“The Best Way to Rob a Bank Is to Own One.” What a title for a book. With a title like that you would expect it to be written by Woody Allen. But, no, it is by William K. Black, a recent guest on Bill Moyers Journal on PBS.
Black, the former director of the Institute for Fraud Prevention, teaches economics and law at the University of Missouri, Kansas City. His book comes from his experience as a regulator during the savings and loan scandal in the 1980s.
After reading the book, I understand why Bill Moyers interviewed him on national television. Moyers asked the question heard round the world about our present financial crisis, “How do they get away with it?”
It was Black who broke open the savings and loan scandal by accusing then-house speaker Jim Wright and U.S. Senators John Glenn, John McCain and three other senators of giving favors for the savings and loans in exchange for perks and election contributions. They were called the “Keating Five” for banker Charles Keating who was in the middle of it.
Moyers deduced that the current crisis is driven by fraud. He asked Black to define fraud. “Fraud is deceit,” Black replied and went on to explain, “the essence of fraud is ‘I create trust in you, and then I betray that trust, and get you to give me something of value.’”
This fraud began in the boardrooms and the CEO offices of our country. But the big question remains, how did they do it?
Black said it begin by making really bad loans. Bad loans evidently pay better. Then you grow rapidly to the point it is a Ponzi-like scheme. Next, come leverage. This means borrowing a lot of money with guaranteed profits in the beginning years. Before you know it, you are rich — rich through the bonuses today’s executives take as compensation. These bank and mortgage firms deliberately made bad loans.
That still does not tell us how they got away with it as long as they did. Firms have checks and balances, as does the U.S. Congress. How did they get by the accounting offices?
Black’s response: “All of those checks and balances report to the CEO, so if the CEO goes bad, all the checks and balances are easily overcome. … it 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.”
What happened is no one went looking. The Bush administration followed Reagan’s to get rid of regulations. (Back in the 1980s, Bill Shaw, South Texas manager of Central Freight Company, said deregulating the trucking industry will bring chaos.) With no regulations, no one looking over their shoulder, making lenders or CEOs be good, the situation goes from bad to worse.
Former U.S. Sen. Phil Gramm, during the Clinton term. not only tried to block regulation of any kind, but to write laws forbidding regulation. Everybody went along blindly.
With a regulator’s checks on the lenders, this whole mess could have been avoided. To Black these lenders were making “Liar’s loans.” They knew they were frauds. For borrowers to get better deals, the lenders tell them to inflate their income and add a few assets whether they have them or not.
With no income verification, no job or asset verification, the borrowers who were taken in, were sunk before they began.
Black became specific: “IndyMac specialized in liars’ loans. In 2006 alone, it sold $80 billion dollars of liars’ loans to other companies.” Other companies did the same and simply gutted the verification process.
A loan with Triple-A ratings means there is zero credit risk. More and more lenders made everything Triple-A. No one checked. This fraudulent exercise continued with no regulation. Where were the investigative reporters? The Securities and Exchange Commission was warned early. They just sat on it. Senator Byron Dorgan of North Dakota, expressed fears about it in 1994.
Last year a Congressional investigation of some of these rating agencies found “fraud in nearly every file.” By the time anyone looked the markets had collapsed and our financial system became a Ponzi scheme.
Black said that Bernie Madoff was a piker. “He doesn’t even get into the front ranks of a Ponzi scheme. … the Justice Department in 2004 very appropriately warned there was an epidemic” nothing was done.
And to add to the messy tale, the very ones who caused the problem are now active in “cleaning it up.” They defrauded the tax payers. Now most are still around to make it right. When the fox is in the hen house, you don’t call in the wolves.
Black summed it up like this: If we changed the bankers, “put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.” It seems Treasury Secretary Paulson failed and now his successor Geithner is failing. Too long too many greedy leaders have kept us in the dark about AIG.
President Obama has a difficult time getting a handle on it. He will not get it done with banks, CEOs and Congress culprits still hanging around “studying how to solve it.” That would be as bad a cover-up as Watergate.
The fundamental lack of integrity got us where we are. And only men and women of integrity will get us through it.
This is not the full story of this record-breaking fraud. It is time well spent to read his book.
Britt Towery is a Brownwood native. Read his opinions online at www.britt-towery.blogspot.