Tag Archives: William K. Black

Addressing the Dominant Critique of MMT

By William K. Black

I’ll begin by addressing today the dominant concern critics have expressed here — the government might act badly with the funds. This is, of course, a real concern. But it is some ways a very odd concern and not a logical objection to MMT. The extreme variant of this critique argues that MMT is “fascist.”

The good news from the standpoint of MMT is that this critique agrees that MMT is accurate and makes available policy choices that are effective in increasing income and employment — and claims that MMT’s effectiveness is the problem because the government leaders might use the increased income and wealth for evil purposes.

If that is a valid criticism of an economic theory (it works — it increases income, wealth, and employment) then virtually any accurate economic theory that improves the economy is “fascist” because the government might be ruled by a fascist and the ruler might use the increased wealth and income to do evil. No one (economist or otherwise) can ever guarantee that a government ruler will not be evil and use the increased national wealth to do evil. Under this logic all effective economic theories are fascist and we should try to make the world as poor as possible so that fascistic governmental leaders have fewer resources with which to do evil.

It is also an odd criticism because it suggests that we should try to hide knowledge about MMT from governments because they might use the knowledge to improve their economies. Trying to hide knowledge about how a monetary system works is a fruitless task. There are tens of thousands of people who understand much of the mechanics of fiat currency systems. Even if we could wipe out the knowledge people would relearn it because their jobs required them to understand monetary operations.

Consider the statements by the UK leadership that the UK has “run out of money.” Does anyone think that the UK financial leaders believe that statement? If Germany declared war on the UK tomorrow would the UK surrender because it had “run out of money” and could not “afford” to increase expenditures to defend the nation? The point is that nations, when faced with the need to make enormous, emergency expenditures, rediscover through necessity the knowledge of how monetary operations actually work even if they previously were captured by economic dogmas that asserted the opposit. That means that a national leader who is determined to be a fascist, imperialist will discover in the course of creating a dramatic growth in its military that it can fund the growth if it has a sovereign, floating currency and if the nation’s debt is denominated in its own currency. (MMT explains that real resources can be scarce, and that can limit the military build up.) So, even if every academic conversant with MMT traveled on the same plane and died in a crash fascist government leaders engaged in an arms race in preparation of invading their neighbors would discover that resources, not funds, were the real restraint on the military growth if they had fully sovereign currencies.

The “fascism” critique expressed on this page does not address two other important points. There are staggering costs to refusing to use MMT to respond to a severe recession. Unemplotyment, poverty, and inequality all rise sharply. Very few democratic governments warrant the term “fascist.” We cannot stop fascist governments from increasing their national wealth by using MMT principles. We should encourage powerful, democratic governments to use MMT principles to recover from severe recessions, which will help them avoid the social disintegration most likely to lead to the rise of fascist leaders. It is theoclassical dogma that is producing the economic crises throughout the periphery that have led to the rise of anti-democratic leaders and policies in much of Europe. Fundamentally, the commenters who raise the “fascist” criticism of MMT do not trust democracy. We would urge against hopelessness. Governments typically use budget expenditures in severe recessions for generally desirable purposes. Instead of embracing over 20% unemployment (roughly 50% for young adults — this is what austerity is doing to the European periphery) as a means to starve potential fascist leaders of the funds to do evil we urge that people work to defeat fascist candidates.

The Italians who joined us for the MMT Summit in Rimini were strong opponents of the fascists. They were regular Italians and their response was overwhelming. Paolo Barnard, the Italian journalist who orgainized the Summit and we, the non-Italian panelists, are all strong opponents of fascism.

The same was true in Ireland, Iceland, and France when we discussed MMT in those nations. The response is so positive because we show that “TINA” is a lie — there are alternatives. We hope Naked Capitalism readers will work with us to implement programs that provide jobs and fund the investments in people, technology, government, and infrastructure that will make possible growth and reduced harm to the environment.

As citizens in a (yes, flawed) democracy, we are not helpless. Our job as citizens is to make our government more democratic and effective and a bulwark against fascism.

Thousands Turn Out to Learn MMT in Italy

The Amazing Vanishing Act: Accounting Control Fraud Disappears from the Regulatory Lexicon


Criminologists know that accounting control fraud causes greater financial losses than all other forms of property crime – combined.  Some of the world’s best economists, George Akerlof and Paul Romer, praised the S&L regulators’ early recognition of these frauds and set out a formal economic theory of accounting control fraud (“Looting: the Economic Underworld of Bankruptcy for Profit”).  They ended their 1993 article with this paragraph, in order to emphasize its importance.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself.”

The primary reasons that accounting control fraud can produce catastrophic losses are the seeming legitimacy of the firm, the supreme status and respectability of the CEO leading the fraud, the fact that accounting control fraud is a “sure thing” (Akerlof & Romer 1993), the ability of control fraud to hyper-inflate bubbles, allowing the fraud to persist for years and magnify losses, and the paradox that the optimal means for a fraudulent CEO to loot “his” bank is to cause the bank to make exceptionally bad loans. 

The last element is so counter-intuitive that despite the accounting control frauds’ dominant role in driving the S&L debacle and the Enron-era accounting control frauds many people cannot really believe that elite CEOs would loot “their” banks despite the many felony convictions of the elite CEOs that drove the two predecessor crises.  

“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.”

Wagner is so befuddled that he thinks that he cannot keep his pronouns straight in the same sentence.  “They” is the fraudulent CEO.  The fraudulent CEO loots “his” bank.  The bank is “themselves” in Wagner’s bewildered sentence.  The CEO is not looting himself when he loots the bank.  Wagner is so confused that he assumes away the existence of insider fraud.  Sacramento is one of the epicenters of mortgage fraud by some of the largest accounting control frauds, and it is no surprise that they have been able to commit their frauds with impunity.

The national commission that investigated the causes of the S&L debacle found:

“The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures…. [E]very accounting trick available was used…. Evidence of fraud was invariably present as was the ability of the operators to “milk” the organization” (NCFIRRE 1993).

The fraud “recipe” for a lender engaged in accounting control fraud has four ingredients:
  1. Grow like crazy by
  2. Making bad loans at a premium yield while
  3. Employing extreme leverage, and
  4. Providing grossly inadequate allowances for loan and lease losses (ALLL)
Understanding the second element is essential to effective financial regulation and prosecution.  Requiring sound underwriting is the best, no cost means of preventing the worst bank frauds.   Making enormous numbers of bad loans requires fraudulent banks to suborn internal controls and underwriting.  The bank operates in a manner that makes no sense for an honest lender.  (See my earlier writings on “adverse selection” and the resultant “negative expected value.”)  Understanding why the recipe is a “sure thing” (the bank will report superb, albeit fictional, income and the controlling officers will, promptly, be made wealthy) is essential to effective regulation because the regulator must treat the fiction as real.  

If there was one agency that should have understood the fraud recipe, it was the Office of Thrift Supervision (OTS).  The Federal Home Loan Bank Board (OTS’ predecessor) first identified it, wrote about it, trained its staff, trained the FBI and the Justice Department, and used our understanding of the recipe to identify, close, sue, sanction, and convict the frauds. 
By August 1983, the Bank Board had detailed written examination manuals that explained much of the accounting control fraud dynamic.

