William K. Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City School of Law. As a senior regulator at the former Federal Savings and Loan Insurance Corp, he played a critical role in the crack-down on savings and loan officials in the 1980s and 1990s and the unraveling of the Keating Five scandal. He is the author of THE BEST WAY TO ROB A BANK IS TO OWN ONE about the S&L fiasco. He was the Executive Director of the Institute for Fraud Prevention from 2005-2007.
BANKSTER: You have written and spoken a lot on the topic of the fraud and lawlessness that led to the S&L crisis and the current financial crisis. What do you say to those who suggest that the current crisis is not so much about out-and-out fraud – such as in the S&L crisis – as it was about people “gaming the system”?
BLACK: Oh no, is precisely parallel to S&L crisis. The way that they gamed the system was through accounting fraud. In the financial sector, accounting is the weapon of choice. And accounting fraud when you are a publicly traded firm – and these were all publically traded firms – is a felony.
In the S&L crisis there were over 1,000 priority case convictions, those were senior insiders, and most of those folks actually did prison time. The huge difference between then and now is that back then, regulators were pushing for criminal convictions. They were providing enormous resources to Department of Justice and the FBI, and they were demanding that they take action. That is what produced the successful convictions along with some very good FBI agents and prosecutors.
BANKSTER: What does Congress think of the lack of indictments? Have members of Congress raised this in committee, has Leahy (Chair of the Senate Judiciary Committee) had a hearing on why there have not been more prosecutions?
BLACK: No there have not been hearings on why there have not been prosecutions. Representative Marcy Kaptur (D-Ohio) has been hitting this very hard, demanding we hire 1,000 FBI agents to replace the 500 FBI white-collar specialist who were transferred to national security after 9-11. And the Bush administration refused to allow the FBI to replace them. Kaptur is right, replacing 500 doesn’t begin to be enough. I think at a minimum you need 1500-2000 agents. White-collar prosecutions in general were down very substantially in the Bush administration. It is no accident that the fact that we have had very few prosecutions has led to the greatest surge in “elite” white-collar crime in the history of the world.
BANKSTER: Has Attorney General Holder said anything on this topic? Is he demanding more resources?
BLACK: No, is the short answer. Congress provided a slight increase in a bill about a year ago and a budget bill is pending that would increase their resources somewhat. But Rep. Kaptur’s point that we need more FBI agents has not been picked up as a priority by the new administration, and I don’t understand it. It is both substantively necessary, but it would be politically popular among virtually all Americans. We ought to bring the crooks that brought on this crisis, to justice.
BANKSTER: What do you say to the banks when they say they didn’t cause the crisis, that it was the nonbanks, the fly-by-night mortgage firm that cause the crisis?
BLACK: It is true when you don’t have effective regulation in financial sphere – whether that comes from never regulating, de-regulating or what we call de-supervision (when the rules stay in place but the regulators never enforce them) – in any of those circumstances de facto you have decriminalized that entire industry for elite fraud when the people in charge of seemingly legitimate organizations use them as weapons to defraud the public. And it is true that 80 percent of nonprime loans were made by unregulated institutions. The FBI has also testified that in 80 percent of the mortgage-fraud losses, lender personal were involved in the frauds. In other words, these are elite frauds or “control frauds” led from the top, but there hasn’t been a single conviction of a senior lender for this kind of fraud.
While it may be true that 80 percent of the people originating the mortgages were not regulated, they sold the mortgages largely to banks who were regulated. And the only way they could sell it was because of the rating agencies taking this toxic paper, giving it AAA rating – the best possible rating which essentially means there is no risk at all – and the rating agencies were regulated as well. So it was a colossal failure not just of the unregulated private sector, but of the regulated private sector as well. And obviously it was a designed collapse of regulation.
BANKSTER: So the big banks packaged and sold the mortgages as securities, and now many of those big banks have a lot of these toxic assets on their books, but they are saying they are solvent. Can you talk about the big banks and how they have handled their accounting here?
BANKSTER: Yes, the overwhelming amount of the worst paper – the toxic stuff, the credit default swaps – is held by the biggest financial enterprises and there were catastrophic losses in it. For example, IndyMac lost about 80 cents on the dollar on these kinds of “liar’s loans” that they packaged. These loses are so large that many of the largest bank are actually insolvent, so they used their political contributions to go to Congress. Congress then extorted the accounting industry to go weak on accounting rules so that they did not have to recognize their loses. [The so-called “mark-market” rule change.] That has really screwed up the ability to bring criminal cases against their current accounting and securities fraud, but that won’t protect them against prior actions.
BANKSTER: So you think the mark-market rule change protects them?
BLACK:Yes, it protects them enormously right now, because they are engaged in what in any other circumstance would be blatant accounting and securities fraud. In other words, they are massively overstating the value of their assets. But since the U.S. Generally Accepted Accounting Principles (GAAP) have been turned into a farce and because of their power, they are going to get away with it. This is why we called it “elite” white-collar crime. At its worse, it has so much power that it defines its crimes as legal – by using its political power to gut the criminal laws.