Oh boy. If you have high blood pressure, you may want to avoid listening to this new podcast…
Bill Black, expert on Wall Street control fraud, returns to discuss the gross abuses of power rampant in our financial, political and judicial systems. In his estimation, regulation and enforcement of financial crimes have been completely gutted and de-fanged — intentionally by corrupt politicians, and unintentionally by inept ones. All while the Justice Department turns a blind eye.
Click the play button below to listen to Chris' interview with Bill Black (58m:19s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. If you want to know where you are headed, you have to know where you are and how you got there. Unfortunately, when it comes to the rampant and overt criminality that now dominates big banking, it is if the United States as well as other major countries have developed permanent amnesia. Each new case of criminal wrongdoing is examined if it were a unique new species never before seen. Yet the response is always the same. Sweep it under the rug as quickly as possible and imply a token fine at worst. But nobody is ever name. Nobody goes to jail. The fines are a fraction of the gains. Like a bank robber forced to return 10 percent of haul, we find that bank robber to be rather embolden and undeterred, not chasing, then cautious.
Today, Bill Black returns to the program to discuss these issues with us. Bill is an American lawyer, academic, author and a former bank regulator. Bill’s expertise is in white collar crime, public finance, regulation and other topics in law and economics. He developed the concept of control fraud in which a business or national executive uses the entity he or she controls as a weapon to commit fraud. He has been a prominent voice against financial and political fraud and in 2005 authored the excellent book, The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.
Now when Bill was a guest in our prior years, we discussed how control fraud is essentially running unchecked and unpunished throughout today’s financial system. I am curious to learn from Bill if things have gotten better or worse since then. Bill, thanks so much for coming back on the program.
Bill Black: It is good to be back. Thank you.
Chris Martenson: All right. Well let me start here. HSBC was caught red handed knowingly laundering vast sums of hard cash for drug cartels. They were fined. But nobody went to jail and they did not lose their license to operate. Five global banks recently agreed to pay more than five billion in combined penalties and pleaded guilty to criminal charges for conspiring to rig the foreign exchange markets. Those are huge. But nobody was specifically name. Nobody went to jail. And the banks did not lose their licenses to operate. Banks have been caught committing overt fraud, market rig Libor, precious metals, big rigging fraud against local governments and immunity markets. And so many cases of insider trading that we just do not even have time to list them here. Not one banker has gone to jail.
And the constant stream of record banking profits says to me the fines as large as they are, are not even remotely denting the banks’ bottom lines. So here is my question, Bill. Would it be wrong for an average person to review all of that and conclude that big banks have entirely too much power and that our political and regulatory systems are deeply corrupted?
Bill Black: No. That would be the rational conclusion. And it would be in the first democratic debate. Bernie Sanders said the strategy of the big banks is fraud. And we would agree that the largest banks have been exposed as criminal enterprises. And the same in most countries has been proven true again. Fish rot from the head.
Chris Martenson: Well it has been the case for a long time that we have seen this fish rotting from the head. You are right. We see it. Deutsche Bank has been nailed with things, various banks all across Europe as well. But let us talk about the United States for a minute. How did this actually happen? Let me back up and start here. Under Obama, Eric Holder, as far as I am aware, failed to prosecute any financial firms in any meaningful way. Your view of Eric Holder, what is his legacy here?
Bill Black: So Eric Holder, of course, did not begin as a prominent lawyer in the Obama Administration. He was a very prominent lawyer in the Clinton Administration. And he was the author of the Holder Memo for the Department of Justice. And as such, the Holder Memo was we need to be really careful about prosecuting large corporations. So his unwillingly to prosecute user limited the banking. It is simply that the largest crimes became in banking the most descriptive white collars became in banking. And he then took his general reluctance to prosecute and made it acute in connection with Timothy Geithner who was, of course, made treasury secretary by President Obama even though he had a horrific record as a failed regulator. But the two reinforced each other. But, of course, their views were well known. So it was the president that appointed them who was ultimately responsible for that.
