Tag Archives: fraud

Dimon Lambastes Loans and Expresses His Devotion to Derivatives

By William K. Black

The ongoing U.S. crisis was driven largely by financial derivatives.  Nine of America’s systemically dangerous institutions (SDIs) failed or had to be bailed out – Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu).  The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic.  The Commodities Futures Modernization Act of 2000 and the Gramm, Leach, Bliley Act of 1999, respectively, made credit default swaps (CDS) into a regulatory black hole and repealed the Glass-Steagall Act’s prohibition against banks mixing commercial and investment banking. Continue reading

William K. Black: Abacus Bank Indicted for Mortgage Fraud – More Prosecutions to Come?

William K. Black on “Career Limiting Gestures”

Senator Grassley calls Attorney General Holder’s Bluff

By William K. Black

On March 7, 2012, I testified before the Senate Committee on the Judiciary on the failure to prosecute the elite fraudulent financial CEOs who drove the ongoing crisis.  The first witness testifying to the committee was Assistant Attorney General for the Civil Rights Division, Thomas Perez.  The focus of the hearing was Countrywide’s massive racial and ethnic discrimination against minorities.  Perez testified that there were over 200,000 identified victims of discrimination by Countrywide and that the settlement his office negotiated led to a payment that was 50 times larger than the largest previous settlement.  Perez testified that each of these victims of Countrywide’s discrimination will receive between one and two thousand dollars.

Continue reading

A Dimon Repeatedly in the Rough who Demands Winter Rules (aka Preferred Lies)

By William K. Black
(Cross-posted from Benzinga.com)

Golf is one of the sports associated with the CEOs of big banks, so it is not surprising that Jamie Dimon is expert at seeking to invoke Winter Rules whenever JPMorganChase (NYSE: JPM) finds that its actions have placed it in an unfavorable lie.

Golfers know that they cannot unilaterally invoke Winter Rules – only the folks in charge of the course can put Winter Rules in effect. When Winter Rules are put in effect the golfer can improve his lies by placing his ball in a preferred lie.


A New York Times investigation by Edward Wyatt documented the depth of the rot at the SEC in a February 3, 2012 article entitled “S.E.C. is Avoiding Tough Sanctions for Large Banks.”

“JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.””

SEC investigations have found that JPMorganChase is a serial violator of the securities laws. The bank gets caught, promises to clean up its act, gets fined, signs a typically useless consent decree that has no admissions, creates no precedent, and undercuts deterrence, and gets waived out of the few detriments there are to banks with records of serial SEC staff findings of violations.

JPMorganChase exemplifies this pattern of the SEC winking at serial fraud by the systemically dangerous institutions (SDIs). The SEC routinely allows the SDIs to operate under Winter Rules and the SDIs routinely and repeatedly employ preferred lies.

But the metaphor is inexact for three reasons. First, Winter Rules are not supposed to be routinely available. They are reserved for unusual circumstances where the course is unusually unplayable due to weather. Second, Winter Rules are available due to problems with the course not caused by the player. Third, when Winter Rules are invoked by the golf course the course posts that information publicly and Winter Rules are available to all players rather than to a subset, i.e., the wealthiest players.

Consider what the world would be like if we had a “three strikes law” for corporations. Assume that the corporations were only assessed a “strike” if the violations were attributable to the actions of a senior officer. Assume further that the SEC and the Department of Justice (DOJ) actually brought actions against the SDIs and required admissions of violations of the law in settlements and pleas. The SDIs would have been dissolved (the equivalent of being sent away for life) decades ago.

Consider the chutzpah of JPMorganChase claiming “a strong record of compliance with securities laws” after SEC staff investigations found six violations in 13 years. But that kind of arrogance and indifference to complying with the law is inevitable under an SEC regime that allows the SDIs to play by Winter Rules. “Improved lies” captures perfectly the perverse incentives that the SEC has created.

The CEOs of SDIs who know that they can commit fraud with effective impunity (the SEC fines are typically chump change from the SDIs’ standpoint) develop a belief in their divine right to transcend the law and conventional morality. Jamie Dimon captures the mindset that Nietzche celebrated for the Superman. Dimon extends the logic of transcendence to its ultimate, absurd, extreme. He is enraged that the CEOs running the SDIs have been criticized. It turns out that the SDIs’ CEOs are sensitive types. Nobody exemplifies this Rich White Whine motif better than Dimon.

