European views on financial regulation (and other American evils)

By William K. Black
(Cross posted at

I was invited back to the give the welcoming keynote address last week to the 33rd SFOA International Bürgenstock Meeting.  SFOA is an acronym for the Swiss Futures and Option Association and their meeting (long held at Bürgenstock, Switzerland but now at Interlaken) is the preeminent meeting in Europe on financial derivatives.  The meeting attracts industry participants, regulators, and academics from all over the world.  I’m writing from the Munich airport, where I get to wait overnight for a flight back to the U.S.

Last year, I squared off with Herr Hummler, a fellow Bürgenstock keynoter, and wrote about the experience in a column entitled:  “Who Put the Rot in Herr Hummler’s Wurst?”  Hummler ran Wegelin Bank, Switzerland’s oldest private bank (founded in 1741).  The subject of my talk this year expanded on our differing views:  “Regulatory Races to the Bottom Kill Ethics, Banks and Economies: We need a Competition in Integrity.”  I emphasized the revolutionary admission that Hummler made about finance, his failure to understand the import of that admission, and why his admission required a reconceptualization of markets and regulatory and prosecutorial policies.  Specifically, he admitted that financial frauds gained a competitive advantage, which made markets perverse and produced a Gresham’s dynamic in which bad ethics drove good ethics out of the marketplace.  This was similar to my metaphor – “green slime” – to describe how rotten the financial system became.

When it came to a policy response to this endemic fraud by our most elite financial firms, Hummler championed the perverse competition of the regulatory race to the bottom – destroying the financial regulatory “cops on the beat” who are essential to breaking such a Gresham’s dynamic.  Hummler’s policies destroyed not only Western finance, but everything he purported to believe in as a theoclassical economist whose high priest was Herr Hayek (the “Austrian” school of economics).  His policies perverted many financial markets into becoming so criminogenic that they drove the epidemics of accounting control fraud that drove the financial crisis and the Great Recession.  (His Austrian austerity policies then gratuitously hurled the Eurozone back into recession.)

Hummler’s admission: Bankers defrauded us by putting the Rot in our Wurst

Hummler’s revolutionary admission was that Adam Smith’s reliable butcher, who acts to ensure that we get wholesome meat because his reliable dedication to his self-interest causes him to act as if he cared about our health, had become a sociopath.  Smith’s village butcher must cultivate and maintain a reputation for selling wholesome meat or be driven promptly out of business.  Smith presents the paradox that the butcher’s incentive to maximize his wealth is so reliable (and, implicitly, long-term) that we count on it to ensure that the butcher serves us only wholesome meat.  Conversely, Smith argues not that altruism does not exist, but rather that it is nowhere near as reliable a consideration as the butcher’s self-interest.  Smith’s parable of the butcher is capitalism’s defining metaphor.

Hummler’s metaphor subverted Smith’s parable.  Hummler admitted that our most elite financial firms had known that they were selling millions of bad home loans and bad financial derivatives, particularly collateralized debt obligations (CDOs), “backed” (not so much) by the bad loans.  The elite financial firms, therefore, hid the bad loans from their customers by adopting opaque structures and mixing the bad loans with some less-bad loans.  His metaphor was that the most elite banks had disguised what he called “the rot” in the sausages (“Wurst” in German) they sold us.  By grinding the meat and serving it an opaque casing, the seller makes it difficult for the customer to discover that the sausage contains rotten meat.  Because the fraudulent Wurst seller can buy rotten meat for a much lower price than its honest competitors must pay to purchase wholesome meat, the frauds gain a competitive advantage and the perverted markets drive the honest firms out of the marketplace.  (If you are familiar with economics, this is the famous “lemons” market problem first described by George Akerlof in his 1970 article, which led to the award of the economics version of the Nobel Prize in 2001.)

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”  Akerlof (1970).

Economists were not the first to discover how fraud turns markets perverse.