Chris Martenson: Well so let us continue that train. I want to get back to Holder’s legacy because I am very interested in making sure that he does not just skate off into history saying I was a big important guy and I did big important things. Because I think his record is absolutely one that is highly damaging and the legacy continues. I mentioned the HSBC criminal act around drug laundering. It was somebody named Loretta Lynch who prosecuted that case. She ended up getting Holder’s job after failing to criminally prosecute HSBC for that drug money laundering case. I think perhaps one of the most obvious, egregious and seemingly easy cases to criminally prosecute, not just the organization, but specific individuals. Did she get the job then in spite of or because of that track record?
Bill Black: Well it is really not complicated. I mean Eric Holder is someone who has legal skills and who was considered to be pretty vigorous in high discrimination. So he was selective, right? It is not that he is not capable of prosecuting. It is that he had this enormous deliberate blind spot when it came to corporations. And as I explained that turned out to be banks in particular. So you got part right. Loretta Lynch was in charge of the HSBC. And the HSBC is a multiple scandal. So HSBC did simply do some of the largest drug laundering in the world, in particular, the Cinderella Cartel in Mexico. That was just one of dozens of types of felons as you say.
But we have to remember they are not just dozens of types. They are literally in the face of HSBC hundreds of thousands of separate felons. And you would expect in those circumstances that you would get prosecutions of both the senior officers and of the corporation. You make the play. Then when happens when you do not prosecute? Well we now see. You get massive positivism. In other words, they will keep committing the crimes unless you are pulling about the fines. You are quite correct.
But we can be even more explicit virtually always and that has happened in the case of the HSBC. When the supposedly large fines get announced, the stock price goes up of the bank that day or the next day. So the market is telling you that they think that these are great deals in which the bank continues to make money a number of places and they know they have to give out the banker’s new fine.
Now the other major change, of course, is that they have now implicitly, they being the Obama Administration and the Department of Justice, have now implicitly admitted that Holder’s policy was a disaster. Because Loretta Lynch, the Military General of the United States, through one of her deputies has adopted a new policy that said you know that everything that Holden was doing was wrong. We need to prosecute the senior officials. It is the only way you get effective deterrence. It is the only thing that could restore justice. It is essential that the Justice Department get back to what the Justice Department always said was the most effective means, which is prosecuting the officers who lead these frauds.
Chris Martenson: Well that seems rather like saying snow is white or some other obvious statement. Of course, without an effective deterrence, you get recidivism and repeat behaviors. How is this even something that we have to rediscover? I am confused. This seems so elementary. Is this not something you would learn maybe in high school law or grade school law? I am confused. How did we get here?
Bill Black: So that is an excellent point as well. And yes, that is the obviously, which is what the new Roach Department of Justice Memorandum says. We have known this for decades. And it has been our policy for decades. We have simply ignored our policy. And despite the fact that, as I mentioned, there is a Holder Memorandum from the Court in Era [PH]. The Holder Memorandum does not go in remotely as far as Holder and then Breuer who was first head of the criminal division actually went and turned a blind eye to early fraud. Indeed, you can see speeches at the Department of Justice and major presentations in the early years of the Obama Administration where senior justice department officials with experienced prosecutors say absolutely flat out. These are typically in the cartel context. But it is not different there.
Look, the only way – only way you get effective deterrence is to prosecute the officers. And then there is this really interesting quotation by a guy who way over a decade again flipped. That means he confessed and brought to justice some people above him with his testimony. He said look, as long as it is a crime of me or the corporation, the corporation can make me whole. But when they take away my liberty by putting me in prison, there is really nothing the corporation can do that takes that away. And that has been the mantra, as I say, for decades at the Department of Justice under republicans and democrats.
