[Marxism] Another scathing intra-class criticism of the bailouts

Marv Gandall marvgandall at videotron.ca
Mon Apr 13 11:16:51 MDT 2009

"The scale of fraud is immense. This whole bank scandal makes Teapot Dome
[of the 1920s] look like some kid's doll set...(Geithner) is flouting the
law...The folks know they are being lied to...you have, in essence, a
multitrillion dollar cover-up by publicly traded entities, which amounts to
felony securities fraud on a massive scale."

-William Black
  Former S and L regulator
The Lessons of the Savings-and-Loan Crisis
April 11 2009

WILLIAM BLACK ...was a deputy director at the former Federal Savings and
Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves
as an associate professor, teaching economics and law at the University of
Missouri, Kansas City. At FSLIC, a government agency that insured S&L
deposits, Black prevailed in showdowns with the powerful Democratic Speaker
of the House, Jim Wright, and helped identify the infamous Keating Five, a
group of U.S. senators (including Sen. John McCain, the Arizona Republican
who lost his bid for the presidency in 2008) who tried to quash his attempt
to close Charles Keating's Lincoln Savings & Loan. Wright eventually
resigned amid unrelated ethics charges, and the senators were reprimanded
for poor judgment. Keating went to jail for securities fraud.

Barron's: Just how serious is this credit crisis? What is at stake here for
the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this
current crisis will probably cost a multiple of that.  Unless the current
administration changes course pretty drastically, the scandal will destroy
Barack Obama's presidency. The Bush administration was even worse. But they
are out of town. This will destroy Obama's administration, both economically
and in terms of integrity.

Q. So you are saying Democrats as well as Republicans share the blame? No
one can claim the high ground?

A. We have failed bankers giving advice to failed regulators on how to deal
with failed assets. How can it result in anything but failure? If they are
going to get any truthful investigation, the Democrats picked the wrong
financial team. Tim Geithner, the current Secretary of the Treasury, and
Larry Summers, chairman of the National Economic Council, were important
architects of the problems. Geithner especially represents a failed
regulator, having presided over the bailouts of major New York banks.

Q. So you aren't a fan of the recently announced plan for the government to
back private purchases of the toxic assets?

A. It is worse than a lie. Geithner has appropriated the language of his
critics and of the forthright to support dishonesty. That is what's so
appalling -- numbering himself among those who convey tough medicine when he
is really pandering to the interests of a select group of banks who are on a
first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy
resolution of insolvencies. He is flouting the law, in naked violation, in
order to pursue the kind of favoritism that the law was designed to prevent.
He has introduced the concept of capital insurance, essentially turning the
U.S. taxpayer into the sucker who is going to pay for everything. He chose
this path because he knew Congress would never authorize a bailout based on
crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such
stiff resolve to put the major banks in receivership would be appreciated in
every state but Connecticut and New York. His use of language like "legacy
assets" -- and channeling the worst aspects of Milton Friedman -- is
positively Orwellian. Extreme conservatives wrongly assume that the
government can't do anything right. And they wrongly assume that the market
will ultimately lead to correct actions. If cheaters prosper, cheaters will
dominate. It is like Gresham's law: Bad money drives out the good. Well, bad
behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets
that were mispriced to the borrower and mispriced by the lender, and which
only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear
Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the
dollar. The last thing we need is a further drain on our resources and
subsidies by promoting this toxic-asset market. By promoting this notion of
too-big-to-fail, we are allowing a pernicious influence to remain in
Washington. The truth has a resonance to it. The folks know they are being
lied to.

I keep asking myself, what would we do in other avenues of life? What if
every time we had a plane crash we said: 'It might be divisive to
investigate. We want to be forward-looking.' Nobody would fly. It would be a

We know that with planes, every time there is an accident, we look
intensively, without the interference of politics. That is why we have such
a safe industry.

Q. Summarize the problem as best you can for Barron's readers.

A. With most of America's biggest banks insolvent, you have, in essence, a
multitrillion dollar cover-up by publicly traded entities, which amounts to
felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the
management and boards stripped of office, title, and compensation. First
there needs to be a clearing of the air -- a Pecora-style fact-finding
mission conducted without fear or favor. [Ferdinand Pecora was an assistant
district attorney from New York who investigated Wall Street practices in
the 1930s.] Then, we need to gear up to pursue criminal cases. Two years
after the market collapsed, the Federal Bureau of Investigation has
one-fourth of the resources that the agency used during the savings-and-loan
crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift
crisis. Right now, things don't look good. We are using taxpayer money via
AIG to secretly bail out European banks like Société Générale, Deutsche
Bank, and UBS -- and even our own Goldman Sachs. To me, the single most
obscene act of this scandal has been providing billions in taxpayer money
via AIG to secretly bail out UBS in Switzerland, while we were
simultaneously prosecuting the bank for tax fraud. The second most obscene:
Goldman receiving almost $13 billion in AIG counterparty payments after
advising Geithner, president of the New York Fed, and then-Treasury
Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government
takeover -- and also receiving government bailout loans.

Q. What, then, is staying the federal government's hand? Have the banks
become too difficult or complex to regulate?

A. The government is reluctant to admit the depth of the problem, because to
do so would force it to put some of America's biggest financial institutions
into receivership. The people running these banks are some of the most
well-connected in Washington, with easy access to legislators. Prompt
corrective action is what is needed, and mandated in the law. And that is
precisely what isn't happening.

The savings-and-loan crisis showed that, too often, the regulators became
too close to the industry, and run interference for friends by hiding the

Q. Can you explain your idea of control fraud, and how it applies to the
current banking and the earlier thrift crisis?

A. Control fraud is when a seemingly legitimate corporation uses its power
as a weapon to defraud or take something of value through deceit.

In the savings-and-loan crisis, thrifts engaged in control frauds in order
to survive. Accounting trickery proved to be the weapon of choice. It is at
work today with the banks, and it is their Achilles heel. You report that
you are highly profitable when you engage in accounting-control fraud, not
only meeting but exceeding capital requirements. These accounting frauds
create huge bubbles, which in turn create large bonuses, which in turn lead
to huge losses.

Q. Why then is there so much smoke and so little action?

A. First, they are inundated by the problem. They are trying to investigate
the major problems with severely depleted staffs. Honestly. We have lost the
ability to be blunt. Now we have a situation where Treasury Secretary
Geithner can speak of a $2 trillion hole in the banking system, at the same
time all the major banks report they are well-capitalized. And you have seen
no regulatory action against what amounts to a $2 trillion accounting fraud.
The reason we don't see it -- aren't told about it -- is that if they were
honest, prompt corrective action would kick in, and they would have to deal
with the problem banks.

Q. Are there any parallels between the current crisis and the
savings-and-loan crisis that give you hope?

A. Of course. Objectively, our case was even more hopeless in the S&L
debacle than in the current crisis. If we were able to do it in such an
impossible circumstance back then, we have reason for hope in the current
crisis. I know how easily things can get off course and how quickly things
can turn back again. The thrift crisis went through several lengthy courses
and distortions before it finally was resolved under the leadership of Edwin
Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment
intent on helping thrift owners. Back then, we had the Justice Department
threatening to indict Gray, the head of a federal agency, for closing too
many thrifts. Next, there were those so-called resolutions, where the
regulators worked day and night -- to create even bigger problems for the
FSLIC. Years later, these so-called resolution deals had to be unwound at
great expense by closing down even larger failures. Or how about the bill to
replenish the depleted thrift-insurance fund that was blocked and delayed by
then-Speaker of the House, Texas congressman Jim Wright?

Q. You say the evidence of a breakdown in the regulatory structure comes
from the fact that America avoided an earlier subprime crisis in the 1990s.

A. Exactly. Why had no one heard of the subprime crisis back in 1991?
Because America's regulators also faced down the crisis early. The same
thing happened with bad credits being securitized in the secondary market.
Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem
didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping
because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial
capitalism at any cost. They remain wedded to the bad idea of bigness, the
so-called financial supermarket -- one-stop shopping for all customers --
that has allowed the American financial system to paper the world with
subprime debt. Even the managers of these worldwide financial conglomerates
testify that they have become so sprawling as to be unmanageable.

Q. What needs to be done?

A. Well, these international behemoths need to be broken down into smaller
units that can be managed effectively. Maybe they can be broken up the way
that the Standard Oil split up back in the early 1900s, through a simple
share spinoff.

The big problem for the last decade is that we have had too much capacity in
the finance sector -- too many banks have represented a drain on our talent
and resources. All these mergers haven't taken capacity out of the system.
They have created even bigger banks that concentrate risk to the taxpayer,
and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need
new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to
mismanagement and fraud. No one has to tell someone they have to stretch the
numbers. It is all around them. It is in the rank-or-yank performance and
retention systems advocated by top business executives. Here, the top 20%
get the bulk of the benefits and the bottom 10% get fired. You don't
directly tell your employees you want them to lie and cheat. You set up an
atmosphere of results at any cost. Rank or yank. Sooner rather than later,
someone comes up with the bright idea of fudging the numbers. That's big
bonuses for the folks who make the best numbers. It sends the message --
making the numbers is what is most important. There is a reason that the
average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing --
the most common way that frauds are found in America -- because the system
draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the
competitive advantage away from the cheats, so the good guys can prevail. We
need to get back to that.

Thanks, Bill.

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