Tag Archives: fraud

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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McCloskey’s First “Cheer for Corruption” is also a Cheer for Fraud

By William K. Black
Quito: March 5, 2015

In my first column in this series I discussed the gaping contradiction in Deirdre McCloskey’s book review of two books on corruption. The title of her article captures the immorality of her proposed “sermons” on corruption: “Two Cheers for Corruption.” McCloskey urges us to embrace many forms of corruption because she asserts that they add to economic efficiency and justice.

“But corruption can be efficient and just, too. It can be good for efficiency if, say, bribes are paid to get around bad laws (such as most of the building codes in American cities) or to smooth the course of sales by U.S. businesses to the Egyptian military. And the turkey at Christmas supplied by Tammany Hall justly helped the poor—if they voted right.”

McCloskey’s first of three “cheers for corruption” is inherently a cheer not only for corruption, i.e., bribery and extortion, but also a cheer for four types of felonies by elite white-collar criminals. The first crime is deliberately violating the building safety codes. The second crime is covering up that underlying crime through corruption – the bribery and/or extortion of the building safety code inspectors.

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McCloskey’s Plea for an Unethical Ethical Response to Corporate Bribery

By William K. Black
Quito: March 4, 2015

Deirdre McCloskey has provided another proof of our family saying that it is impossible to compete with unintentional self-parody. She did so in the guise of a review in the Wall Street Journal of two books on corruption. McCloskey’s thesis is that only ethics, not institutions, matter when it comes to stopping corruption.

“All that works in the end is ethical change, urged from the mother’s knee, the pastor’s pulpit, the judge’s bench, the schoolmaster’s lectern. It is fruitless to propose ‘mechanisms’ or ‘institutions’ absent an ethical desire in enough of us to do good.

We need sermons, which is to say instruction from our mothers and movies and imams about How to Be Good. Sarah Chayes and Jay Cost provide ample texts for the sermons. Indignation on the ground, if pervasive, stops corruption. The books give us cause for indignation, surely. But the rest is up to us, or our mothers teaching us at their knees.”

McCloskey proposes that we create “pervasive” “indignation” demanding an end to “corruption.” She suggests that the key is the consistency of that ethical message to “do good.” We need “sermons” from clergy, mothers, teachers, judges (during sentencing), and the media and movies that reinforce the message that the public must achieve a “pervasive” loathing of corruption and a commitment to “stop” it.

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Standard Chartered Is Outraged That It Is Treated Like A Criminal For Its Criminal Acts

By William K. Black

After a decade of committing tens of thousands of felonies that the U.S. government believes helped fund terrorism and Iran’s development of nuclear weapons, having the great fortune of settling the cases without any senior officers being prosecuted or its license to operate in the U.S. being pulled, having immediately violated the settlement agreement by lying about its prior actions, being discovered to have mislead the U.S. during the settlement negotiations, and being found to have continued to violate the same U.S. laws after entering into the settlement, one might think that Standard Chartered’s leaders would learn to keep their mouths shut and to obey the law at least until the settlement agreement restrictions lapse. Standard Charter’s senior leadership, however, is composed of the most arrogant and entitled class. When the bank’s Chairman of the Board is “Sir John Peace” entitlement (but no longer noblesse oblige) comes naturally. So, instead of mea culpa, the Standard Chartered mantra is: how dare you criticize us?

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Capital “Can’t be Gamed” – Except Whenever the Bank CEO Wants To

By William K. Black

On October 6, 2014, the Wall Street Journal, only three days ago, published an editorial claiming that regulatory capture was “inevitab[le]” and that we should give up on regulation and rely instead on “simple laws that can’t be gamed” such as an increased capital requirement for banks.  I wrote a two piece response to the editorial.  What I just discovered (though it bears an October 7, 2014 date on the WSJ website) is that one day after the editorial claimed that asset and liability values (the inputs that define “capital”) “can’t be gamed” they presented data indicating that corporations frequently game asset values and that private auditors frequently fail to follow former audit procedures to detect and prevent the overstatement of asset values.  The title of the article is “Audit Deficiencies Surge” and the first two sentences contain the key data.

“Auditors at the largest U.S. accounting firms failed to follow proper procedures in more than four in 10 audits, according to the latest inspections by the U.S. government’s audit watchdog. That was more than double the rate four years earlier.”

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Floyd Norris’ Apologia for Citi’s Frauds

By William K. Black

I have just written a column about the New York Times’ financial journalist, Floyd Norris’ August 20, 2014 column decrying attacks on those who detect and seek to sanction elite frauds.  Norris’ focus was on the Chinese government attacks on whistleblowers who “detect” elite frauds.  Norris bemoaned that those who detect elite fraud suffer far more than those that commit it.

My column pointed out that the practice of elite frauds, in league with their protectors in government and the media, attack those that detect and seek to sanction elite frauds in every country.  Indeed, I showed that Norris had aided and abetted the SEC’s leadership’s smears of Gary Aguirre, the SEC whistleblower who detected evidence of what he (and his superiors) considered likely fraud by elites.  His SEC superiors, however, blocked the investigation when they discovered it would lead to John Mack, the soon-to-be CEO of Morgan Stanley, one of the world’s largest investment banks.

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Europe’s Lousy Bank Loans Expose the “Recovery” Myth

By William K. Black

One of the great lies of the financial industry is that it is the engine of Main Street’s growth.  Giving the finance industry an enormous share of total business profits was supposed to super charge Main Street’s growth.  It has never delivered on this promise.  The truth is the opposite.  The efficiency condition for a middleman like finance is that its size and profits should be minimized.  Finance’s fraud epidemics blew up the world economy and devastated Main Street.  Finance is a parasite that saps Main Street.  The latest example of this comes in a New York Times article about European bank’s bad loans.

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UPDATE: Bank of America Fined Another $16 Billion for Fraud

By L. Randall Wray

Bank of America just agreed to pay another $16 Billion fine for one of its frauds—selling trashy securities to its investors. Another day, another fraud exposed. No surprises there. This is so routine it barely deserves a headline.

According to Bloomberg, that raises the total it has agreed to pay for its mortgage lending frauds to $70 billion. Most of this is related to its purchase of Countrywide, where Mairone oversaw much of the fraud. See here.

BofA rewarded Mairone for creating Countrywide’s “Hustle” fraud by hiring her. So far that woman’s criminal expertise contributed toward mounting costs to BofA of $70 billion. Quite an accomplishment!

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Credit Suisse’s Guilty Plea: The WSJ Uses the Right Adjective to Modify the Wrong Noun

By William K. Black

The Wall Street Journal has editorialized about Credit Suisse’s guilty plea in a piece entitled “If Credit Suisse really is a criminal, why protect it from regulators?”  More precisely, and confusingly, the full title is:

“Holder Convicts Switzerland

If Credit Suisse really is a criminal, why protect it from regulators?”

The U.S. Saved Switzerland and Its Banks

I’ll begin by responding to the WSJ’s weird claims about Switzerland.  Far from “convict[ing] Switzerland,” the U.S. Fed bailed out the Swiss Central Bank at the acute phase of the crisis (by making large unsecured loans to it in dollars) so that it in turn could provide dollars to its two massive, insolvent, and fraudulent banks (UBS and Credit Suisse).  The Treasury, with the support of Secretaries Paulson and Geithner, used AIG to secretly bail out not only Goldman Sachs but also UBS (to the tune of $5 billion).  The unconscionable deal was so toxic that the heads of each of the three U.S. financial regulatory agencies involved (Treasury, the Fed, and the NY Fed) deny that they had any involvement in the decision – it’s the Virgin Bailout.

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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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