Regulatory Concerns
In summary, incentives to report higher earnings, the nature of assumptions used in certain transactions, like securitizations, and improper reporting in general may affect reported earnings.  Examiners should be alert to the regulatory concerns cited throughout this section, and to the following additional regulatory concerns as well:

• Management may use gains to further leverage the balance sheet. You should consider the quality of capital supporting asset growth to the extent that management based gains on optimistic assumptions or that the value of the retained interest is highly sensitive to accelerating prepayments or declining asset quality.

• Management compensation or dividend payouts may be excessive, and dependent on earnings.  Associations often tie compensation and dividends to reported profits. To the extent that reported profits are overstated, these payouts can dissipate assets and capital.

• Management may ignore credit quality. The incentive for profits can override attention to quality of earnings. The potentially significant profit that management can generate by gain-on sale accounting creates a strong incentive to produce originations, often with little attention to credit quality.


Remember, this was written nearly 30 years ago.  We have known for a very long time that modern executive compensation plus deregulation created an intensely criminogenic environment that could lead bank CEOs leading accounting control frauds to make epic amounts of bad loans in order to optimize fictional reported income and the CEO’s compensation. 

Unfortunately, OTS retreated to the dark ages as it came under the sway of anti-regulators influenced by theoclassical economists who were ignorant of the criminology, regulatory, and economics literature about control fraud.  These economists were unaware of how central underwriting is to lenders’ success.

Clinton administration economists “knew” that a lender would never deliberately make a bad loan.  They knew that accounting control fraud did not exist – even though it had so recently devastated the S&L industry.  The June 20, 2000 HUD/Treasury report on lending abuses made explicit this claim, which ignored Akerlof & Romer, criminologists, and OTS’s (a bureau of Treasury) contrary findings,.

“In most respects, lending in the subprime mortgage market follows the same principles as lending in other markets.  Basic economic theory, not to mention common sense, tells us that a lender will only lend money to a borrower if the lender expects to be repaid. That repayment has two components: the return of the original amount lent (the principal), and compensation for the opportunity cost of lending the money and for taking the risk that the loan is not repaid as promised (the interest rate charged).  While a lender will not make a loan unless he or she expects to be repaid, clearly not all borrowers present a lender with the same risk of default.”

On January 17, 1996, OTS’ Notice of Proposed Rulemaking proposed to eliminate its rule requiring effective underwriting on the grounds that such rules were peripheral to bank safety.

“The OTS believes that regulations should be reserved for core safety and soundness requirements.  Details on prudent operating practices should be relegated to guidance.
Otherwise, regulated entities can find themselves unable to respond to market innovations because they are trapped in a rigid regulatory framework developed in accordance with conditions prevailing at an earlier time.”

This passage is delusional.  Underwriting is the core function of a mortgage lender.  Not underwriting mortgage loans is not an “innovation” – it is a “marker” of accounting control fraud.  The OTS press release dismissed the agency’s most important and useful rule as an archaic relic of a failed philosophy.

“By getting away from ‘cookie cutter’ and ‘one size fits all’ regulations, we’re giving thrifts more flexibility to tailor their operations to better meet the needs of their customers,” said John Downey, executive director, Supervision. “Enhancing flexibility and reducing paperwork will hopefully make the lending process easier for both savings institutions and their customers,” he noted.

“We believe we can simplify our rules and give thrift management more flexibility without jeopardizing the safety and soundness of thrifts’ lending and investing operations,” said Carolyn Buck, OTS chief counsel. “We are eliminating numerous picky details from the regulations, while leaving fundamental safety and soundness constraints in place,” she said.

The OTS underwriting rules imposed the minimum, not the optimal, underwriting processes that a prudent lender would follow.  It imposed no costs on honest lenders.  Any prudent lender should have done considerably more than was required under the rules. 

OTS was not unique.  The Clinton administration was in thrall to the “Reinventing Government” movement, which asserted that government was largely a failure and needed to be radically altered to embrace purportedly superior private sector practices.  Vice President Gore’s passion was pushing the reinvention of government.  (Then Texas Governor Bush was shared Gore’s passion.)  The scholars pushing reinvention claimed that their approach would invigorate regulation.  Their assumption was that CEOs were good people who wanted to do the right thing but were driven to despair and rebellion against bureaucratic restrictions that prevented them from doing the right thing and demonized them as bad guys.  The scholars wanted dramatically reduced regulation, regulations devised with the active participation of industry partners, greatly increased privatization, far less enforcement and fewer sanctions (which were said to only build a climate of business resistance), and a service mentality for the regulators (we were ordered to refer to the S&L as our “clients” and directed to always think of them as clients).   

The Clinton administration thought so little of the OTS that he left an economist in charge of it on an “acting” basis for many years.  The economist was not evil, but he inherited an industry that had been scoured of its control frauds and an economy that had swung into recession.  The Clinton administration wanted vastly less regulation of lenders and OTS Acting Director Fiechter was happy to deliver an anti-regulatory policy that he substantively supported.

“In summary, after the lifting of statutory requirements for mortgage loans in 1982, regulatory requirements were lifted as well.  The federal regulators relied on bank management to ensure sound operations, and on consumers to protect themselves against abusive loan practices [p. 161].

Regulators expected that market-­based decisions would lead to innovative loan products, which would maximize availability of credit and which practices.  Lender self-­interest, bounded by the legal mandate of “safety and soundness,” was relied upon to ensure safe offerings.  Consumer self-­interest was also relied upon to weed out unsafe products and practices [p. 163, footnotes omitted].”  

Di Lorenzo, Vincent, “Unsafe Loans in a Deregulated U.S. Mortgage Market” (2009). Pace Law Review. Paper 633.

Di Lorenzo misses the period in which OTS and its predecessor agency the Federal Home Loan Bank Board, rejection of this theoclassical dogma allowed us to prevent the debacle from becoming a national financial crisis and allowed us to prosecute the elite frauds.  He is, however, certainly correct about the overall triumph of theoclassical dogma (and the Reinventing Government movement, which he does not discuss). 

The single most destructive deregulatory act, ironically, was contemporaneous with Akerlof and Romer’s hopeful conclusion in 1993:  “now we know better” – and can use that knowledge to prevent future crises.  The 1993 deregulation was “bound to produce looting,” which demonstrated that economists never “knew better” and our successors as regulatory leaders no longer “knew better.”  In 1993, the federal financial regulatory agencies adopted an interagency rule junking their loan underwriting rules and substituting deliberately unenforceable guidelines.  This is the rule change that allowed fraudulent liar’s loans.  It was adopted only two years after we (OTS West Region) forced the end of S&Ls making liar’s loans.  I do not want to overstate the impact of the rule change.  Liar’s loans were overwhelmingly made by uninsured lenders.  OTS, however, was supposed to regulate several of the largest originators of liar’s loans – Countrywide, WaMu, and IndyMac.  The Federal Reserve’s anti-regulatory dogma was far more destructive because only the Fed had statutory authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to stop all lenders from making liar’s loans.