“The Lilliputians look upon fraud as a greater crime than theft.  For, they allege, care and vigilance, with a very common understanding, can protect a man’s goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage.”  Swift, J., Gulliver’s Travels.

In fairness to Smith, he was an intense foe of corporations because he believed that what we now call “the separation of ownership and control” produces a severe conflict of interest in the controlling officers that can lead them to use the corporation as a weapon to loot the customers, creditors, and shareholders (what we now call “control fraud”).  He did not assume that the controlling officers of a corporation had a reputational interest that would prevent them from looting.  Hummler, however, did not premise his argument as to why elite financial firms engaged in endemic fraud on Smith’s conclusion that corporations are criminogenic.  Hummler showed no indication in his talk that he was aware of Smith’s disdain for corporations.  Instead, Hummler used Smith’s principal parable of the butcher as his own metaphor – one that turned Smith’s parable on its head and launched a frontal assault on the theories of capitalism embraced by its proponents.

Hummler’s butcher is a sociopath.  He knows that the rotten meat will poison us and make us dreadfully ill.  He acts to hide the truth from us and to suborn other professionals to “bless” his rotten meat as the epitome of wholesomeness.  His corruption of the “Betty Crocker seal of approval” gulls us into purchasing his rotten sausages and allows the butcher to sell millions of rotten sausages for many years.  Hummler’s sociopathic butcher becomes wealthy because he is so willing to sell us rotten meat.  His more ethical rivals will be driven into bankruptcy because they sell high quality meat honestly.  The markets are reduced to the ultimate perverse economic force because they are perverted by a psychopath.

Hummler’s pathetic effort to excuse the financial butchers’ putting the rot in our Wurst

Hummler excuses the elite financial perpetrators

Hummler was a very big deal in Europe when he presented his keynote address at Bürgenstock last year.  He sent a bi-monthly newsletter to 100,000 recipients – a “who’s who” of global finance.  His newsletter often sparked news stories, frequently sympathetic to his themes.  He put full moral culpability for the endemic fraud by bankers on “the government.”  Indeed, he placed it on the U.S. government and he made clear that the U.S. government disgusted him.  Though the time period of the elite bank fraud made his argument impossible, he made clear that his greatest disdain, hostility, and blame was reserved for President Obama.

Hummler’s moral culpability whitewash for the bankers who put the rot in our Wurst founders on multiple levels.  First, assume (contrary to all fact) that “the government” ordered Lehman, Bear Stearns, and Merrill Lynch (collectively, LBSML) to buy fraudulent bad loans.  (I will get to Fannie and Freddie in detail below.)  Why would it be moral for them to do so?  Why shouldn’t they have used their extraordinary political power to change the governmental mandate to buy fraudulent loans?  Failing that, why shouldn’t they cease mortgage purchases entirely rather than buy fraudulent loans?  (The reality is that LBSML – and the great bulk of the entities that sold LBSML fraudulent loans – were not even subject to the Community Reinvestment Act (CRA).  Further, the CRA never mandated that any entity make or purchase fraudulent loans and the CRA had been in existence for decades and had been greatly weakened by the Bush administration during the period of the mortgage fraud epidemic.)

Second, if the government forced LBSML to buy fraudulent loans, why didn’t they make criminal referrals (something the investment banks did with vanishing rarity)?  Those referrals would have produced intense political pressure to remove the (fictional) government mandate that they buy fraudulent loans.

Third, if the government forced LBSML to buy fraudulent loans, why didn’t they put the loans back to the (twice – in the making and the sale) fraudulent sellers of fraudulent mortgages (which they nearly always had a contractual right to do)?  This would have (a) allowed LBSML to avoid crushing losses, (b) killed the origination of fraudulent mortgages (relieving LBSML of the fictional duty to buy fraudulent loans), and (c) created intense political pressure to end the fictional governmental mandate to LBSML to buy fraudulent loans.