Even under the Clinton Administration, there were more prosecutions. We reached a low that had not been seen for a very long time since the very beginning of the Clinton Administration under President Obama. And not just in banks, but in financial. So it is not simply the elite bankers they do not prosecute. They do not even prosecute the CEOs of sleazy mortgage banks that have 150 employees.
Chris Martenson: Now that needs to be delved into a little bit because it just does not make sense. So from out here, it looks like this is just politics rather than justice. Obviously, in a justice system, it is important that both the letter and the intent or just the actuality and the appearance of justice are there. Obviously, we have one set of pieces of justice that people of Ferguson was saying was very clear, very black and white, very draconian. The little people are getting hammered all the time. But the big guys are skating. So we do not have even the remote appearance of justice. Why would the Obama Administration be willing to go down that path other than is this just money? Is this just all about campaign money and wanting to preserve their political power by not rocking the money boat?
Bill Black: So at least two additional things came into play. And remember that for all the things the Obama Administration did for the bankers and they gave an extraordinary number of things to the bankers in particular what we are talking about, but not limited too. And there were also massive bailouts originally under President Bush, but continued under President Obama. For all those things, the big bankers turned on Obama. And in the last general election, the money turned as well so that it went very substantially republican. So the anomaly was in President Obama’s run for the democratic nomination originally for president. And then the first general election where despite all the things, I mean the courtrooms had been historically exceptionally pro industry and in particular, exceptionally pro big finance. And you would have expected to record these in the first nomination battle with then Senator Obama to clear his clock on political contributions from finance. In fact, he won. He got more money from finance than Bill Clinton. And this is very unusual, more money from big finance of his republican opponent in the general election.
But that flipped. Even though he, Holder and Breuer had so many things for the industry. And in the last general, the money went the other direction. And it is because the banks are not simply criminals. They demand complete obedience. So when Obama criticized them as fat cats, which is hardly much of the criticism and he said it was. He said fat cats instead of fellows. They were outraged – outraged. Then they turned on him.
Now as to how we got here in addition to money and it is important for your listeners to understand that it is not just money. And we got to change these other things too if you want to have success. We eliminated the senior kornau [PH], the thing that is essential to effective prosecutions even if you were at the wheel. So what you were talking about is did they have the will to prosecute. And obviously they did not.
So I will talk about the thing that they have to fix. And they have to fix the criminal referral process. Again, there the key members have gotten much worse since 9/11. We have got 1.5 million in ballpark in employees in our criminal justice system. And I know that people can object to that word justice. That is not the people incarcerated. That is just the folks who get a paycheck for doing it. Of that 1.5 million, right around 2 thousand in the FBI White Collar section are the only folks who do sophisticated white collar stuff like we have been assessing with the banks.
But let us not forget places like Volkswagen. I mean that is that 11 million felonious acts over the course of a decade with rampant, massive cover ups in doing things that in that could people because of the super corrosion. And giving away prosecutors overcharged cases, there would not be 11 million fellows that would be charged with just blue collar type folks with 110 million fellows. Because each one is a multiple crime, right. It is wire fraud or it is bail fraud. Or it is fraud EPA. It is false statements to oral statements to the EPA. It is false written statements to the EPA. It is securities fraud, etcetera, etcetera, etcetera. So many, many, many acts of fraud. And you get this willingness to cheat because you make money by cheating as with a bankster, right.
So we have got two thousand folks who can investigate these kinds of crimes. They have the skillsets to do so. We have simply over one thousand industries. So we got right around two FBI agent per industry. We used to have 2.5. And when 9/11 came, we transferred roughly 500 folks. And they made, they being the Department of Justice and the FBI, national security and I know that could be obscuring color for many folks as well in our team, all right. There are literally -- this is not made up stuff. Literally, it is in writing. Priorities one through nine are national security. Priority ten was everything else. And within everything else, financial fraud is number seven, okay.