OTS was the last of the federal regulators to fully drink the anti-regulatory Kool-aid in October 2006.  It junked its underwriting rules, claiming that it was doing so to comply with the Reinventing Government initiatives and laws.  OTS explained how its policy process relied on input that came exclusively from the industry, without even feeling the need to defend it.

“OTS also sought industry input regarding staff’s initial recommendations through an industry focus group meeting among seven thrift representatives, an industry trade association and OTS staff.”

When the S&Ls, rather than the people, are your “client”, it makes sense to meet only with the industry so that one can fulfill their desires. 

“OTS’s objective in removing the detail from some regulations and relying on a more general set of regulations and safety and soundness standards is to allow institutions greater flexibility in their lending and investment operations.” 

Banks gain exceptional “flexibility” when a regulator junks enforceable rules and replaces them with unenforceable guidelines. The industry, however, had a practical concern. OTS still had many examiners who knew that the guidelines were “bound to produce looting.” The danger was that the examiners would try to make the guidelines effective. The OTS, therefore, assured the industry that it would make sure it would not allow such an act. 

“OTS is also sensitive to commenters’ concerns regarding the potential for examiners to treat guidelines as binding regulations. OTS will emphasize the proper interpretation of supervisory guidance in its examiner training programs to ensure that guidance is not treated in the same manner as binding regulations.” 

The industry demanded even greater protection from regulation, raising the fear that the states might fill the regulatory gap left by the OTS and regulate federally chartered S&Ls. The OTS was happy to allay that fear, by making explicit its intent to preempt any protective state rule: “the agency still intends to occupy the entire field of lending regulation for federal savings associations.”

As late as 2004, the OTS examination guide provided this warning and mandate about inadequate records. Of course, the agency’s leadership no longer supported the guidance. Given what we know about the endemic nature of record deficiencies in the loan origination and foreclosure contexts, consider how harmful anti-regulatory leaders are.

 
Incomplete or Inaccurate Records
Regions should immediately take enforcement action if an association’s books and records are incomplete to make an examination impossible or if they do not provide complete and accurate details on all business transactions. The caseload manager (or equivalent) should promptly meet with the association’s board of directors, discuss the problem, and require prompt corrective action. If the association does not correct the deficiency, the caseload manager should refer the matter to OTS’s Regional Counsel for initiation of cease-and-desist proceedings.

You should be particularly alert to violations of Part 562 and § 563.170(c), as the presence of incomplete and inaccurate records historically is evidence of severely deficient operating standards and a resultant deteriorating financial condition. 
 

The federal banking agencies’ anti-regulatory leaders and economists drummed into their staff the fictional claim that “basic economic theory” and “common sense” proved that the CEO would never lead an accounting control fraud. The regulatory agencies, therefore, made zero criminal referrals against the massive frauds that specialized in making liar’s loans – loans that the lenders’ CEOs did not expect to be repaid. We are left with the myth of the Virgin Crisis, conceived without sin.


Bill Black is the author of The Best Way to Rob a Bank is to Own One (now translated into French as Une fraude presque parfaite : Le pillage des caisses d’épargne américaines par leurs dirigeants with a new preface from the French Jurist Jean de Maillard and a new chapter on the ongoing financial crisis. Paris, France: Charles Léopold Mayer. (January 2012)). Bill 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 New Economic Perspectives.


Follow him on Twitter: @WilliamKBlack

Confederacy-lite: The Oklahoma’s AG’s Civil War against the United States of America

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

The fact that only 49 State Attorneys General (“AG”) entered into the mortgage fraud foreclosure fraud settlement focused attention briefly on Oklahoma’s AG, E. Scott Pruitt. The Oklahoma Republican Party bills Oklahoma as the reddest state, and Pruitt is beet red. He refused to enter into the settlement not because it was too weak, but because it provided any reduction in the principal amount of the debt of distressed Oklahoma homeowners.

The distinguishing characteristic about Pruitt is that he was elected on the promise to launch a litigation war against the federal government, particularly federal regulation. Pruitt and his counterparts in Virginia (Ken Cuccinelli) and Florida (Pam Bondi) claim that their principal function is protecting their citizens from the depredations of – the United States of America. Pruitt, ala South Carolina in 1860, expressly politicized the cause as opposition to the elected President of the United States. He asserts that regulation is inherently illegitimate because it is done by “unelected bureaucrats.” (So is policing and firefighting and service in the military.)

“Oklahomans deserve an Attorney General who will stand up to the Obama Administration that seeks greater and greater control your life. Oklahomans deserve and Attorney General who will stand unapologetically for the truths of the Constitution.

Liberty:

I will serve as Attorney General of the State of Oklahoma for one fundamental reason — to advance your freedom.

Washington DC tells us that we possess freedom, yet the federal government defines the extent of that freedom through the regulations of unelected bureaucrats.”
http://www.scottpruitt.com/Issues.html

“What is your reason for running?

“I truly believe this election is unlike any other election that any of us have ever experienced. Right now, all across Oklahoma, our families and businesses are besieged by a Congress, an Administration and its federal agencies that are hostile to our most cherished values and ideals. Furthermore, I believe that what is at stake in this election is whether we are going to live consistent with what our Constitution stands for – whether we will live with the freedoms for which we were intended. I am seeking to serve as Attorney General of the State of Oklahoma to advance your freedom….”
http://www.news9.com/story/13167845/2010-elections-scott-pruitt?redirected=true

It is no coincidence that the three AGs represent states (a territory in the case of Oklahoma) that supported the Confederacy and use phrases and arguments made famous by secessionists. They represent the resurgence of the old, sad embrace of the great lie. The United State of America, the greatest democracy in world history, is supposedly the great evil threatening Virginia, Florida, and Oklahoma. The Confederacy viewed the great evil as the threat to the “state right” to “our way of life” – enslaving black slaves. One hundred and fifty years ago the worst disaster in U.S. history was brought on by proponents of this monstrous system. It took 150 years of massive bailouts from the Northern and Western states to the states and territories that supported the Confederacy to make it possible for them to overcome the damage their racism did to their economies.

The new Confederacy-lite has no “noble cause” akin to slavery, but the cry is still the need to preserve “our way of life.” Pruitt, during his election campaign, highlighted what he described as the epitome of federal tyranny destroying the freedom of Oklahomans. Listen to the full horror of the federal regulatory assault on the cherished “way of life” of Oklahomans.

(Aug 27 [2010]) Republican candidate for attorney general, Scott Pruitt, said today the recent petition filed by the Center for Biological Diversity and several other groups with the US Environmental Protection Agency (EPA) to ban lead in ammunition and fishing tackle is a direct assault on the freedoms guaranteed Oklahomans under the Second Amendment.

While visiting the Lawton area today, Pruitt said, “The attempts to ban lead in ammunition and fishing tackle is a back-door attack on basic freedoms we enjoy as Oklahomans and our way of life. Should the Environmental Protection Agency pursue this ban, as attorney general, I will do all I can to stop Washington bureaucrats like the EPA.”