Fourth, if the government forced LBSML to buy fraudulent loans – why did they sell them to others and, to the extent they held the fraudulent loans and CDO tranches in portfolio, why didn’t they disclose the suicidal nature of purchasing such loans to their shareholders and creditors?  Remember, Hummler emphasizes the reality – the originators and purchasers of the fraudulent loans knew that they were fraudulent.  Charles Calomiris, a banker and a vociferous academic opponent of financial regulation, describes what the mortgage participants did as the deliberate creation of “plausible deniability.”

“[A]sset managers were placing someone else’s money at risk, and earning huge salaries, bonuses and management fees for being willing to pretend that these were reasonable investments. [T]hey may have reasoned that other competi[tors] were behaving similarly, and that they would be able to blame the collapse (when it inevitably came) on an unexpected shock.”

“Who knew?”

The (non) fact that the government mandates that you buy fraudulent mortgage loans provides no moral basis for you to sell the fraudulent loans to others, particularly if such sales do not inform your buyer that the loans you are selling are often fraudulent.

Fifth, Calomiris comments on the managers growing wealthy through putting the rot in the financial Wurst should have led Hummler to discuss the ethics of the officers of the elite banks that put the rot in our Wurst.  Assume that LBSML were subject to a fictional government mandate to buy fraudulent loans.  Why would the officers of those corporations be willing to stay and commit frauds sure to harm everyone except themselves and their colleagues?  They and their colleagues were sure to become wealthy by putting the rot in our Wurst, but they had no mandate or duty to stay at LBSML and commit these frauds.  No ethical officer would stay and commit such frauds.  (Again, their mass resignations would have killed the fictional mandate.)

Sixth, Hummler’s metaphor includes two realistic elements of the endemic fraud committed by those who created and sold the fraudulent CDO tranches.  The fraudulent sellers (a) hid from us the endemically fraudulent nature of the loans used to construct the CDO tranches and (b) suborned “independent” “experts” to certify that the CDOs’ top tranche was so free of rot that it represented the epitome of wholesomeness (“AAA” credit ratings and “clean” opinions from Big 4 auditors).  (I would add the purchasers’ cynical use of Clayton’s faux reviews of asset quality to hide the endemic fraud from LBSML’s customers, creditors, and shareholders.)  Hummler is describing sociopaths or psychopaths who think cleverly about how to suborn fraud allies while maintaining the twin illusions of exceptional safety of the mortgage loans “blessed” by “independent expertise.”

Seventh, the nearly universal refusal of the elite managers who chose to stay and become wealthy by selling endemically fraudulent loans and CDO tranches to their customers to admit their wrongdoing, return their bonuses, and agree to be held accountable for their frauds demonstrates their moral failures.

Hummler blames the victims

I explained this point in my column last year.

“I found Hummler’s real views in his Investment Commentary No. 262 (March 16, 2009).  Remember, this is a newsletter Hummler indicates goes out to roughly 100,000 recipients.  Hummler explained that banks made rotten subprime loans when they started to make loans “favoring … particular sections of the populace.”  That, of course, sounded like code.  Hummler explains later in his newsletter who he thinks was being favored – and why.  “It is said that the vast majority of insolvent home-owners belong to ethnic minorities.”  The phrase “it is said” is a sure sign that the author has no reliable information he can cite.  It is no surprise that Hummler’s demons are “ethnic minorities” in the U.S.  Hummler then explains why the U.S. banks suddenly began to make huge numbers of loans to “ethnic minorities.”

“[S]ub-prime mortgages in the USA. Encouraged – indeed, driven – by the politicians, who had championed home ownership with the “Community Reinvestment Act” (1977/1995), the banks offered loans to households that would never have been regarded as creditworthy by normal standards.”

Hummler presents the favorite theoclassical explanation of any malady – misplaced governmental efforts on behalf of ethnic minorities led to unexpected negative consequences.

Hummler then adds a further racial element – President Obama is an ethnic minority.