When we transfer the floor to your alter priority from your distinctly minor priority, you are going to transfer what you consider to be the five hundred absolutely best folks. And the key skillset, the reason you are transferring white collar folks to national security is that you are getting the absolute best folks at firing the money. Because you want to look at the terrorist funding, okay. You know the other thing is that is the rationale, right? So that is exactly the skillset that is indeed fairly financial fraud. And when we take the top 5 hundred people out of an organization of 25 hundred, you do not reduce the effectiveness by 20 percent. You probably reduce the effectiveness someone in the order of 70 percent – maybe 80 percent, right. Because the absolute best people of the organization are the keys to ruining your really tough cases. And they are not just skilled. They are more vigorous, forceful people, courageous people willing to take on the powerful, right. All of those skillsets go together in who you choose to transfer.
So that, you have to fix. It is just outrageous that we have not fixed simply the resource issue and reestablished and greatly expanded the number of folks who do elite white collar investigations for the FBI. Remember, we make money from these folks when they are doing their jobs both in terms of fines, which should not be the real response. But fines should be part of the response. But also recoveries and also what we have been discussing, deterrence, which is, of course, by far the best thing that they never commit the crime in the first place.
And by the way, because we prosecute cartels more vigorously than anybody in the world and because those prosecutions have involved using electronic surveillance, in other worse, we wire people, and because we are almost unique internationally in prosecuting people historically prosecuting the corporate officials, not just corporations cut to create a cartel is actually a crime in the United States. In most countries, it is not. But because of that, we actually have people on tape explaining that their cartel does not do things in the Unites States because of the risk of prosecution that they deliberately do their business in Europe, for example, historically. So we know the deterrence works. We have actually people on tape explaining all of this. We see it all kinds of cases like in FIFA, the soccer investigation where we actually decide to investigate. We have better laws and ability. So fix those things.
Second thing, if you only have 2 thousand folks or even if you have 25 hundred folks before 9/11, again, because you have right around 2 per industry. You cannot walk a beat or really find anything. And B, you obviously cannot have industry expertise. Only a liberal handful of FBI white collar specialists will have, as they begin the process, any particular expertise in the industry. The numbers mandate that. Now combine that with a fact that is obvious, but ignored by the Obama Administration, which is banks and Volkswagen do not make criminal referrals against their own CEOs. So if the FBI only investigates if there is a criminal referral and the industry is never going to make criminal referrals against their own CEOs, then those referrals can only come from one of two sources. Overwhelmingly, historically, they come from the regulators.
And in the Savings and Loan crisis, where the losses were 150 billion. And the best estimate of economists now is just the lost GDP from this great recession, which was produced by this wave of bank fraud, will cost a lost GDP of 24.3 trillion dollars. And trillion is one thousand billion. In other words, the losses are 160 times larger than the Savings and Loan crisis.
We made, now we being the federal regulators, the Office of Thrift Supervision for Savings and Loan over 30 thousand criminal referrals. And that peak, when their used to be 25 hundred FBI agents, 1 thousand of them, huge commitment of resources was dedicated in the peak of the Savings and Loan crisis to just working in our industry. So you can see that they actually put their people where their mouths were in that era. Well criminal referring is eliminated at the banking regulatory agencies.
Sometime in the Bush Administration, they got rid of the criminal referral coordinators. And the Obama Administration, despite me harping on this for all these years, has refused to reinstate it even though it is a complete no-brainer that if you want prosecutions you absolutely need these criminal referrals which (a) get the FBI involved and (b) start the process of their expertise transfer. And we did not end it with a criminal referral, it began. Well none of that happens now. And so the FBI does not even understand the fraud schemes. It does not understand finance. And it had to end the crisis with Tim Geithner breathing in their ears and reinforcing Holder’s worse instincts and Obama’s worst instincts. Saying oh, the banks are fragile. The banks are fragile. You must not do anything to them. This is, of course, particularly ridiculous in the context of prosecuting bank officers. Because that never has produced crises. It solves crises. You do not need felons in charge of your largest banks. That produces crises. It does not prevent them. It is nuts.
