.  I offer my twitter exchanges with two of Deal Book’s financial reporters on the subject of the New York Times story discussing the Manhattan DA’s indictment of the former leaders of the failed Wall Street law firm Dewey & LeBoeuf as an example.

The indictment alleges facts that if true would demonstrate that they were running the firm as an accounting control fraud for several years before it collapsed.

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Deal Book Thinks Lawyers’ “Cardinal Rule” is to Advise CEOs how to Defraud with Impunity

By William K. Black
(Cross posted at Benzinga.com)

Overview and Background

The New York Times’ “Deal Book” continues its ethics-free treatment of the ethical collapse of the leaders of many of our most elite firms related to finance. Matthew Goldstein’s*  March 6, 2014 article is entitled “4 Accused in Law Firm Fraud Ignored a Maxim: Don’t Email.”

The article is about the indictment charging the leaders of one of finance’s leading law firms – Dewey & LeBoeuf – with securities fraud and larceny.

“The indictment paints a portrait of a law firm being run like a criminal enterprise. Mr. Vance said his office had already secured guilty pleas from seven other people who once worked for Dewey.”

Deal Book refuses to recognize control fraud even when the indictment describes a control fraud.  The indictment does not “paint a portrait of a law firm being run like a criminal enterprise.”  The indictment describes a criminal enterprise led by the partners controlling Dewey & LeBouef.  Deal Book still can’t bend its mind around the fact that seemingly legitimate firms make the best “weapons” for fraud.

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Finance Refuses to Take Akerlof and Romer Seriously about Looting

By William K. Black
(Cross posted at Benzinga.com)

I have often written and spoken of my frustration that economists refuse to read George Akerlof and Paul Romer’s classic 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) and apply it to an analysis of the current financial crisis.   Note that their title expresses the paradox they were reporting – the best way to loot the bank is for its controlling officer to cause it to make extraordinary amounts of terrible loans that will typically cause the bank to fail.

In my fantasy world I am even frustrated that they refuse to read the white-collar criminology literature that my colleagues and I have spent decades developing about “accounting control fraud” (what Akerlof and Romer called “looting”).  Economists do not study fraud and in my flights of fantasy I imagine a world in which they would read the work of those who specialize in that field.  Silly, I know, though that is exactly what Akerlof and Romer did, see their beginning note*, because they wanted to get the facts correct.  If you think that is the obvious approach that any scientist examining an issue would take – congratulations – you just might be a scientist, but you’re almost certainly not an economist.

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How to Prosecute the Elite Bank CEO that Led the Frauds that Drove the Crisis

By William K. Black

Step one: Understand the three “control fraud” epidemics that drove the crisis.

Control fraud occurs when the person that controls a seemingly legitimate entity uses it as a “weapon to defraud.”  In finance, accounting is the “weapon of choice.”  Lenders engaged in accounting control fraud display the four “ingredients” of the fraud “recipe.”

  1. Grow massively by
  2. Making loans at a premium yield that are so bad that they will produce losses
  3. Employing extreme leverage and
  4. Providing only trivial allowances for loan and lease losses (ALLL)

The recipe produces three “sure things.”  The lender will report record profits in the near term, the controlling officers will promptly be made wealthy through modern executive compensation, and the firm will suffer catastrophic losses.  The recipe is also an ideal means to hyper-inflate a financial bubble in real estate, which can delay loss recognition for many years.  Minor variants on this recipe drove the savings and loan debacle and the Enron-era frauds.

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