In May of 2009, Simon Johnson wrote in The Quiet Coup:
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
We are now at May 2010, and how do things look?
Not so good. Yes, we haven’t had another great depression. But there is a big old “yet” hanging over our heads. Because we are not through with this crisis. We have done virtually nothing to avoid the next one. And all the oligarchs are still in charge on Wall Street and Washington.
But will we get it?
There is now a Republican alternative to the Democrats reform bill, so it looks like Congress may finally passes financial regulatory reform.
Will it do enough?
The chairman of the Senate Banking Committee and principal author of the Senate financial regulation bill, Chris Dodd explains his bill thusly:
I don’t restore Glass-Steagall in this bill. But we come pretty close to trying to at least push or cajole or lure institutions back to more core functions. Banks being banks. We’ve got to move this thing back, and I think we achieve a lot of that through this bill.
Sad to think that the best they can do is try to ‘push’ or ‘cajole’ or ‘lure’ these financial institutions into behaving well. It really does show who is in charge. And unfortunately it’s not a Teddy Roosevelt type trust buster. They can’t even manage to utter some good trustbusting rhetoric.
The MSM has dedicated itself to the partisan political battles, but have barely mentioned the Sherrod Brown and Ted Kaufman “SAFE banking Act” to bust up the big banks? What happened to hard core investigative journalism that would look into the bad politicians from both parties that helped to create and enable this mess. There is so much about this crisis and the system that created this crisis that we are just now learning. Like the credit rating agencies and what to do about them.
As Paul Krugman points out:
the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix….
Those seals of approval came to play a central role in our whole financial system, especially for institutional investors like pension funds, which would buy your bonds if and only if they received that coveted AAA rating.
… In one e-mail message, an S. & P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.
Fraud is not only at the heart of this crisis, it has infected every aspect. And yet no one in this administration or in Congress is using that word very much. Yes, the SEC filed a fraud complaint (civil suit) against one employee at Goldman, but will that do enough? Eliot Spitzer and William Black think not. While the fraud complaint:
… points to fundamental problem in the financial sector that has been at the root of the financial crisis — one that still exists today. The market is not transparent. It has been fraudulently manipulated to enrich managers. Investors lack clear information to make decisions about what they are buying.
We applaud the SEC lawsuit, but it will not solve the problem. Unless our financial system is reformed to put adequate protections and checks and balances in place, we can expect this kind of fraud to continue. Financial executives will continue to take risks they do not understand. Those who control the flow of capital will continue to churn out profits with socially disastrous consequences.
So what should we do? Where do we go from here? And how do we gain transparency, end the fraud, and get rid of the oligarchs?
Economist James Galbraith suggests:
“Once you understand the implications of massively fraudulent practices,” said James Galbraith, a progressive economist at the University of Texas, “it changes the professional community that has the principal say about interpreting the crisis.”
Economists, he said, should move into the background — and “criminologists to the forefront.”
Which brings me to back to Bill Black. For a criminologist like Black, this was predicted and predictable. From The Great Global Bank Robbery – part 1.
…the warnings of an “epidemic” of mortgage fraud, which began in 2003, were embraced by the FBI in 2004, and were supplemented by warnings of endemic appraisal fraud in 2005.
By the time this crisis began economists (Akerlof & Romer 1993), regulators (Black 1993); and criminologists (Calavita, Pontell & Tillman 1997; Black 2003; Black 2005) had developed effective theories explaining why combining financial nonregulation and modern executive and professional compensation produced criminogenic environments that led to epidemics of accounting control fraud. We also explained why these were near perfect frauds and explained how control frauds used their compensation and hiring and firing powers to create a “Gresham’s” dynamic that allowed them to suborn the “independent” professionals that were supposed to serve as “controls” and transform them into allies.