Chris Martenson: Well it is nuts. And I will tell you. The one thing I am aware of that Holder did quite vigorously was prosecute whistle blowers. Chelsea Manning for exposing war crimes. Snowden for exposing vast unconstitutional activities on the part of NSA. So we went against whistle blowers. And so as we trot over into the financial world, I am very familiar with the case of Markopolos of the fraud that Bernie Madoff was committing. He brought it to the SEC for years and years. And all they did was ignore it. So of course, whatever criminal prosecution or referral that might have come out of the SEC to the FBI got killed on the spot there. And it was just an obvious and massive conflict of interest. And yet nobody really gets in trouble for that. And in our system, it seems like if I was going to pick, I would guess that the Obama Administration was a little bit more angry or annoyed with Markopolos than with Madoff.
Bill Black: Well so, of course, because Markopolos does most of that well before the Obama Administration under the Bush Administration. So Holder makes worse on existing policy and existing practice. But he said there was a good thing to concentrate on in banking because – you cannot rely on whistleblowers to replace the government regulators. Whistleblowers are episodic and typically they do not have access to the CEO or the CFO where the fish is really rotted, right.
But compared to the Savings and Loan debacle, we have fabulous whistleblowers in this crisis. We did not in the Savings and Loan crisis. But here, we had people like Richard Bowen at Citigroup. And these are folks who would be ideal whistleblowers from the corporate standpoint, right. So these were not allegedly external whistleblowers. They did not see something wrong and then go public wide with it. They acted just like the bank claimed their officers to act. In other words, they persistently did the right thing. They did not stay silent. They braced their objections and said this wrong. In the case of Richard Bowen, he eventually documents it and puts on notice all the way up the food chain to Robert Ruben, for example. And says look, we are buying the mortgages without even doing due diligence before we buy mortgages. And we are obviously buying them from really sleazy mortgage originators because we might need to look – and my people, he was a senior vice president. He had a staff of over two hundred underwriters. Those are the people who evaluate should we refer them. Those are the people that spot mortgage origination fraud. And Citi Corp bought 50 billion a year in mortgages without even checking. Insane, right.
Chris Martenson: Right.
Bill Black: When they do check, they find that 40 originally within Bowen’s space, this is after the fact that they are assigned to check after the fact. And they find that 40 percent of the representatives of loan agents fail to representation. So people think because of them pulling them properly that all the banks did not care about the quality of loans because they could simply sell it to the secondary market and they were off scotch free. No, you could only sell these secondary market on making representations of the royalties that said these loans are Kosher. And Bowens says look. And they say no, 40 percent of the plan, they are lies. Then they look again. And they find that 60 percent of the time they are lies. And then ultimately they look and it is up to 80 percent. Richard Bowen puts them on notice. As I said, all the way up to expressly Robert Ruben and then customer retirement finance commission is from the senior guys level. We intervened and made it right. Yes, they did. They pushed Richard Bowen to the side with his entire staff except for Rimm, the secretary, so he could not do anything. And then they resold that 50 billion a year, which became, as I said, 80 percent fraudulent to Fannie and Freddie through fraudulent representations of the royalties by Citi Corp. So that case is great.
The whistleblower to J. P. Morgan has gone public. They said there are – and I am quoting her “mountains of evidence” on the break against the senior folks at J. P. Morgan. And it would have what we call in the business great jury appeal. Because the order in her case from the senior guy was put nothing in writing. Now the mantra in underwriting is put everything important in writing. And jurors understand within 15 seconds why you get an order like that. It is fabulous testimony for prosecution. And even in those cases like you rightfully say. When you have the best whistleblowers who acted just like the corporations say that they should do that try to do the right thing that were proven correct that then after the crisis went to the SEC, went to the Department of Justice, after they had been retaliated against. And said look, here is the case. The SEC not only sat on Richard Bowen’s stuff, it refuses to allow other investigators and reporters to have access to the information. So it took the information and created black hole. So they not only do not act, they protect the plans of the banks and the banksters these days.