“I’ve disagreed right from the beginning of this blanket blame of all banks,” Dimon said in an interview with Charlie Gasparino of the Fox Business Network Tuesday. “I don’t like that. I think that’s just a form of discrimination that should be stopped.”

The interview was taped shortly before Dimon left for the World Economic Forum summit in Davos, Switzerland, where Dimon said he will be speaking with other attendees about financial regulation. At last year’s Davos summit, Dimon made similar remarks pushing back against the vilification of the banking industry, calling it “a really unproductive and unfair way of treating people.”

No serious critic has a “blanket blame of all banks.” The blame is focused on SDIs, particularly SDIs like JPMorganChase that investigations find engaged in recurrent fraud, yet were treated to Winter Rules because they were SDIs. These SDIs are not only the bane of the world economy; they are the bane of honest banks.

Dimon has also reached the logical, albeit absurd, conclusion about the legitimacy of investigating JPMorganChase. He is tired of the investigations finding fraud, so he has decided, in the context of the settlement negotiations of the widespread foreclosure fraud by five large mortgage servicers including JPMorganChase, to offer a settlement in return for prohibiting the government from investigating his banks’ mortgage origination and foreclosure fraud.

When news reports claimed that the federal government was reducing its disgraceful offer of widespread impunity from investigation and prosecution, Dimon responded that it was likely that JPMorganChase would not enter into a settlement that did not have a broad prohibition on investigating JPMorganChase’s frauds.

“The new unit “has a pretty good chance of derailing it,” JPMorgan Chase CEO Jamie Dimon told CNBC on Thursday, referring to the settlement. JPMorgan is one of the five banks involved in those negotiations.”

Dimon is the face and mindset of crony capitalism. It is long past time for the SEC to end selective Winter Rules and Preferred Lies for the SDIs.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and is an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog

Follow him on Twitter: @WilliamKBlack

Holder & Obama’s Propaganda is “Belied by a Troublesome Little Thing Called Facts”

By William K. Black

The Obama administration’s record of prosecuting elite financial frauds is worse than the Bush administration’s record, which is a very large statement. Syracuse University’s TRAC issued a report on November 11, 2011 entitled “Criminal Prosecutions for Financial Institution Fraud Continue to Fall.”

Neither administration has prosecuted any elite CEO for the epidemic of mortgage fraud that drove the ongoing crisis. This contrasts with over 1,000 elite felony convictions arising from the S&L debacle. The ongoing crisis caused losses more than 70 times greater than the S&L debacle and the amount of elite fraud driving this crisis is also vastly greater than during the S&L debacle. Bank CEOs leading “accounting control frauds” now do so with impunity from the criminal laws. They become wealthy through fraud and even if they are sued civilly they almost invariably walk away wealthy with the proceeds of their frauds.

Continue reading

What if the SEC investigated Banks the way it is investigating Mutual Funds?

By William K. Black 

The Wall Street Journal ran a story today (12/27/11) entitled “SEC Ups Its Game to Identify Rogue Firms.”

“Rogue” is an interesting word with a range of definitions. When it is used as an adjective its meaning is: “a playfully mischievous person; scamp.” The trivialization of the most destructive elite frauds is one of the most common forms of what criminologists call “neutralization” of the moral content of wrong doing. Neutralization increases crime.

The actual story makes it clear that the criminals that the SEC was identifying were not “rogues.” They were the CEOs of seemingly legitimate firms. The SEC is identifying “accounting control frauds” – the frauds that cause greater financial losses than all other forms of property crime combined. The SEC is not identifying a few rotten apples, but roughly 100 hedge funds likely to have engaged in accounting fraud. The WSJ describes the SEC’s identification system:

“The list is the low-tech product of a high-tech effort by the SEC to crack down on fraud at hedge funds and other investment firms. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud.

In 2009, the SEC began developing a computer-powered system that now analyzes monthly returns from thousands of hedge funds. Officials won’t say exactly how it works or how much it cost to build, but the agency has announced four civil-fraud lawsuits filed as a result of what it calls the “aberrational performance initiative.””The SEC should be applauded for finally understanding that “if it’s too good to be true; it probably isn’t true.” Our agency put a similar system in place in 1984 to identify the S&L accounting control frauds that were driving that crisis. A quarter-century later, the SEC began to follow our well-trodden trail – but only with regard to felons inhabiting the middle of the fraud food chain (hedge funds). 

