- William Black
Former bank regulator at the Federal Savings and Loan Insurance Corporation. In the 1980s he helped expose the savings and loan scandal. He now teaches at the University of Missouri–Kansas City and is the author of the book The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.
The Dow Jones Industrial Average has topped 10,000 for the first time in a year, as JPMorgan Chase reported massive profits in the third quarter. Meanwhile, the Wall Street Journal is reporting that major US banks and securities firms are on pace to pay their employees about $140 billion this year — a record high. But on Main Street, foreclosures are also at record levels, and the official unemployment rate is expected to top ten percent. We speak to former bank regulator William Black, author of The Best Way to Rob a Bank Is to Own One. [includes rush transcript]
JUAN GONZALEZ: The Dow Jones Industrial Average topped 10,000 Wednesday for the first time in a year, as JPMorgan Chase reported massive profits in the third quarter. The nation’s second-largest bank took in $3.6 billion during the last three months. JPMorgan is not the only bank making billions. Earlier this morning, Goldman Sachs announced it made about $3.2 billion in the third quarter.
Meanwhile, the Wall Street Journal is reporting that major US banks and securities firms are on pace to pay their employees about $140 billion this year — a record high. Goldman Sachs alone is set to pay out at least $20 billion in bonuses. That’s an average of $700,000 per employee.
The record bonuses come less than a year after taxpayers bailed out many of those same financial institutions.
While Wall Street is on the path of recovery, the real economy remains in a state of crisis. It was just announced that US foreclosure filings climbed to a record high in the third quarter. Nearly 940,000 homes received a default notice or were repossessed by banks — that’s a 23 percent increase from a year earlier. Meanwhile, economists project the national unemployment rate will soon top ten percent.
AMY GOODMAN: On Capitol Hill, lawmakers have been slow to implement any meaningful reform to help protect consumers and to curb what’s been described as Wall Street’s casino.
On Wednesday, the House Financial Services Committee began marking up a bill that would create a Consumer Financial Protection Agency and introduce the first regulation of the exotic financial instruments known as derivatives. The finance and business communities have been lobbying against both reform measures.
To talk more about this, we’re joined by former bank regulator William Black. You might recognize him from Michael Moore’s film Capitalism: A Love Story. During the 1980s, Black helped expose the savings & loan scandal. He now teaches at the University of Missouri-Kansas City and is the author of the book The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.
Bill Black, welcome to Democracy Now! Your comment on just the latest figures? Dow Jones tops 10,000, Wall Street reports massive profits, executives receive record bonuses, and what? Foreclosures also at a record high.
WILLIAM BLACK: It’s one of the proofs that the real economy and the finance world have been completely unhinged. Finance is supposed to exist for only one purpose: to make the real economy work better. But now finance simply works for finance, and in particular for the elites within finance. And they harm the real economy on a regular basis, and periodically, they come close to destroying the real economy.
JUAN GONZALEZ: And William Black, where is the outrage? It seems to me, at this stage, with the — as the foreclosures continue to escalate in numbers, and yet we’re seeing these enormous profits less than a year after the financial crisis. There doesn’t seem to be the kind of outrage, even in Congress, that there was six months or eight months ago.
WILLIAM BLACK: There’s no palpable outrage, certainly not in Congress. The reform efforts on derivatives, for example, are a scandal. They exempt virtually all of the problem derivatives, and they’re designed to exempt it. And that’s the bill that’s introduced, and of course it’s likely to get worse with additional lobbying from the special interests.
Link the things that you’ve just been talking about. You talked about foreclosures reaching record highs. But in fact, foreclosures, relative to delinquencies, are quite low compared to historical ratios. In other words, banks have tons of folks who are not paying their mortgages on time, and they’re not foreclosing. And the reason they’re not foreclosing is, once you foreclose, you have to recognize losses under the accounting rules. And the banks gimmicked the accounting rules. They put pressure on Congress, and Congress put pressure on the accounting profession to gimmick the accounting rules now about a year ago. Now, these bonuses, of course, are paid compared to alleged profits. What happens if you understate your losses dramatically? You report much higher profits and much higher bonuses. So this is a web of fraud, in which they are getting as much as they can before the place goes to hell in a handbasket again.
AMY GOODMAN: William Black, talk about Timothy Geithner. Talk about Lawrence Summers. Talk about Obama’s inner circle and what they have to gain from this.