…we have recurrent, intensifying crises in so many nations. The principal cause is epidemics of “control fraud.” “Control frauds” are seemingly legitimate entities controlled by persons that use them as a fraud “weapon.” (The person that controls the firm is typically the CEO, so that term is used in this article.) A single control fraud can cause greater losses than all other forms of property crime combined. …Financial control frauds’ “weapon of choice” is accounting. … Its hostility to regulation, endorsement of opaque assets that lack readily verifiable market values, and support for executive compensation that creates perverse incentives to engage in accounting control fraud and optimizes fraudulent CEOs’ ability to convert firm assets to the CEO’s personal benefit have created a nearly perfect crime.
Control fraud is deliberate and well planned. From The Great Global Bank Robbery – part 1.
A lender optimizes accounting control fraud through a four-part recipe. Top economists, criminologists, and the savings and loan (S&L) regulators agreed that this recipe is a “sure thing” – producing guaranteed, record (fictional) near-term profits and catastrophic losses in the longer-term.
The firm fails, but the officers become wealthy through:
– Extremely rapid growth
– Lending at high (nominal) yield to borrowers that will frequently be unable to repay
– Extreme leverage
– Providing grossly inadequate reserves against the losses inherent in making bad loans.
Control frauds, either directly or indirectly through the perverse incentives their compensations systems create for loan officers, loan brokers, and mortgage brokers, cause, encourage, and accede to endemic appraisal fraud.
In order to maximize their (fictional) accounting income, the nonprime lenders needed to induce others to send them massive quantities of relatively high yield mortgage loans with supporting appraisals, without regard to credit quality. The nonprime lenders created perverse incentives that produced a series of “Gresham’s” dynamics [cheats prosper at the expense of their honest competitors]. This did not require any formal agreement (conspiracy), which made it far easier to create an upstream echo epidemic and far harder to prosecute. Traditional mortgage underwriting has shown the ability to detect fraud prior to lending. The senior managers that controlled nonprime mortgage lenders that were control frauds, therefore, had to eliminate competent underwriting and suborn “controls” to pervert them into fraud allies.
When the nonprime lenders gutted their underwriting standards and controls and paid brokers greater fees for referring nonprime loans they inherently created an intensely criminogenic environment for loan brokers and appraisers. The brokers’ optimization strategy was simple – refer as many relatively high yield mortgage loans as possible, as quickly as possible, with applications and made the borrower appear to qualify for the loan. The nonprime lenders, in essence, signaled their intention not to kick the tires and weed out even fraudulent loan applications and appraisals. I call this the financial version of “don’t ask; don’t tell” (a justly maligned U.S. military policy about gays serving in our armed services).
We are doomed to keep repeating these crises as long as the Oligarchs are allowed to stay in place. More from the The Great Global Bank Robbery- part 2:
…there is nothing fundamentally new about fraud schemes. The U.S. has long been complicit in refusing to crack down on the tax havens. The deal it made with UBS was scandalous. We have to end the “race to the bottom.” We can end it. It would do enormous good for the world in a wide range of spheres – and it would be immensely political popular. It would, however, enrage the richest Americans who evade taxes (but make political contributions).
We face recurrent, intensifying economic crises (and economic stagnation for the working and middle class in the developed West) because our financial elites are unworthy. They are too often outright criminals – control frauds. They have no sense of accountability, no sense of duty to the nation (or community or world). … Their anti-regulatory, pro-greed ideology triumphed and produced a global Great Recession. And what do our elites do? They blame the least powerful citizens for the crisis the elites designed, implemented, and grew rich on.
I’m tired of political and media spin. I’d like the truth. And I’d like the criminals to go to jail and their enablers removed from power. Without a thorough investigation, we can’t possibly learned enough about the who, what, when, where, why, and how of such a complex system to prevent a repeat or even bigger crisis.
So, lets bring in the criminologists!
The video of Bill Black on Bill Moyer’s Journal can be seen here.
And in case you missed this hard hitting five part series of interviews with Bill Black regarding how our government worked and still works – for Wall Street:
Part 1: Psychopaths and Sociopaths in Charge Part 2: An Engorging Leech System Part 3: No Protection & No Prosecution Part 4: No Reregulation Part 5: Political Gold Mine
[Original version cross posted at No Quarter]