The SEC has, inevitably, discovered that accounting fraud is common among hedge funds. It is unlikely that the SEC system is really “high-tech” in information science terms. Low-tech information systems have been capable of identifying “aberrational performance” for at least thirty years. We did not have to create any pioneering software in 1984 in order to identify aberrational performance. The cost and time to create our “red flags” was trivial (a few hours of programming time by an agency staffer). (We were collecting the data and computing the necessary ratios anyway. One simply decides the level of a few key variables worthy of being flagged. There’s nothing magic about a “flag.” All it means is that suspicious levels are highlighted on the computer screen and on physical copies of the periodic reports so that they capture the reader’s attention.)

The SEC took two years to create its “aberrational performance” system and is embarrassed enough about the cost that it wants to keep it secret. The two year development process allowed the SEC to make a major advance relative to our system – they invented a title consisting of two words and eight syllables. Devising a title that recondite doubtless accounts for six months of the time it took the SEC to develop its flags.

The most interesting aspects of the WSJ story, however, are two unexamined topics that should have been central to the story. First, there is not a word in the article about criminal prosecutions for the frauds the SEC has identified. The frauds, as described in the article, are so blatant that they would make relatively simple to prosecute. There is no indication that the SEC wanted the WSJ to know that they had made well over a hundred criminal referrals against hedge fund CEOs and senior officers. There is no indication that the WSJ reporters were interested in whether the SEC had made criminal referrals against these moderately elite felons. As a result, we have no information on whether the SEC has in fact made hundreds of criminal referrals against the senior officers at the hedge funds that they have identified as having engaged in likely fraud. Indeed, we have no evidence that they have made any criminal referrals. Neither the SEC nor the WSJ reporters indicated that any prosecutions, or even Department of Justice investigations, resulted from the SEC hedge fund investigations.

Second, why isn’t the SEC’s top priority the systemically dangerous institutions (SDIs)? The SDIs are the financial institutions that are so large that the administration fears that their failure will cause a new global crisis. The SDIs pose by far the greatest risk to the economy and investors of any entity. Their frauds reached “epidemic” proportions and drove our ongoing crisis and the Great Recession. The SEC, however, applied its “aberrational performance” system to its smallest entities and is now expanding it to mutual funds. There is no indication that the SEC intends to use the system to spot fraudulent SDIs. There is no indication that the SEC has even contemplated using the system to spot fraudulent SDIs. There is no indication that the WSJ reporters asked why the SEC was failing to use its system where it was most needed.

Applying the SEC system to the SDIs would have led the SEC to develop a more sophisticated analytical approach to identifying fraud. There is no indication that the SEC has any familiarity with the criminology, economics, and regulatory literature about how to identify accounting fraud. Admittedly, the SEC (finally) has taken seriously the warning that generations of parents have impressed upon their children – “if it’s too good to be true; it probably isn’t true.” The Achilles’ heel of the SEC analytics is that it assumes fraud must be aberrational and its flags are (at least as described in the story) all tied to identifying aberrations premised on the implicit assumption that fraud cannot be endemic. The SEC official told the WSJ reporter that they looked for “outliers.” Accounting control fraud, however, can become endemic, particularly in a product line, because it produces a “Gresham’s dynamic” in which bad ethics drives good ethics out of the market. Accounting control frauds report results that are too good to be true, but they all report extraordinary results because accounting fraud is a “sure thing” (George Akerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy for Profit, 1993). Accounting control fraud was far more common among the SDIs than the SEC system has identified among hedge funds.

“Greedy Bastards”: A Review of Dylan Ratigan’s Views on the Financial Crisis

By William K. Black
(Cross-posted from Benzinga)

Dylan Ratigan, MSNBC’s financial expert, has writtena book about how markets have become perverse. It is an interesting example of how strange “competition” hasbecome.  One oddity presented itself onthe cover of the package in which the book arrived.  The cover proclaimed “Simon & Schuster: ACBS Company.”  The author works forNBC.  Only in America!

