William K. Black, a regulator during the dark days of the Savings & Loan Crisis, gave the most sensible testimony about the financial crisis heard in Washington so far.* Fraud thrives and spreads in a regulatory free, highly paid, criminogenic environment. Cheaters prosper driving honesty out of the market.
"Firms such as Citigroup and Merrill Lynch [and others] were able to create complex securities backed by recklessly underwritten [often fraudulent] mortgages, knowing that they could pass the risk along to someone else who had less information about the underlying loans. [The] $62 trillion credit derivatives market allowed Wall Street to lend without having confidence in the men and women it lent to. Wall Street hedged away the risk of lending and in the process undermined the entire system."
Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff, P. 295, Christine Richard (Wiley, 2010).
It's time to bring back Black and resolute regulators like him. Our proposed "financial reform" bill is a sham, and the health of our society and our economy is at stake. ("William Black Warns That Financial Reform Bill Won't Stop the Wall Street Crime Wave," Dan Froomkin, HuffPo, April 21, 2010)
Failed Regulators Are Still in Charge
Our financial "investigations" aim to miss. First, the media writes breathless articles portraying Washington's financial "investigators" as "tough." Each new commission is billed as our "Pecora" moment. The "investigators" hire teams of staffers who badger people like me for charity with insightful questions like: "What's a CDO?" Treasury, Federal Reserve, and Wall Street notables loudly complain about "unfair" and "harsh" investigators. Then everyone marches to the Hill where the committee pelts Wall Street executives with verbal marshmallows. Here are just four examples:
The FCIC: Phil Angelides, Chairman of the Financial Crisis Inquiry Commission, had Robert Rubin, Citigroup's former senior advisor (also former Treasury Secretary under President Bill Clinton, and former Co-Chair of Goldman Sachs), and Chuck Prince, former CEO of Citigroup, in the palm of his hand. He failed to question them about Citigroup's sales of complex CDOs and a $200 million loan to the failed Bear Stearns hedge funds, even though it was public information and a classic situation for securities fraud. ("Congress's FCIC Nearly Nailed Citigroup Executives to the Wall--Then Blew It," Tavakoli, HuffPo, April 8, 2010)
The SEC: The SEC filed a recent complaint of alleged fraud in a civil lawsuit against Goldman Sachs. The complaint did not mention that Goldman may have used the subprime mortgage-linked security at issue to unload other complex bonds it created. The complaint strikes me as an SEC publicity stunt. Wall Street banks had deep ties (and often ownership) with corrupt mortgage lenders and created phony securities that funded loan fraud. Corrupt finance--enabled by the SEC's multi-year failures--amplified the problem. The SEC (rating agencies, and more) behaved as collaborators, and now they seem to want credit for bringing one seemingly incomplete complaint against a sapling, while the forest fire rages on. ("Abacus Might Have Had Other Benefits for Goldman," Matt Goldstein, Reuters, April 23, 2010, "Goldman Sachs: Spinning Gold," Tavakoli, HuffPo, April 7, 2010.
Senate's Permanent Subcommittee on Investigations - "Trial by Email": The leak of Goldman's emails suggests that shorting as a hedge is the same thing as betting against clients. ("Blankfein E-Mail Shows Firm Profited Betting Against Mortgages," Christine Harper, Bloomberg, April 24, 2010.) It's not necessarily so.** Even if facts show it is true, there is a much bigger issue. Wall Street banks bet against our entire society when they created and sold phony securities that fueled fraudulent mortgage lending. That activity was profitable for some firms (Goldman) and unprofitable for others (Lehman, Citigroup, Merrill Lynch, and more). Yet in every case, it was control fraud. CEOs and bankers grew rich while the financial institutions that employed them often imploded. The agents of the fraud prospered while American society and the American economy were massively damaged. ("Wall Street's Fraud and Solutions for Systemic Peril, " Tavakoli, TSF, September 29, 2009)
TARP "Investigations": Unintentionally or otherwise, the TARP Inspector General's November 17 "SIGTARP" Report appeared to be evasive action or just plain whitewash. Ten days before that particular SIGTARP report was released I disclosed key information that the SIGTARP report didn't even mention. With better access, a budget, a mandate, greater staff, and more time, the "investigator," did a poor job, yet is lauded in much of the media and in Washington as "tough." After damaging facts become public, SIGTARP "catches up." It's an embarrassment. ("Goldman's Undisclosed Role in AIG's Distress," Tavakoli, TSF, November 10, 2010.)
I urge the President to play the race card--the human race card. The Founding Fathers sought to protect the Republic from this tyranny of private interests. This was meant to be a place where all members of the human race have a fair opportunity to thrive.
These show trials and faux 'investigations" distract us from the real job of reform and protect Wall Street's interests. It's time to bring back Black--or regulators like him--and truly give us our "Pecora" moment.
* Statement by William K. Black, Associate Professor of Economics and Law, University of Missouri - Kansas City before the Committee on Financial Services, United States House of Representatives regarding "Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner." April 20, 2010. William K. Black is also the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry (University of Texas Press, 2005).
** When banks sell short, it is often to hedge their risks. Sometimes hedges result in a net loss, and sometimes they result in a profit. Some hedge funds ethically sold short shares in companies with sham-based-accounting earnings. Short sellers were often the only people sounding the alarm as Pershing Square head Bill Ackman did with bond insurer MBIA. Christine Richard's just released book, Confidence Game (Wiley, 2010) is the gripping account of how he tried in vain for years to get regulators to listen. Meanwhile MBIA, at first an apparently healthy company, was a financial mirage and within a few years the "AAA" rated company sank like a stone. Short sellers were not responsible for the death of Lehman Brothers. My book on the meltdown, Dear Mr. Buffett (Wiley, 2009) is exculpatory evidence for anyone who shorted the stock or bought puts on the shares of Bear Stearns, Lehman, Merrill Lynch, Citigroup (and more) prior to the financial crisis. This type of short selling is very different from shorting a healthy company and spreading false rumors. It is also different from selling short while withholding damaging information.