“It is understandable that the Obama administration is inclined to take an accommodating approach to these home-owners, and that appropriate financial help is on its way.”

“[T]he obfuscatory approach adopted by Obama, with (again) the favoring of particular sections of the populace…”

“The righteous are ‘punished’.”

Because the “vast majority” of the people defaulting on their mortgages are “said to be” “ethnic minorities,” it follows that the people who are not defaulting are white and represent “the righteous.”  It is “understandable” that Obama is inclined to help “these home-owners” – the ethnic minorities by adopting an “obfuscatory approach” designed to “favor[]” … “particular sections of the populace” [ethnic minorities].  I interpret Hummler as arguing that because Obama is black it is “understandable” that he has adopted policies designed to “favor” ethnic minorities and “punish” primarily whites (aka, “the righteous”).

Collectively, Hummler asserts that these U.S. policies that favor ethnic minorities and punish whites constitute a public subsidy that violates sacred property rights.   “In terms of property theory, this constellation represented the provision of a subsidy in the form of free guarantees to a certain section of the populace….”

In fact, the U.S. has not provided “appropriate financial help” to homeowners of any ethnicity under either President Bush or President Obama.”

The reality is that it was overwhelmingly lenders and their agents (typically the loan brokers) who put the lies in liar’s loans and committed appraisal fraud.  The widespread fraud was due to a Gresham’s dynamic.

“Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share…. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete.”  Miller, T. J. (August 14, 2007).  Iowa AG.

“[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.” [Iowa AG]

“Marc S. Savitt, a past president of the National Association of Mortgage Brokers, told the Commission that while most mortgage brokers looked out for borrowers’ best interests and steered them away from risky loans, about 50,000 of the newcomers to the field nationwide were willing to do whatever it took to maximize the number of loans they made. He added that some loan origination firms, such as Ameriquest, were ‘absolutely’ corrupt.” (FCIC 2010: 14).

“More loan sales meant higher profits for everyone in the chain. Business boomed for Christopher Cruise, a Maryland-based corporate educator who trained loan officers for companies that were expanding mortgage originations. He crisscrossed the nation, coaching about 10,000 loan originators a year…. (FCIC 2010: 7).

“His clients included many of the largest lenders—Countrywide, Ameriquest, and Ditech among them. Most of their new hires were young, with no mortgage experience, fresh out of school and with previous jobs ‘flipping burgers,’ he told the FCIC.  Given the right training, however, the best of them could ‘easily’ earn millions.”  (FCIC 2010: 8)

“He taught them the new playbook: ‘You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower or whether the loan performed.’ He added, ‘I knew that the risk was being shunted off. I knew that we could be writing crap. But in the end it was like a game of musical chairs. Volume might go down but we were not going to be hurt.’” (FCIC 2010: 8)

“From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets.”( FCIC: 18)

Note that these facts refute Hummler’s bare assertion that “ethnic” Americans caused the housing crisis.  The reality is that American minorities were disproportionately victims of the lenders’ mortgage frauds.  They were induced, often by inflated appraisals, to purchase homes they believed (due to the appraisals) to have substantial net worths.  The borrowers reasoned that if they could not meet the payments they could always sell the home at a profit.  Nonprime borrowers were often brought into the market at its most inflated peak and saddled with loans with variable payments and interest rates that were likely to increase sharply and cause mass defaults.

The elite banks were all aware of the endemic fraudulent nature of the liar’s loans “backing” (not really) CDOs.  The FBI’s twin warning in 2004 was that there was an “epidemic” of mortgage fraud and the FBI prediction that it would cause a financial “crisis” if it were not stopped.  MARI, the mortgage industry’s own anti-fraud group, sent the following five warnings to all members of the Mortgage Bankers Association (MBA):

  • Stated income loans “are open invitations to fraudsters”
  • Study: fraud incidence in such loans is “90 percent”
  • “[T]he stated income loan deserves the nickname used by many in the industry, the ‘liar’s loan.’”
  • “It appears that many members of the industry have little … appreciation for the havoc created by low-doc/no-doc products that were the rage in the early 1990s. Those loans produced hundreds of millions of dollars in losses….”
  • “Federal regulators of insured financial institutions have expressed safety and soundness concerns over these loans….”

Only a fraudulent lender would make liar’s loans or inflate appraisals.  The CRA has never required a lender to make a fraudulent loan or inflate an appraisal.

In response to these governmental warnings against liar’s loans – the industry massively increased the amount of fraudulent liar’s loans it made and purchased and their use to “back” CDOs.  Between 2003 and 2006, the number of liar’s loans grew by over 500% and the growth continued in 2007 well after the collapse of the housing bubble until the secondary market for endemically fraudulent liar’s loans collapsed.

“Despite the well documented performance struggles of 2006 vintage loans, originators continued to use products with the same characteristics in 2007.”  Iowa AG

Note that the contemporaneous documents from the industry’s own anti-fraud group stresses that “federal regulators” are warning against – not promoting or mandating – liar’s loans.  This makes liar’s loans the perfect “natural experiment” to evaluate rival suggested reasons why lenders made vast quantities of nonprime loans and Wall Street and (eventually) Fannie and Freddie purchased vast amounts of nonprime loans.  The investment banks were not subject to CRA or any affordable housing goals, yet they drove the expansion of nonprime loans (overwhelmingly by lenders who were also not subject to the CRA).  Fannie and Freddie eventually purchased vast amounts of liar’s loans not because of any governmental mandate, but for the same reason the investment banks did so – the accounting control fraud “recipe” is optimized by making and purchasing crappy loans at a premium yield.

“Overall, while the mortgages behind the subprime mortgage–backed securities were often issued to borrowers that could help Fannie and Freddie fulfill their goals, the mortgages behind the Alt-A securities were not” (FCIC 2010: 125).

“Alt-A” loans were almost exclusively liar’s loans by 2006.

“Alt-A mortgages were not generally extended to lower-income borrowers, and the regulations prohibited mortgages to borrowers with unstated income levels—a hallmark of Alt-A loans—from counting toward [Fannie and Freddie’s] affordability goals” (FCIC 2010: 125).

Not only did “the government” never mandate that Fannie and Freddie purchase liar’s loans – the rules generally forbade Fannie and Freddie from counting such loans towards Fannie and Freddie’s affordability goals.  Recall also that liar’s loans involved the endemic, substantial inflating of the borrower’s income by the lender and its agents.  Inflating income would have been a poor strategy for maximizing “affordability” loans (generally loans to borrowers with below median income) even if such loans counted toward Fannie and Freddie’s affordability goals.

It should also be remembered that the Bush administration had the ability to ban liar’s loans at all times pursuant to the Home Ownership and Equity Protection Act of 1994 (HOEPA).  The Federal Reserve had the unique authority to ban liar’s loans by all lenders, including those that were not insured by the FDIC (and not subject to the CRA).  ACORN, the NAACP, and many housing advocates asked Greenspan, and then Bernanke, to use HOEPA to ban liar’s loans.  The Bush administration never did so.  It was only under Congressional pressure – and the death of the secondary market for liar’s loans – that Bernanke finally used HOEPA to ban liar’s loans (citing the MARI warnings) on July 14, 2008.  Even then, Bernanke delayed the effective date of the rule for 15 months.  One would not wish to discomfit any surviving fraudulent lenders.

An update on Hummler and Bank Wegelin

Hummler was remarkably candid in his 2011 Bürgenstock address in stating that the sole reason that Bank Wegelin was growing massively was by helping foreigners evade domestic taxation.  The U.S. and other EU nations were fed up Swiss banks aiding and abetting tax evasion by their nationals.  Hummler presented his foreign customers, and his bank, as brave resistors to the oppression of government taxation.  Indeed, he claimed in one of his newsletters that there was a natural law property right to avoid all taxation of income and wealth because the bank’s foreign clients had been promised by the Swiss that their banks would help the foreign clients evade taxes with impunity.

“[F]oreign clients have so far enjoyed the benefit offered by Switzerland of noncriminalization for simple tax evasion. In terms of property theory, this is a “property right” that had previously been assured; should one wish (or be obliged) to modify it, this amounts to expropriation in the sensitive area of personal integrity.”


The Wall Street Journal had an article explaining how the U.S. government responded to Hummler’s claim that Swiss banks had a legal duty to aid and abet U.S. citizens’ tax evasion.

“Speaking in Swiss-German, Hummler announced the bank had sold most of its assets to another Swiss bank. According to a person familiar with the matter, Hummler called it a last-ditch effort to preserve employees’ jobs amid withdrawals of assets by investors who were increasingly worried about a growing problem: a U.S. federal investigation into Wegelin’s sale of tax-evasion services to wealthy Americans. The dark-suited bankers and conservatively dressed office clerks, said the person, were in shock and tears.

The news for Wegelin, its headquarters nestled in the town of St. Gallen next to the Appenzell Alps near the German-Austrian borders, would only get worse. Six days later the U.S. Justice Department, acting on plans it had been making for weeks, indicted the 270-year-old bank on charges of enabling wealthy Americans to evade taxes on at least $1.2 billion from 2002 through last year. U.S. criminal laws apply to foreign banks that do business in the United States, even if the banks, like Wegelin, have no U.S. branches. The charges made Wegelin the first overseas bank in history to be indicted by U.S. authorities and marked a milestone in a burgeoning American crackdown on Swiss bank secrecy and efforts to force banks to turn over client names. The sale and the subsequent indictment effectively brought an end to the storied bank.

Under Hummler’s oversight, which began after he joined Wegelin in 1991, the bank grew rapidly, managing some $1.2 billion in undeclared U.S. assets as of 2010 from only $240 million in 2005.

Soon after the UBS investigation hit Switzerland, Wegelin told its U.S. clients to sell all their U.S. assets held through the bank. But it also took at least $1.2 billion from Americans who were fleeing the U.S. crackdown on U.S. tax evaders at UBS over 2008 and 2009, according to the indictment. Wegelin’s spokesman declined when asked for comment on this charge.

One of Hummler’s friends said he was confused by this.

“What I do not understand is that Wegelin approached all its customers, in 2009, to sell all U.S. and U.S.-related assets – at the same time the bank was about to acquire U.S. customers from UBS,” said the friend Heinz Zimmermann, a finance professor at the University of Basel.

Wegelin was “undeterred by the crystal-clear warning they got when they learned that UBS was under investigation for the identical practices,” the indictment said.”

The Swiss are the primary beneficiaries of the rise of the One Percent

I spent much of Saturday in the Appenzell Alps.  They are beautiful.  It was the day that they bring the cows down from higher elevations because of the risk of cold weather and snow.  The people moving the cows dress up in traditional costumes (the men wear an earring in one ear).  One of the groups of men yodeled.  It is a magical region.  It is also an exceptionally conservative region, including one area that was the last to bar Swiss women from voting (a bar overturned by the courts, not the people of the region).  Hummler remains a hero to much of this region.  He also remains a hero to many of the people, particularly the Swiss, who attend the Bürgenstock meeting.  This includes many thoughtful Swiss who trade derivatives.  The U.S. is the hypocritical villain in their eyes, and U.S. financial regulation of derivatives and criminal prosecutions are our great sins.

It was only in the course of this trip that I began to understand that the Swiss have been the greatest beneficiaries of the rise of plutocracy in the U.S. and other portions of the world.  The justly infamous Citicorp memoranda celebrating the rise of “plutonomy” shows that the “1%” have three economic goals.  They wish to use their political power and legal and accounting experts to minimize the taxes they pay and they want to accumulate more toys and playgrounds – particularly ultra-expensive luxury goods that demonstrate that they hold the most elite status.  Switzerland provides tax evasion to the American “one-percent,” but as least as valuable is the Swiss practice of pandering to plutocrats by praising their crimes as acts of brave rebellion against a tyrannical state.  Switzerland also makes a significant portion of the plutocrats’ favorite playthings.  The ultra-expensive Swiss watch is simply the most famous example.  Switzerland is a nation of stunning beauty famous for its ability to draw the foreign “one percent” by catering as a playground to the plutocrats.  Swiss elites have a symbiotic relationship with foreign plutocrats, many of whom grew wealthy by helping to cause the financial crisis.

The prevailing position of Swiss members of the derivatives industry was that self-regulation worked well in Switzerland.  The Swiss senior financial regulator who spoke to the Bürgenstock meeting announced that Swiss financial regulation would only occur if it met four tests:

  • It showed net benefits through a benefit/cost test
  • A thorough review was conducted of the “necessity” for regulation and its impact
  • The rule would be “neutral” in terms of competition (i.e., not hurt or aid any firm more than any other competitor)
  • The rule “improved the attractiveness of location” (i.e., Switzerland would only adopt rules that helped it “win” the competition in financial regulatory laxity)

To sum it up, the Swiss senior financial regulator announced that his foundational principle was winning the regulatory race to the bottom.  He wasn’t there to hear my opening keynote so he did not respond to my arguments against engaging in such a race.  However, it is clear that the Swiss remain convinced (a) that their disdain for U.S. financial regulation and income taxation is appropriate and even brave and principled and (b), that U.S. financial regulation is hypocritical and harmful.  It was also abundantly clear that it was inconceivable to the senior Swiss regulator that his prime function was to serve as a regulatory “cop on the beat” and prevent accounting control fraud (much less tax evasion).

Switzerland’s giant banks, UBS and Credit Suisse, have been in repeated scandals and both would have failed but for (indirect) support from the U.S. Federal Reserve, but the dominant Swiss view is that they escaped the Great Recession so repeated bank fraud by the most elite Swiss banks “macht nichts.”  Senior Swiss regulators see their principal task as protecting elite Swiss banks’ aiding and abetting of foreign tax evasion from being subject to effective regulatory or prosecutorial counter-measures.

Swiss industry members went from discussions about how evil Greece was for not successfully preventing massive tax evasion by its elites to discussions about how evil it was for other nations to try to prevent Swiss banks from aiding and abetting tax evasion by elites.  They saw no contradiction in the two positions, taken an hour apart.

I stress that this is the position of the thoughtful Swiss not simply that of their extreme right wing whose primary issue is the influx of non-Swiss, particularly Muslims.  Hummler’s barely veiled effort to blame American blacks for the crisis is one that is shared by many Germans prominent in business and finance.  The WSJ article on Hummler and Wegelin contains a coded variant on this theme.

“In recent years, under Hummler, Wegelin refashioned a retail space below its headquarters into a bar it christened Nonolet (from the Latin phrase “pecunia non olet” or “money does not reek”). The purpose, Christian Raubach, a Wegelin partner, told Reuters in 2009, was to ensure a glossy crowd below the wood-paneled offices of the private bank, whose logo of a “W” between two griffins declares in German “Private Bankers since 1741.” “You cannot have a strange business there like a kebab shop” or patrons “vomiting” after a night drinking beer, Raubach said.”

A “kebab shop” is such a “strange business” that Wegelin’s bankers “cannot have” it near them.  Muslims run kebab shops.  The Swiss, German, Dutch, and Austrian versions of the U.S. tea party are very large, have many elite adherents from the financial sector, and frequently display their impassioned prejudices.  They want stringent governmental regulation of some aspects of life, e.g., deporting foreigners and restricting Muslim dress, but they are often strong opponents of vigorous financial regulation and bear deep resentments against the U.S.

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

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