I was concerned by the title (“Greedy Bastards”).  I thinkthat greed is unlikely to have changed greatly over the last quarter century inwhich the U.S. has suffered three recurrent, intensifying financialcrises.  I don’t call people bastards,even the self-made ones, because my mother reacted poorly to Speaker Wrightreferring to me as the “red-headed SOB.” Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, butperverse incentives.  When CEOs haveincentives adverse to the public and their customers they tend to act on thoseincentives and harm the public and their customers.  This observation is one of those obvious butessential points so often overlooked.  ACEOs’ principal function is creating, monitoring, and adjusting thecorporation’s incentive structures. There is a massive business literature on this function and CEOsuniformly believe that incentive structures for officers and employees arecritical in shaping their behavior.

There is only one (disingenuous) exception to thisrule – when officers and employees act criminally because the CEO has createdperverse incentive structures.  Suddenly,the CEO is shocked that his officers and employees acted criminally in responseto the CEO’s incentive structures that encourage criminal conduct.  Ratigan focuses on precisely thisexception.  Anyone that has had themisfortune to listen to compulsory business ethics training by his or heremployer will have learned that the key is the “tone at the top” set by theCEO.  True, but that always ends the discussion.  No employee is going to be trained by hisemployer as to what to do when the tone at the top set by the CEO is pro-fraud.

As Ratigan demonstrates, our most elite financialCEOs typically created and maintained grotesquely perverse incentive structuresthat encouraged their officers and employees as well as “independent”professionals to act criminally in a manner that harmed customers, the public,and shareholders – but made the controlling officers wealthy.  Is there any CEO of a lender incapable ofunderstanding that the loan officers and brokers’ compensation depends onvolume and yield – not quality – the result will be catastrophic?  Is there any CEO of a lender incapable ofunderstanding that if the loan brokers’ fees depend as well on the reported debt-to-income andloan-to-value ratios and the broker is permitted to make liar’s loans theresult will be that the brokers will engage in endemic, severe inflation of theborrowers’ incomes and their homes’ appraised values?  Is there any reader that doubts that the CEOsintended to produce precisely what their perverse incentives were certain toproduce?  A CEO cannot send a memo to50,000 loan brokers instructing them to inflate appraisals and use liar’s loansto inflate the borrowers incomes’ but he can, and does, send the same messagethrough his compensation system.  None ofthese perverse incentives produces an unexpected result.

Ratigan gets right two of the three essentials tounderstand why we suffer recurrent, intensifying financial crises.  First, cheating has become the dominantstrategy in finance.  Second, cheating isdominant because finance CEOs create such intensely perverse incentives thatfraud becomes endemic.  The BusinessRoundtable (the largest100 U.S. corporations), had to react to the Enron erafrauds.  It chose as its spokesperson aCEO who embodied the best of American big business.  This was the response he gave to Business Week when their reporter askedwhy so many top corporations engaged in accounting control fraud:

“Don’t just say:”If you hit this revenue number, your bonus is going to be this.” Itsets up an incentive that’s overwhelming. You wave enough money in front ofpeople, and good people will do bad things.”

How did the CEO know about the “overwhelming” effectof creating incentives so perverse that they would routinely cause “good people[to] do bad things”?  He knew because hedirected and administered such a perverse compensation system.  An SEC complaint would soon identify thatcompensation system as driving accounting control fraud at his firm.  His name was Franklin Raines, CEO of FannieMae.


Ratigan can add tothe effectiveness of his explanation by adding a description of the thirdessential driving our perverse incentives. Accounting control fraud, as criminologists, economists, and (competent)financial regulators recognize is a “sure thing”.  See GeorgeAkerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy forProfit” (1993).  It produces guaranteed,record (albeit fictional) short-term reported profits if one follows the fraud“recipe” for a lender, which produces guaranteed, extreme compensation for thecontrolling officers, and causes catastrophic losses.  It is trifecta of guaranteed results that causesCEOs to adopt the perverse incentives they know will cause their officers andemployees to follow the fraud recipe.  Itis the three “de’s” – deregulation, desupervision, and de facto decriminalization that allow the CEOs to put theseperverse incentives in place with impunity and produce the criminogenicenvironments that drive our recurrent, intensifying financial crises.



Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.


Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.


Follow him on Twitter: @WilliamKBlack

Bill Black’s Address To #OccupyLA

William K. Black on Democracy Now: 10/19/2011

For those of you who missed the live interview this morning, watch Bill Black on Democracy Now with Amy Goodman: