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April 06, 2009

The best way to rob a bank is to own one (Bill Moyers and William K. Black)

Bill Moyers interviews William K. Black, a former bank regulator who helped save our asses during the savings and loan mess. Black argues that the financial collapse should be regarded as the result of systematic fraud, i.e., that the results of the profligate lending practices of the housing bubble were so profitable at the outset and so unsustainable as to constitute fraud, criminal betrayal of trust for financial gain.

It's a great piece of TV journalism. Watch it.

Here's a particularly topical snippet, not directly related to the fraud allegations, but worth highlighting all the same:

BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

Watch the clip.

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NY Times in 1999
============================================================================
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another’s businesses…

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.”

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system.
============================================================================

In 1999, I was against repealing laws meant to prevent another Great Depression.

So were these Senators who voted against the final bill:
Barbara Boxer, Richard Bryan, Byron Dorgan, Russell Feingold, Tom Harkin, Barbara Mikulski, Paul Wellstone, and Richard Shelby.

90 Senators voted Yes. They include Joe Lieberman, Chris Dodd, Harry Reid, Jay Rockefeller, Dianne Feinstein, and Charles Schumer.

What a piece of crap that Bush administration was. Thanks a lot Mr. Bush and friends! And thank you too gullible fundies for believing the big line of crap they fed you.

The interview was on a par with a Fox interview of Dick Cheney. Consider the following exchange:

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

The question "How did they get away with it?" is a complete softball. It's fairly standard on the MSM so I shouldn't knock it too much, but the interview would've been far more enlightening if Moyers had instead asked, "Saying that people engaged in fraud is a very serious charge. How do you know it's true?" What we got instead was an interesting story, one that is similar to the standard story but that argues, without additional evidence, that there was deliberate, systemic fraud. (The NPR special on the crisis from a few months ago gave concrete examples of fraud, but all of these were fairly low-level - for instance, a borrower who found out his broker inflated his income so that he could get a loan).

Black gives the example of the liar (aka NINA) loans--which were set up on the express principle that the lender would not check the borrower's claims about his or her income and assets. Officers who did check were fired. He gives the examples of rating agencies knowingly giving securities spurious triple A credit ratings in order to earn commissions from the companies that made the securities the first place. As Black says, everyone was buying a pig in a poke wrapped in the pretty pink ribbon of a fraudulent triple A credit rating.

Black also gives the example of CEOs looting companies through bonuses when any prudent manager would have known that their business model was completely unsustainable. As he explained, their business practices produced guaranteed massive short-term profits, of which they took a cut, and equally predictable long-term carnage, which they are now facing. Of course, they don't care because they already pocketed their fortunes in good times in the equivalent of massive pump and dump boileroom stock fraud.

No, he doesn't give examples; he asserts that it's a trend, without naming a single CEO who looted his company, a single broker or loan officer or investment banker who used NINA loans to lie, or a single person or company that lied about the AAA process. The only specific culprit he names is Bernie Madoff. The NPR special, which doesn't say anything about systemic fraud, was far more specific, and did give examples of how NINA loans encouraged people to lie. It was also more anecdotal, but it made sure to show what happened every step of the way, instead of make grand claims about fraud.

As I said, it's a good story... just one that he doesn't make an effort to connect to what really happened. He claims that there have been internal and Congressional investigations that have found fraud; if so, he can name specific examples, rather than merely say that Finch found some AAA fraud.

Things to press:

Why does Summers still have his job? (5 million from DE Shaw last year, 2.5 million in "speaking fees" from Wall Street industry last year.) He is going to reel in excessive compensation?

Why does Rahm Emanuel have his job? (6 million/year,for three years running, 18 million total, working for Warburg Pincus. All he seemed to do was call his contacts from Clinton years. Great work if you can get it. Why does he have his job?). Again, he will push agenda to reel in excessive compensation?

Aren't there minutes to the infamous meeting that Paulson hosted, as Treasury Sec, where Wall Street IBs were called in to discuss matter of AIG rescue? Let's see those minutes. Let's subpoena Pauslon's public and private phone and email correspondence over the past year. At the very least this evidence will be useful for those who wish to pursue Wall Street through civil action.

Daniel, the answer to both your question is that if anyone with a possible conflict of interest were barred from political office, the pool of Presidential advisors would consist of homeless people and drifters. Personally, I'd rather have people who're cozy with finance and are unlikely to do what needs to be done about bank nationalization and executive compensation than people who're cozy with GM and are likely to reenact Smoot-Hawley and keep American's addiction to cheap oil.

"P.S."

Alon Levy writes;
Personally, I'd rather have people who're cozy with finance and are unlikely to do what needs to be done about bank nationalization and executive compensation than people who're cozy with GM and are likely to reenact Smoot-Hawley and keep American's addiction to cheap oil.

Doyle;
Interesting comparison. The financial scandals are an order of magnitude larger than the car industry problems. And then saying that potential trade restrictions would do even bigger damage is quite an interesting statement indeed given the scale of auto production compared to financial influence on the economy. It seems to me that your problem with conflicts of interests is colluding with capitalists systemic problems. People can be trained to regulate outside the system of crony capitalism. Crony capitalism (synonym for monopolies supported by government) is by definition a small elite of people whose interests are narrowed from the whole. Said another way we have a class system and the workers rights represent the majority, and capitalist 'rights' represent a tiny fraction of the nation. So to say the whole of the nation is incapable of closing down capitalist conflicts of interests is absurd.

Well, every major economist has given talks to corporations as a way of supplementing his professor's income. Even Krugman did consulting work for Enron. The only way of getting someone outside the system is to get someone who's completely ignorant.

And it's interesting that you see this as labor vs. capitalism, when GM's management is largely on the same side as the UAW here. It's far more of a clash between the industries of the past and the industries of the future. Part of it comes from legitimate resentment of the role of finance in the crisis, but a lot of it involves a backlash against educated people and their lines of work, complete with calls for more focus on industries for people without college degrees. It's not even a class issue - UAW's members are well-compensated, earning $80,000 plus benefits, which adjusted for the cost of living isn't far behind what Silicon Valley programmers make. It's more of a mythology of big auto as the source of America's middle class, whereas software, finance, music, etc. are for people who're apart from Real America (R) and its wholesome values.

>>the answer to both your question is that if anyone with a possible conflict of interest were barred from political office, the pool of Presidential advisors would consist of homeless people and drifters. Personally,

>Well, every major economist has given talks to corporations as a way of supplementing his professor's income.

Levy,

Evidently, you are star struck. It appears that you believe the only people of competence and merit are those who grab the headlines of our so manipulated media. Pick any college, any university in America. Select the best economics professor from the faculty. I have no doubt that this candidate will be as smart, and capable and certainly less compromised than any who have served the Executive over the past 20 years. This nation abounds with talent, but there is a small wall street connected clique that has assumed control of policy direction.

Summers, Geithner, Pauslon, Rubin, Eammanuel....are tools. They represent the interests of their oligarchical class.

BTW, class resentment is perfectly legitimate. Going forward I intend to increase my resentment. Also, do you really think that you can build and uphold a productive society through pixel-pushing "industries"?

Does Krugman represent the interest of his oligarchical class?

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