Lead is highly toxic, so removing lead from ammunition would be exceptionally good for waterfowl (who feed in a way that can fatally concentrate lead pellets) and for hunters who eat waterfowl. Non-toxic ammunition is now readily available. I do not know why Pruitt thinks that preventing the poisoning of waterfowl “is a[n] attack on basic freedoms” and Oklahomans’ “way of life.” The Oklahoma “way of life” is to shoot waterfowl and eat them. You cannot shoot or eat waterfowl that die from poisoning themselves by ingesting lead shot in a marsh along the migratory flyway six hundred miles north of Oklahoma. Waterfowl are big believers in interstate commerce.

We adopted the U.S. constitution in great part because under the Articles of Confederation the States interfered with interstate commerce in ways that harmed the national interest and because the States could not protect their citizens’ interests when protecting those interests depended on actions taken in other states. [EPA denied the petitions asking it to regulate lead ammunition and sinkers.]

It isn’t fair, of course, to characterize Pruitt’s passion to defend the right to poison ducks as typical of his basis for making his assault on federal regulation his office’s top priority. Pruitt wants to sue to stop most federal regulations that protect Americans. Oklahoma is a huge energy producer, so Pruitt’s real hate is any rule that restricts pollution or increases energy efficiency. Under Pruitt’s ideology, it is tyrannical for the EPA to protect Americans from pollution or for Congress to require NHTSA to adopt rules requiring that vehicle manufacturers improve the fuel efficiency. Providing health care to Oklahomans who cannot afford health care is tyrannical.

“Limited Government:
ObamaCare:

The passage of President Obama’s healthcare legislation in Washington fundamentally alters the relationship of citizen to government in America. Rather than government serving the citizen, it seeks to become master, controlling, dictating and utilizing power it does not possess.

Our founding documents are legal documents, not suggestions. They exist to control the impulses of men, and counteract the temptation toward tyranny; where elected individuals think they know better than the people they serve, that they are somehow more enlightened. The Founders defeated a monarchy that believed such things. We must in our generation now do the same.

I will, on behalf of Oklahomans, initiate a constitutional challenge to the legislation in its entirety, with a goal of rendering the legislation null and void in the State of Oklahoma.”
http://www.scottpruitt.com/Issues.html

Pruitt has a self-inflicted problem with candor when it comes to his openly partisan attack on what he repeatedly labeled “Obamacare.” He now repeatedly denies that he has made such references.

“Pruitt, who was elected attorney general last year, said his office has filed two lawsuits against the federal government’s Affordable Care Act, also known as Obamacare. However, Pruitt said he does not refer to the controversial health care legislation as Obamacare because the issue is not about politics for him.”
http://www.piedmonttoday.com/city/attorney-general-discusses-federalism-in-visit-to-piedmont/

Pruitt gently chided those who refer to the law as “Obamacare,” saying, “You will never hear me say ‘Obamacare.’ This is too important of an issue to make it partisan. It’s not about health care. It’s about the Constitution.”
http://www.tulsaworld.com/site/printerfriendlystory.aspx?articleid=20110615_16_A18_CUTLIN370896

In the face of budget cuts that have greatly reduced the already grossly inadequate ability of State AGs to protect their citizens from elite white-collar criminals, Pruitt redirected the scarce resources of his office away from protecting the citizens from the elite criminals.

“As part of keeping one of my primary commitments during the campaign, I formed a special federalism unit dedicated to the purity of constitutional balance of power, enforcing the plain meaning of the founders’ directive that the federal government be one of specific and enumerated powers, and conversely preserving to Oklahoma and its citizens reserved powers, all with an aim of preserving individual liberty. The Office of Federalism is under the direction and leadership of my Solicitor General, who constantly monitors the actions of the federal government and works as my top appellant litigator.”
http://scottpruitt.com/

“Office of Federalism

Inside the Office of Federalism I will assign attorneys in the A.G.’s office whose primary responsibility is to determine how the office can and should push back against Washington. Whether it’s related to property rights, the right to keep and bear arms, the right to educate our children, or related to the first amendment, the attorney general must have resources and leaders internal to the office fighting those battles every day.

In addition to bringing suit against the Obama Administration’s newly passed health care mandates, the new Office of Federalism will defend Oklahomans against agencies such as the Environmental Protection Agency when its regulations seek to establish climate and energy policy absent congressional action, and the Nat’l Highway Traffic & Safety Administration in setting new fuel-economy standards.”
http://www.scottpruitt.com/Issues.html

The federal government is a massive enterprise, yet Pruitt has prioritized his inadequate resources to “constantly monitor[] the actions of the federal government” in an effort to achieve “purity” of the constitutional balance of power. His office brings suits designed to allow elites to become even wealthier by maiming or killing others through their pollution.

“This week, we also saw the EPA delay the announcement of draconian ozone standards they seek to put in place to advance a leftist-environmental agenda until after the November elections. This is the politics of Washington bureaucrats trying to hide their intentions from the people of Oklahoma, and it’s got to be stopped.”Pruitt said as attorney general one of the first initiatives of his administration will be to prioritize resources in the AG’s office, and dedicate a team to defend against abuses of power by the federal government that impact Oklahomans, “I will assign attorneys in the AG’s office whose primary responsibility is to determine how the office can and should push back against Washington. Whether its related to property rights, the right to keep and bear arms, the right to educate our children, or related to the first amendment, the attorney general must have resources and leaders internal to the office fighting those battles every day,” said Pruitt.
http://www.facebook.com/note.php?note_id=155526974461029

“I will be a new type of Attorney General. I will be an activist Attorney General, but from the conservative side of the political spectrum. I will shift existing resources to create an ‘Office of Federalism’ whose task it will be to keep the federal government from unduly burdening Oklahomans and Oklahoma businesses.”
http://www.bipac.net/page.asp?g=oklahoma&content=Attorney_General&parent=OKLAHOMA

In his election campaign, Pruitt used “battle” metaphors to describe his “activist” role and that of his new federalism office.

Issue Position: Office of Federalism

“I will establish an Office of Federalism with the Attorney General’s office. I will assign attorneys in the A.G.’s office whose primary responsibility is to determine how the office can and should push back against Washington. Whether its [sic] related to property rights, the right to keep and bear arms, the right to educate our children, or related to the first amendment, the attorney general must have resources and leaders internal to the office fighting those battles every day.”
http://www.votesmart.org/public-statement/537842/issue-position-office-of-federalism

Pruitt campaigned on the basis that he would protect the freedom to exercise one’s religion in the public space. In office, he has made clear that there is only one exception to that rule – Muslims are not welcome to seek to exercise their religion in the public sphere. Pruitt has continued to defend the constitutionality of an Oklahoma law that blatantly singles out Muslim religious tenets for discrimination in a manner that is inescapably unconstitutional under the U.S. and Oklahoma constitutions.

Pruitt’s twin objections to the national foreclosure fraud settlement with five massive financial institutions were that it sought reforms to their foreclosure practices to prevent the resumption of the endemic fraud and modestly reduced the principal on some underwater loans to borrowers. He is the perfect embodiment of Confederacy-lite – he runs his office to protect his elite contributors at the expense of Oklahomans.

Of course, he claims that he is doing the opposite – protecting little banks by going after the largest banks that the Obama administration refuses to go after. Indeed, he asserts that the federal government intentionally destroys small banks through regulation in order to ensure systemically dangerous institutions’ (SDIs) dominance.

“Sixty-eight percent of all money in this country is deposited into seven banks,” Pruitt said. “The regulatory environment is strangling the life out of community banks and I will tell you it’s intentional because the (federal government) can better manage an economy when you have all your money in just seven banks.”
http://www.piedmonttoday.com/city/attorney-general-discusses-federalism-in-visit-to-piedmont/

When push came to shove, Pruitt sought to weaken the reforms that the Obama administration (reluctantly) imposed on the gigantic and fraudulent financial institutions. He worked against the interests of small, honest banks. Pruitt stresses that he will sue to force federal government “accountability”but he gives the big banks a pass from criminal liability or even serious civil liability.

“Pruitt has announced that he intends to establish an office to deal with federalism in the attorney general’s office with the intention of protecting Oklahoma’s rights against federal encroachment. The office would also deal with issues such as federal regulation of health care, financial business and immigration.

“I will look at options to make sure we take whatever steps necessary to hold the federal government accountable,” he said.

Pruitt previously announced that he plans on reviewing and taking some sort of action to hold the federal government responsible for securing the border. He said several states have considered such action as an alternative to enacting immigration laws such as those recently passed in Arizona.”
http://www.icapitol.net/ivote02.oki?cnd=0W50JK8FI&pgno=2&order=3&ascend=ASC

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

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

Anti-employee Control Fraud

By William K. Black

Apple has released a report on working conditions inits suppliers’ factories.  It highlightsa form of control fraud that criminology has identified but rarelydiscussed.  I write overwhelmingly aboutaccounting control fraud because it drives our recurrent, intensifyingfinancial crises.  The primary intendedvictims of accounting control frauds are the shareholders and thecreditors.  Other private sector controlfrauds target customers (e.g., George Akerlof’s 1970 article on “lemons”), andthe public (e.g., the unlawful disposal of toxic waste, illegal logging, andtax fraud). 

Anti-employee control frauds most commonly fall infour broad, but not mutually exclusive, categories – illegal work conditionsdue to violation of safety rules, violation of child labor laws, failure to payemployees’ wages and benefits, and frauds based on goods and loans provided bythe employer to the employee that lock the employee into quasi-slavery.  Apple has just released a report on itssuppliers that shows that anti-employeecontrol fraud is the norm.  Remember,fraud is hidden and is often not discovered and Apple did not have an incentiveto make an exhaustive investigation. Apple calls its inquiries “audits” and it is apparent that most of itsinformation comes from reviewing written and electronic records at itssuppliers.  That is exceptionallyrevealing.  The suppliers know that theycan defraud their employees with such impunity that they don’t even bother toget rid of records that prove their frauds. Apple has resisted making public its suppliers and the report refused toidentify which suppliers committed which violations – often for years despiterepeated, false promises to end their anti-employee control frauds.  Two other facts are evident (but notreported).  First, Apple rarelyterminates suppliers for defrauding their employees – even when the fraudsendanger the lives and health of the workers and the community – and even whereApple knows that the supplier repeatedly lies to Apple about these fraudulentand lethal practices.  Second, it appearsunlikely in the extreme that Apple makes criminal referrals on its supplierseven when they commit anti-employee control frauds as a routine practice, evenwhen the frauds endanger the worker’s and the public’s health, and even whenthe supplier repeatedly lies to Apple about the frauds.  Apple’s report, therefore, understatessubstantially the actual incidence of fraud by the 156 suppliers (accountingfor 97% of its payments to suppliers).

“The company said audits revealed that93 supplier facilities had records indicating that more than half of theirworkers exceed a 60-hour weekly working limit. Apple said 108 facilities didnot pay proper overtime as required by law. In 15 facilities, Apple foundforeign contract workers who had paid excessive recruitment fees to laboragencies.
And though Apple said it mandatedchanges at those suppliers, and some facilities showed improvements, inaggregate, many types of lapses remained at levels that have persisted foryears.”

http://www.nytimes.com/2012/01/14/technology/apple-releases-list-of-its-suppliers-for-the-first-time.html?hp

The New YorkTimes, Wall Street Journal, and theWashington Post articles on the Apple report are all lengthy, but none ofthem has any input from a criminologist and each of the articles misses most ofthe significance of the report.  I havealready brought out several of these deficiencies.  The most fundamental flaws, however, have todo with why anti-employee control fraud is the norm at Apple’s suppliers andwhy the suppliers typically don’t even take the inexpensive efforts necessaryto avoid holding a paper trail that makes the frauds obvious even to a notterribly vigorous audit that they know is coming. 

If there is one single thing that drives uswhite-collar criminologists around the bend it is the implicit assumption thatfraud cannot be common.  There is, ofcourse, no logical (or experiential) reason for this belief.  Nevertheless, it is a common belief and amongeconomists it is a virtually universal dogma. Economists have a tribal taboo against even using the word “fraud” todescribe individual frauds.  The surestway to be considered an un-serious economist is to use the “f” word to describefrauds by elite economic actors. Economists’ taboo is particularly bizarre because it is economic theory,developed by a Nobel Laureate that explains why fraud can become endemic.  George Akerlof, in his famous article onmarkets for “lemons” (largely describing anti-customer control fraud),explained the perverse “Gresham’s” dynamic in 1970.  

“[D]ishonest dealingstend 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; thecost also must include the loss incurred from driving legitimate business outof existence.” 

Anti-employee control fraud creates real economicprofits for the firm and can massively increase the controlling officers’wealth.  Honest firm normally cannotcompete with anti-employee control frauds, so bad ethics drives good ethics outof the markets.  Companies like Apple andits counterparts create this criminogenic environment by selecting least-cost –criminal – suppliers who offer components at prices that honest firms cannotmatch.  Effectively, they hang out a sign– only the fraudulent need apply to be suppliers.  But the sign is, of course, invisible andcannot be introduced in court so Apple and its peers also get deniability.  They are shocked, shocked that its suppliersare frauds that cheat their employees and put them and the public’s health atrisk in order to make a few extra yuan ordong for the senior officers.  

Fraudulent suppliers, therefore, have compellingincentives to locate in nations and regions in which they can commit fraud withimpunity.  The best way to evaluate thefraudulent CEOs’ view as to the risk of prosecution for their frauds is toobserve whether they take cheap means of hiding their frauds.  When the CEOs do not even bother to avoidcreating a paper trail documenting their frauds one knows that they view therisk of prosecution as trivial.  Nationsthat are corrupt, have weak rule of law, weak or non-existent unions, poorprotections for workers, a reserve army of the impoverished, and have fewresources devoted to prosecuting elite white-collar crime provide an idealcriminogenic environment for firms engaged in anti-employee control fraud.  The ubiquitous nature of anti-employeecontrol fraud (and tax fraud) in many nations explains why U.S. industries havebeen so eager to “outsource” U.S. jobs to fraud-friendly nations.  Companies like Apple also discovered long agothat Americans often made poor senior managers in these nations because theyobjected to defrauding workers.  Not aproblem – there are plenty of managers from other nations that have no suchethical restraints.  Foreign suppliersrun by Asian managers are increasingly dominant.

The endemic nature of anti-employee control fraudalso demonstrates an important technical point. The wages reported in the most fraud-friendly nations are substantiallyoverstated because workers work far longer hours without receiving thecompensation to which they are entitled. Their hourly rate is much lower than reported, which means that the wagegap between U.S. and the most fraud-friendly nations is significantly greaterthan reported.  U.S. firms that haveforeign suppliers in these nations are well aware of this data bias and maketheir outsourcing decisions based on the real (much larger) wage gap.            

TheHarm to Employee and Consumer Health is Grave

The NYT article notes that it was badpublicity in the U.S. that finally forced Apple to make greater disclosuresabout its suppliers’ frauds.
“The calls for Apple to disclosesuppliers became particularly acute after a series of deaths and accidents inrecent years. In the last two years at firms supplying services to Apple, 137employees were seriously injured after cleaning iPad screens with n-hexane, atoxic chemical that can cause nerve damage and paralysis; over a dozen workershave committed suicide or fell or jumped from buildings in a manner thatsuggests a suicide attempt; and in two separate blasts caused by dust frompolishing iPad cases, four were killed and 77 injured.”
“Apple found that 62 percent of the 229 facilitiesit inspected were not in compliance with the company’s maximum 60-hour workpolicy; 13 percent did not have adequate protections for juvenile workers; and32 percent had problems with the management of hazardous waste.

One supplier was caught dumping wastewater at anearby farm. Another had a total lack of safety measures, creating “unsafeworking conditions,” the report found. Five facilities employed underageworkers.

The company in the past had refused to divulge itsfull supplier list even as it became standard practice for multinationalcorporations to do so after the public outcry in the 1990s over labor problemsat Nike factories in developing countries.

Apple’s change of heart follows a highly publicizedstring of factory worker suicides in 2010 and deadly explosions in two Chinesefactories in 2011.”



The WSJ emphasized this chillingfinding:


“The report also found 24 facilities conducted pregnancytests and 56 didn’t have procedures to prevent discrimination against pregnantworkers. Apple said that at its direction, the suppliers have stoppeddiscriminatory screenings for medical conditions or pregnancy.”



The article does not make this point explicitly, but these firms conductthese tests in order to unlawfully coerce their pregnant employees to haveundesired abortions in order to obtain and keep their jobs.

ForeignAnti-employee Control Fraud harms U.S. Workers

These frauds take place abroad, but they harm employees in the U.S.  Mitt Romney explains that Bain had to slashwages and pensions to save firms located in the U.S. who had to meetcompetition from foreign anti-employee control frauds.  The damage from foreign anti-employee controlfrauds drives the domestic attack on U.S. manufacturing wages.  Bad ethics increasingly drive good ethics outof the markets and manufacturing jobs out of the U.S. and into morefraud-friendly nations. 


A final caution is in order because each of the major articles on the Applereport failed to mention it.  CEOs whoare willing to routinely defraud their workers and expose them to grave threatsto their health are exceptionally likely to commit other forms of controlfraud. 



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 Chats with Dylan Ratigan: Firedoglake Book Salon This Afternoon

Don’t miss William K. Black on today’s Firedoglake book salon.  Professor Black will be chatting with Dylan Ratigan about his new book, Greedy Bastards:  How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry.  The chat begins at 5:00 p.m. (EST).  Click here to watch the chat.

In the meantime, you can read Professor Black’s review of Dylan’s book below.

Dylan Ratigan is well positioned to author a book,designed to be an enjoyable and informative read by normal humans, on theongoing financial crisis.  He is the wunderkind who became Global Managing Editor for Corporate Finance ofBloomberg, the premier news service that specializes in finance, at anexceptionally young age.  He was at CNBCwhile that network was hyping the housing bubble as a non-bubble offeringfantastic investment opportunities.

Now an anchor forMSNBC, Ratigan is a fierce critic of prominent politicians in both parties forwhat he views as their destructive policies and slavish efforts to aid thewealthiest and most politically powerful at the expense of the best interestsof America and its people.  He ispassionate about these subjects and far less predictable than many of his peersbecause he is not a political partisan.      

In finance, the most important question is why wesuffer recurrent, intensifying financial crises.  That question is really two questions.  Answering it requires that we determine whatcauses our crises and why we fail to learn from these crises, but instead makethe incentive structure ever more perverse after each crisis.  Anyone from a finance background is likely toconclude that perverse incentives cause financial crises, so I was surprised byRatigan’s choice of book title (“Greedy Bastards”).  I think that greed is unlikelyto have changed greatly over the last quarter century in which the U.S. hassuffered three recurrent, intensifying financial crises. 

Idon’t call people bastards, even the self-made ones, because my mother reactedpoorly to Speaker Wright referring to me as the “red-headed SOB.” Ratigan’s view on these points turns out to be similar to mine.  He arguesthat the issue is not greed, but perverse 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 isone of those essential points so often overlooked by writers about this crisis. A CEOs’ principal function is creating, monitoring, and adjusting thecorporation’s incentive structures.  There is a massive businessliterature on this function and CEOs uniformly believe that incentivestructures for officers and employees are critical in shaping their behavior.
There is only one (disingenuous)exception to this rule – when officers and employees act criminally because theCEO has created perverse incentive structures.  Suddenly, the CEO isshocked that his officers and employees acted criminally in response to theCEO’s incentive structures that encourage criminal conduct.  Ratiganfocuses on precisely this exception.  Anyone that has had the misfortuneto listen to compulsory business ethics training by his or her employer willhave learned that the key is the “tone at the top” set by the CEO.  True,but that always ends the discussion.  No employee is going to be trainedby his employer as to what to do when the tone at the top set by the CEO ispro-fraud.
As Ratigan demonstrates,our most elite financial CEOs typically created and maintained grotesquelyperverse incentive structures that encouraged their officers and employees aswell as “independent” professionals to act criminally in a manner that harmedcustomers, the public, and shareholders – but made the controlling officerswealthy.  Is there any CEO of a lender incapable of understanding that whenthe loan officers and brokers’ compensation depends on volume and yield – notquality – the result will be catastrophic?  Is there any CEO of a lenderincapable of understanding that if the loan brokers’ fees depend as well on thereported debt-to-income and loan-to-value ratios and the broker ispermitted to make liar’s loans the result will be that the brokers will engagein endemic, severe inflation of the borrowers’ incomes and their homes’appraised values?  Is there any reader that doubts that the CEOs intendedto produce precisely what their perverse incentives were certain toproduce?  A CEO cannot send a memo to 50,000 loan brokers instructing themto inflate appraisals and use liar’s loans to inflate the borrowers incomes’but he can, and does, send the same message through his compensationsystem.  Each of these perverse incentives produces precisely the resultthat the CEOs expected and desired. 
Ratigan gets right twoof the essentials to understanding why we suffer recurrent, intensifyingfinancial crises.  First, cheating has become the dominant strategy infinance.  Second, cheating is dominant because finance CEOs create suchintensely perverse incentives that fraud becomes endemic.  The BusinessRoundtable (the largest100 U.S. corporations), had to react to the Enron erafrauds.  It chose as its spokesperson a CEO who embodied the best ofAmerican big business.  This was the response he gave to Business Week whentheir reporter asked why so many top corporations engaged in accounting controlfraud:
“Don’t just say: “If you hit this revenuenumber, your bonus is going to be this.” It sets up an incentive that’soverwhelming. You wave enough money in front of people, and good people will dobad things.”
How did the CEO knowabout the “overwhelming” effect of creating incentives so perverse that theywould routinely cause “good people [to] do bad things”?  He knew becausehe directed and administered such a perverse compensation system.  An SECcomplaint would soon identify that compensation system as driving accountingcontrol fraud at his firm.  His name was Franklin Raines, CEO of FannieMae.
What Ratigan does in this book that differs soimportantly, and accurately, from nearly every other account of the crisis by aprominent writer is to say in plain English that our most elite financialinstitutions caused the crisis, that they did so because their controllingofficers caused them to cheat, and that the senior officers cheated their ownshareholders for the purpose of becoming wealthy. 

Ratigan shows that theself-described “productive class” is actually a group dominated by “greedybastards” who win by cheating.  As GeorgeAkerlof and Paul Romer said in their famous 1993 article (“Looting: theEconomic Underworld of Bankruptcy for Profit”), accounting fraud is a “surething.”  Ratigan shows that while lootingbegins with accounting fraud it ends with tax fraud, political domination andscandal by the wealthy frauds, and crony capitalism.  Indeed, Ratigan shows how far we have fallensince 1993.  Fraudulent CEOs who controlsystemically dangerous institutions (SDIs) can now become wealthy by looting,cause the SDI to become insolvent, get bailed out by their political lackeys,resume looting, pay virtually no federal income tax, and do so with nearlycomplete immunity from prosecution.  Heshows that rather than being “productive”, the greedy bastards are destroyingAmerica’s middle and working classes, hollowing out our economy, and destroyingwealth and employment. 

Bill Moyers Essay: Occupying a Cause

The first episode of Bill Moyers’ new TV, Moyers & Company, features our own William K. Black and the Occupy Wall Street movement.  Click here for local listings.


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Greenspan’s Laissez Fairy Tale

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

We continue to witness remarkable developments inthe intersection of the related fields of economics, finance, ethics, law, andregulation.  Each of these five fieldsignores a sixth related field – white-collar criminology.  The six fields share a renewed interest intrust.  The key questions are why wetrust (some) others, when that trust is well-placed, and when that trust isharmful.  Only white-collarcriminologists study and write extensively about the last question.  The primary answer that the five fields giveto the first question is reputation.  Thefive fields almost invariably see reputation as positive and singular.  This is dangerously naïve.  Criminals often find it desirable to developmultiple, complex reputations and the best way for many CEOs to develop asterling reputation is to lead a control fraud.  Those are subjects for futurecolumns.

This column focuses on theoclassical economics’ useof reputation as “trump” to overcome what would otherwise be fatal flaws intheir theories and policies.  FrankEasterbrook and Daniel Fischel, the leading theoclassical “law and economics”theorists in corporate law, use reputation in this manner to explain why seniorcorporate officers’ conflicts of interest pose no material problem.  The most dangerous believer in the trump,however, was Alan Greenspan.  Hisstandard commencement speech while Fed Chairman was an ode to reputation as thecharacteristic that made possible trust and free markets.  I’ve drawn on excerpts from one example, his May15, 2005 talk at Wharton

I find Greenspan’s odes to reputation as theantidote to fraud to be historically inaccurate and internally inconsistent intheir logic.  Here, I ignore his factualerrors and focus on his logical consistency.    


“The principles governing business behavior are an essential support to voluntary exchange, the defining characteristic of free markets. Voluntary exchange, in turn, implies trust in the word of those with whom we do business.

Trust as the necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation became a valued asset. Throughout much of that century, laissez-faire reigned in the United States as elsewhere, and caveat emptor was the prevailing prescription for guarding against wide-open trading practices. In such an environment, a reputation for honest dealing, which many feared was in short supply, was particularly valued. Even those inclined to be less than scrupulous in their personal dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.

To be sure, the history of world business, then and now, is strewn with Fisks, Goulds, Ponzis and numerous others treading on, or over, the edge of legality. But, despite their prominence, they were a distinct minority. If the situation had been otherwise, late nineteenth- and early twentieth-century America would never have realized so high a standard of living.
* * *
Over the past half-century, societies have chosen to embrace the protections of myriad government financial regulations and implied certifications of integrity as a supplement to, if not a substitute for, business reputation. Most observers believe that the world is better off as a consequence of these governmental protections. Accordingly, the market value of trust, so prominent in the 1800s, seemed by the 1990s to have become less necessary. But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice. After the revelations of recent corporate malfeasance, the market punished the stock and bond prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. But in the wake of the scandals, the Congress clearly signaled that more was needed.

The Sarbanes-Oxley Act of 2002 appropriately places the explicit responsibility for certification of the soundness of accounting and disclosure procedures on the chief executive officer, who holds most of the decisionmaking power in the modern corporation. Merely certifying that generally accepted accounting principles were being followed is no longer enough. Even full adherence to those principles, given some of the imaginative accounting of recent years, has proved inadequate. I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act’s details points the way.

It seems clear that, if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. Companies run by people with high ethical standards arguably do not need detailed rules on how to act in the long-run interest of shareholders and, presumably, themselves. But, regrettably, human beings come as we are–some with enviable standards, and others who continually seek to cut corners.

I do not deny that many appear to have succeeded in a material way by cutting corners and manipulating associates, both in their professional and in their personal lives. But material success is possible in this world, and far more satisfying, when it comes without exploiting others. The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.
* * *
Our system works fundamentally on trust and individual fair dealing. We need only look around today’s world to realize how valuable these traits are and the consequences of their absence. While we have achieved much as a nation in this regard, more remains to be done.”

Greenspan appears to have relied on the trump ofreputation as the basis for causing the Fed to oppose financial regulationgenerally and at least five specific examples of proposed or existingregulation designed to deal with conflicts of interest.  He supported the repeal of the Glass-SteagallAct despite the conflict of interest inherent in combining commercial andinvestment banking.  He supported thepassage of the Commodities Futures Modernization Act of 2000 despite agencyconflicts between managers and owners of firms purchasing and selling creditdefault swaps (CDS).  He opposed usingthe Fed’s unique statutory authority under HOEPA (1994) to regulate banfraudulent liar’s loans by entities not regulated by the Federalgovernment.  He opposed efforts to cleanup outside auditors’ conflict of interest in serving as auditor and consultantto clients.  He opposed efforts to cleanup the acute agency conflicts of interest caused by modern executivecompensation.  He opposed taking aneffective response to the large banks acting on their perverse conflicts ofinterest to aid and abet Enron’s SPV frauds. 

Greenspan’shypothesis: reputation trumps perverse incentives

Greenspan’s overall anti-regulatory hypothesis seemsto be that laissez faire led tosubstantial control fraud, which gave business actors a strong incentive toavoid being defrauded.  This caused themto care a great deal about reputation, which successfully prevented fraud.  Indeed, the frauds “had to adhere to a more ethicalstandard in their market transactions, or they risked being driven out ofbusiness.” 

The mostobvious logic problem with this hypothesis is why laissez faire led to substantial control fraud.  Here is his key sentence, discussing businesslife under laissez faire:  “In such an environment, a reputation forhonest dealing, which many feared was in short supply, was particularly valued.”  How could “many” American business peopleoperating under laissez faire fearthat reputations for honest dealing were “in short supply” among theircounterparts?  Under Greenspan’s logicreputations for honest dealing should have been omnipresent among Americanbusiness people during laissez faire.  Greenspan assures us that under laissez faire even frauds “had to adhereto a more ethical standard in their market transactions, or they risked beingdriven out of business.”  If this istrue, then the “many” who “fear[ed]” that “a reputation for honest dealing “wasin short supply” must have been irrational. Reputations for honest dealing should have been virtually universalunder Greenspan’s logic. 

Markets make the Mensch                        

Greenspanasserted that unethical CEOs who act like scum in their personal lives engagedin a daily “Road to Damascus” conversion whenever they worked.  Greenspan concedes that CEOs dominatecorporations and that a honest CEO will prevent any material corporate fraud (“ifthe CEO chooses, he or she can, by example and through oversight, inducecorporate colleagues and outside auditors to behave ethically”).  In short, Greenspan asserts (contrary to AdamSmith’s warnings) that there is no serious “agency” problem caused by theseparation of ownership and control in corporations.  Markets force CEOs to act as if they werehonest because a good reputation is essential to the CEO.  The CEO, in turn, is able to ensure thatsubordinates act ethically.  ButGreenspan then contradicts his logic again, despairing that:  “regrettably, human beings come as weare–some with enviable standards, and others who continually seek to cutcorners.”  Greenspan has just assertedthat humans do not “come as we are”to business.  Markets force us to behaveas if we are moral regardless of our actual morality.  When we are in our business mode we are atour patriarchal Grandfather’s house on our best behavior in constant fear ofarousing his ire.        

Greenspan claimed that we were inthe midst of a renewal of CEO honesty – in 2005

InSeptember 2004, the FBI warned that there was an “epidemic” of mortgage fraudand predicted that it would cause a financial “crisis” if it were notcontained.  The fraud epidemic grewmassively, and I have shown why we know that it was overwhelmingly lenders whoput the lies in liar’s loans – at a rate of roughly a million fraudulentmortgages annually at the time that Greenspan gave his talk at Wharton inmid-2005. 

“We should not be surprised then to see a re-emergence ofthe value placed by markets on trust and personal reputation in businesspractice. After the revelations of recent corporate malfeasance, the marketpunished the stock and bond prices of those corporations whose behaviors hadcast doubt on the reliability of their reputations. There may be no betterantidote for business and financial transgression.”

Again, myemphasis here is on Greenspan’s logic. It does not follow that because “the market punished the stock and bondprices of those corporations” that collapsed because they were looted by theirCEOs this served as the best “antidote” to prevent future accounting controlfrauds.  George Akerlof and Paul Romerpublished their famous article in 1993 (“Looting: the Economic Underworld ofBankruptcy for Profit”).  Indeed, GeorgeAkerlof received the Nobel Prize in economics in 2001.  Greenspan was Charles Keating’s principaleconomic expert and had seen him loot Lincoln Savings in the late 1980s.  Accounting control frauds are funded by stockand bond sales.  The markets fundaccounting control frauds, and they do so massively even when the CEO islooting the firm and causing losses principally to the shareholders andcreditors.  The CEO walks away wealthyfrom the husk of the failed corporation. Almost everyone agrees that leverage is one of the great causes oflosses in our recurrent, intensifying financial crises here and abroad.  Debt drives leverage.  Debt is supposed to provide the “privatemarket discipline” that prevents accounting control fraud, and reputation issupposed to be the piston that adds immense power to this great brake.  But accounting control fraud, as Akerlof& Romer (and we criminologists) emphasize is a “sure thing” – it producesrecord (albeit fictional) profits in the near-term.  When there are epidemics of accountingcontrol fraud, bubbles hyper-inflate. The combined result is that loss recognition is hidden byrefinancing.  Reporting record profitsand minor losses via accounting control fraud is the surest means for a CEO togrow wealthy and develop a strong reputation. Creditors rush to lend to corporations reporting stellar results, whichis what produces the extraordinary leverage. Far from acting as an “antidote” to accounting control fraud, reputationhelps explain why private market discipline becomes an oxymoron.  Reputation is the great booster shot aidingand encouraging accounting control fraud. 

In anyanalogous context we would consider Greenspan’s “antidote” claim to be faciallyinsane.  If the head of the public healthservice announced proudly that the service had triumphed because, while onemillion Americans had died of an epidemic of cholera, the death rate had beenso severe and rapid that the epidemic had burned out, we would consider him tobe delusional and heartless.  The deathof the pathogen’s host (us) does not constitute a triumph over cholera.  It also does not leave the survivors who werenot exposed to the pathogen with additional antibodies that will prevent futureepidemics. 

“Texas Triumphs”



In an article I wrote in 2003 during the unfolding Enron-era frauds I calledsimilar claims by prominent Texas politicians that Enron’s failure representeda triumph of capitalism “Texas triumphs.” 


I distinguished Texas triumphs from Pyrrhic victories.  The origin of that phrase comes from King Pyrrhus’ (of Epirus in Greece) victory over theRomans in 279 BC at the battle of Asculum in Apulia (on the Eastern side of theItalian peninsula).  The Roman legionswere elite and outnumbered Pyrrhus’ forces (which had many mercenaries).  Nevertheless, he twice defeated the Romanforces, inflicting significantly greater casualties on their forces.  After the battle of Asculum he responded tocongratulations by remarking that one more such victory would undo him.  He was a great commander who defeated highlycompetent opponents defending their own lands. 


Only theoclassical economists could call thefailure of our most elite firms that were looted by their CEOs a triumph ofcapitalism.  I wrote: 


“MartinWolf repeated the well-worn claim that Enron’s failure demonstratescapitalism’s virtues in 2003.  It is aview most famously stated by Larry Lindsey, a member of George W. Bush’s first(failed) economic team, when he saidin January 2002 that Enron’s failure was “a tribute to American capitalism.” Thethen treasury secretary, Paul O’Neill, wasn’t to be outdone. He insistedEnron’s failure proved “the genius of capitalism.””



Our family’s rule that it isimpossible to compete with unintentional self-parody remains intact.   Adiscipline (economics) that counts massive looting by the CEOs of elite controlfrauds as its greatest triumphs desperately needs an intervention.  None of these control fraud failures (andthat includes Fannie and Freddie) involves valiant efforts by economists toprevent the looting.  The theoclassicalfailures to prevent control fraud did not occur because the economists stroveto prevent the looting but were defeated by impossible odds.  Theoclassical economists were theanti-regulatory architects of the criminogenic environments that produce ourepidemics of control fraud.  They are theelite frauds’ most valuable allies.        



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