WILLIAM BLACK: Well, I mean, Summers, for example — you talked about Geithner’s aides and how much money they had made, and, of course, it’s absurdly large, and they’re making it typically for not doing much of anything. But they’re taking their cue from Summers, who got $5 million, roughly, for working one day a week in areas he had no expertise. So, you know, once you leave the federal service, then these interests that you were very helpful to find a way to make you spectacularly rich, and they know that that’s what’s coming in their future. That’s part of the problem.
But the bigger part of the problem, in many ways, is that they have such an ideology about the market and its ability to deal with all problems that has no basis in reality, has been exposed in this crisis as completely fictional, and yet they can’t give it up. I mean, think of yourself as one of these professors who’s been trained in the Milton Friedmanish views, and you’re in your fifties, and you’ve been saying — you know, everything you’ve said in your career is wrong. Everything you’ve learned in your career is wrong. All of your areas of expertise are wrong. Are you going to admit that? “Hi, I’ve been misleading you, and I’m sorry I caused this disaster. And by the way, I have no meaningful skills or experience.”
AMY GOODMAN: Would Alan Greenspan —-
WILLIAM BLACK: It’s not going to happen.
AMY GOODMAN: —- fit into that picture?
WILLIAM BLACK: Well, Alan Greenspan, of course, is doing this when he’s in his eighties and isn’t going to teach and isn’t going to do anything else. And even then, he didn’t volunteer it. He was asked pointed questions in front of Congress.
And that comes back to your point: where’s the congressional outrage there? There is some. We work with some of the progressives. You may have seen, your listeners may well have seen Representative Grayson asking very difficult questions. Representative Kaptur has certainly been on people. But that’s a tiny minority of folks within Congress. And it comes back, of course, to campaign contributions. And the Supreme Court is about to make that much worse. It’s almost certainly going to strike down the portions of McCain-Feingold that restricted corporate contributions, and it’s “Katy, bar the door.”
JUAN GONZALEZ: I’d like to ask you to go back to this issue of the foreclosures and delinquencies, which you make the point that the delinquencies are much higher. For instance, I think the delinquency rate for prime loans, not for the subprime or even the Alt-A or the more questionable loans, but for prime loans, rose to 6.41 percent in the second quarter from six percent, so that you’re getting supposedly the best loans in the home mortgage market are now at these very, very high rates of delinquency. What does this say about the future for these banks that are holding these loans?
WILLIAM BLACK: Well, it means that many of these banks are deeply insolvent and actually losing money, but they have the gimmicked accounting, so they’re able to report that they have lots of profits.
And, by the way, the other thing they’re doing is speculating like crazy and other trading activities that add absolutely nothing to economic value. So, if they’re winning, somebody’s losing. Right? They’re doing bond trading, and they’re producing allegedly billions of dollars in profits in bond trading. Well, somebody’s the counterparty and losing money. And so, there’s going to be other bad news outside the financial sector.
And again, remember, financial sector exists supposedly for one purpose — to help the real economy — and it’s taking billions out of the real economy in trading profits. So the combination of these things, both in the financial sector and in the real economy, means very bad things down the road, in terms of increased business failures, increased banking failures.
But, of course, we’re not allowing the large banks to fail. In a part of his speech that was almost completely ignored, and it’s incredibly radical, but in the right word — you know, right drift range, Geithner said twice that for the largest banks we now have a program of capital insurance — not deposit insurance, capital insurance. In other words, we’re going to stand in there and bail out the shareholders, no matter how badly management screws up the place, even if management screws it up through fraud. And that’s just an appalling change in America.
AMY GOODMAN: We’re talking to William Black, former bank regulator at the Federal Savings and Loan Insurance Corporation. In the ’80s, he helped expose the savings and loan scandal. Now he’s a professor at University of Missouri-Kansas City and author of the book The Best Way to Rob a Bank Is to Own One. We’ll be back with him, and then we’ll be joined by the Slovenian public intellectual Slavoj ÎiÏek at the end of the broadcast. Stay with us.
AMY GOODMAN: Our guest is William Black, former bank regulator at the Federal Savings and Loan Insurance Corporation, now a professor at University of Missouri-Kansas City, wrote The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.
So, let’s go back more than what, about a quarter-century now, William Black, to your specialty, to exposing the savings and loan scandal. What happened then, and how does it relate to today?
WILLIAM BLACK: What happened then was an epidemic of what we call in criminology “control fraud.” And that means what happens when the fraud is led by the person who controls a seemingly legitimate corporation or government agency. In this case, they were savings and loans. And these frauds were growing at an annual rate of over 50 percent.
Their weapon of choice is accounting fraud. So it’s real easy. It’s a three-part optimization. First thing you do is grow like crazy, Ponzi-like scheme. Second thing you do is deliberately make really bad loans, because they have a higher interest and higher expenses associated with them, so you report more profits. And the third thing you do is have extraordinary leverage. Leverage is simply lots of debt compared to your equity. And the point of this is, if you do those three things, you are mathematically guaranteed to report not just profits, but record profits.
JUAN GONZALEZ: But William Black, wouldn’t —-
WILLIAM BLACK: At that kind of -—
JUAN GONZALEZ: I’m sorry, go ahead.
WILLIAM BLACK: At that kind of growth rate, with people concentrating on whatever the optimal area is for the fraud, you produce financial bubbles. In the case of the savings and loan crisis, we re-regulated the industry in the face of opposition from the Reagan administration, the House of Representatives and the Senate. And we looked for the Achilles’ heel for this kind of scheme, which is growth. And so, we restricted growth. And this kind of fraud also creates a distinctive pattern of operations, and we used that to triage and to go after these institutions while they were still reporting they were the most profitable savings and loans in America. People thought we were crazy, contemporaneously, who were conservative economists. But it turned out we were right about every single one of these institutions.
What does it mean for today? The same thing. We have another epidemic of accounting fraud. In this case, it’s not commercial real estate, which it was in the savings and loan crisis. It started out with, in the United States’ context, with home mortgages.
JUAN GONZALEZ: But William Black, it’s been amply documented the level — the extensive level of the fraud that occurred in this current crisis. I remember seeing the emails that Attorney General of New York, Andrew Cuomo, secured, where it showed that, for instance, Countrywide, whenever it started getting appraisals of properties that it did not like, it fired the appraisers, it got rid of them, told them they wanted higher appraisals. All along the line in these no-doc loans, there was constant fraud occurring — the lawyers that were involved in the cases, the real estate appraisers, the people who were packaging the loans — and yet, except for the occasional Madoff or a couple of individuals, there’s been no sort of criminal prosecution of these folks.
WILLIAM BLACK: Well, when you say it’s been amply demonstrated, you’re right, but only where people have looked. And people, to pick up your latter point, have generally not looked.
So, what happened? The FBI transferred 500 of its white-collar crime specialists out of white-collar crime into national security, in response to the 9/11 attacks. And, you know, you can understand why they did that. But you can’t understand why the Bush administration refused the FBI request to allow them to replace the lost agents. And so, white-collar prosecutions were down more than 25 percent under the Bush administration during the greatest wave of white-collar crime in the history of the world. The FBI has also testified that 80 percent of the mortgage fraud losses occur when lender personnel are involved.
To add to your point about appraisers, the only reason you inflate an appraisal is for fraud. There’s no other purpose in the world. And we have survey information that’s quite good on appraisers. In 2003, 70 percent reported that they had been the subject of an attempt to intimidate them to inflate appraisal values in that year alone. When we did the same survey in 2007, that percentage was up to 90 percent. So we have horrific, endemic fraud, and it’s coming out of the lenders, not the poor people who can’t pay the mortgages. And that is what brought this crisis.
AMY GOODMAN: William Black, the New York Times recently reported that Citigroup has hired Richard Hohlt, who was a top lobbyist for the savings and loan industry in the 1980s.
WILLIAM BLACK: Yes. He is the most notorious lobbyist out of the savings and loan crisis. Even within a notorious group, the US League of Savings Institutions, which back then was the political scientist types, often said it was the third most powerful lobbying group in America. That group had, in essence, a black ops subgroup, and Richard Hohlt led it and is responsible for causing immense damage in the savings and loan crisis.
Beyond that, of course, he then comes back in the slime campaign on — when Wilson went public with some of his protests against the lying about the intelligence that got us into the war, the invasion of Iraq, Richard Hohlt reappears. And now he’s back being hired by — in essence, by taxpayer money to help loot the taxpayers again. My phrase for it in the New York Times
was that it was “singularly obscene.”
AMY GOODMAN: I wanted to ask you about the Financial Crisis Inquiry Commission that opened on September 17th. What do you expect to get out of it? I was looking at a piece in The Nation by William Greider. He says Chairman Phil Angelides, the former California state treasurer, says his purpose is “[to uncover] the facts and providing an unbiased historical accounting of what brought our financial system and our economy to its knees."
Greider goes on to say, “In the New Deal years, the Congressional investigation led by Ferdinand Pecora helped build the case for landmark regulatory reforms — legislation establishing the Securities and Exchange Commission and the Glass-Steagall Act, which separated commercial banks from risk-taking investment banks. Like Pecora, Angelides does not intend to propose policy solutions but simply to discover what really happened.”
Your thoughts on it?
WILLIAM BLACK: Well, it’s true that the Pecora Commission was critical to successful reforms and that those reforms worked for a good forty to fifty years, until we decided we were much brighter and got rid of a lot of them. To link the two things you just had me talk about, when you deregulate an industry or de-supervise, the rules stay in place, but the people enforcing them no longer enforce the rules; de facto you decriminalize it, because the regulators have to make the criminal cases as a practical matter.
And so, Pecora did — not only found the problems, he did something else that was critical. He exposed to the American people just how bad the elites were. For example, they discovered a list of prominent Americans that were able to buy stock at half price. The investment banks would let them buy stock at half of the market price. And that list included a former president of the United States of America. So that kind of exposure of corruption, exposure of the fact that the top bankers hadn’t paid any taxes in three years, all of this created the political space under which real reform could occur, as well.
Unfortunately, the Pecora Commission, the modern one, is not set up in that manner. It’s set up as a separate commission, whereas the real Pecora worked through the Senate Banking and had subpoena authority. The current commission can only subpoena if you can pick up a super majority; in other words, you have to pick up, in this context, Republican-appointed members’ votes to be able to do it. So the first big gut check is going to be, are they going to issue a vigorous set of subpoenas, and are they going to have unanimity, or near unanimity, in support for a serious investigation? Because, of course, it has the possibility of embarrassing greatly not just financial elites, but also political elites.
JUAN GONZALEZ: And William Black, what is your sense of the prospects now for stronger financial regulation, given the fact that — my understanding is now that the financial and securities firms have invested about $200 million in lobbying — in their lobbying efforts in Congress, and the halls of Congress are filled with the lobbyists now who are trying to influence the members of Congress on the new regulation of the financial system?
WILLIAM BLACK: Well, the earliest effort is — should be a real wake-up call, because it’s horrible. Barney Frank has proposed legislation on financial derivatives that essentially exempts what are called over-the-counter derivatives from most regulation, and it is over-the-counter derivatives that have been a major cause of this crisis. So that’s utterly insane. There’s no conceivable justification for it. And he stacked the hearing. There were nine witnesses; eight of them were from the industry and, of course, testified that they were vital to the world. The ninth witness was the only person who was in the least bit skeptical, and he was promptly gaveled down, unlike the others, by the chair. So it’s not only a farce; they’re willing to have us see that it’s a farce. They are so little afraid of public opinion and outrage that they’re not even taking steps to cover up the cover-up.
AMY GOODMAN: Bill Black, how much does the 2010 elections coming up have to do with what’s happening now — I mean, from preserving the health insurance industry to preserving the financial elite in this country and the money that goes into the — back into politicians’ pockets, into their coffers?
WILLIAM BLACK: Well, it has a lot to do, in particular, with the Blue Dogs. The Blue Dogs are the more conservative Democrats, and they are racking up unprecedented political contributions, because, of course, they’re such a powerful voting bloc. Even though they’re not all that large in number, they can be decisive in whether anything gets through the Senate, in particular, but they can also be real obstructionists in the House. And by being obstructionist, they make themselves very attractive to the lobbyists. And a number of the Blue Dogs are in jurisdictions where, you know, they have to worry about reelection, and so they think maximizing political contributions is the best possible thing they can do. And the result is very perverse, in terms of our ability to get any reforms.
AMY GOODMAN: William Black, I want to thank you very much for being with us, former bank regulator at the Federal Savings and Loan Insurance Corporation. His book is called The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.