And while I mentioned two of these whistleblowers, there are actually hundreds in the current crisis. And as the frontline specialists said, it would untouchables that helped expose Lanny Breuer as such. They lost sleep feeling that a bank might fail because he prosecuted. He did not lose sleep that America would lose 24.3 trillion dollars and 15 million jobs due to the bankers’ fraud. He lost sleep that some banker might lose his job. And it is just absolute travesty. They have prosecuted a few of the whistleblowers. But mostly they have ignored them. And that is what the front specialist said in the interview with Lanny Breuer. He said look, as the soon as the word got out on the street that you were doing this documentary, we were inundated with whistleblowers. And you know what they told us time, after time, time after is that they blew the whistle to you folks and you have never even contacted them.
Chris Martenson: So what is the difference? I mean fundamentally, if we were writing this as a script, what would be the difference in the script that drove the main narrative on the Sopranos in what you have just described to me?
Bill Black: Well the same legitimacy of the firm is critical to their success. And to take another organized crime thing, recall how the Godfather starts. So it is the wedding day of Don’s daughter. And there was the tradition that you could come to the Don and ask favors. And so it begins with I believe in America, right. The guy who runs the mortuary whose daughter was beat up and the rich elites got away with it, right. That is how that movie starts.
But along the way, early in that movie also one of the Don’s lieutenants, in fact, I think it was Dr. Hudson Subereli [PH] comes in. And he reads him a list of senators and members of the United States House of Representatives who are expressing their regrets as to why they were unable to attend the wedding. And then you see that scene in the moving again early on. The FBI agents are looking and writing down the license plates numbers of everybody that attends the wedding. So it is critical that you see the determent that the members of the house and the senate do not have to take secret bribes, but can openly take massive political contributions. Which, of course, we have bundling of senior executives in banking to make sure that you and the bank get credit for the literally hundreds of millions of dollars in loans. And remember, as I was saying in the Savings and Loan crisis as regulators is that the highest return on an asset is always a political contribution.
Chris Martenson: So this brings up too this. Optically, obviously, this all is just awful. And any thoughtful person could look at this and see this is obviously a recipe for disaster. And I will get to that in just a second. But it is so overt at this point in time that Eric Holder steps out of this attorney general position and goes and join Covington and Burling, a corporate a law firm that especially serves Wall Street clients, optically just rancid.
Ben Bernanke, architect and promoter of the largest transfer of wealth in history from everyone to a select few, he is out there trying to refurbish his image as a caring and thoughtful person who is just trying to do the right thing. But he joins Citadel, a major financial market maker, high frequency trading firm very much at the center of our increasingly distorted, dysfunctional markets. Obviously, optically again, this is pretty hard to take. To me, those are really just characterizations and capsulations of this larger position you are talking about, which is that we are so far down this rabbit hole that people are not even trying to create the appearance of correctness in this such at the SEC sitting on all of those documents and running flanking guard actions for a major bank. I mean just your thoughts on – I mean optically, it does not even look like they are trying to hide this at this point really. It feels [Cross talk].
Bill Black: Well no, they clearly are trying to hide it. They have the new memorandum. And they say implicitly. It is clear. If you read the memorandum, everything Holder did and failed to do was disastrous. And we’ve known in sends the memorandum. We have known this for a very long time. So there is that admission. Now behavior has not changed yet. And the question is is the word yet appropriate? Are they at least going to do a symbolic prosecution? I was amazed that Holder and Lanny Breuer, again, his head of the criminal division who, by the way, is also a partner at Covington and who, by the way….
Chris Martenson: I did not know that.
Bill Black: Yes, as their top white collar criminal defense partner.
Chris Martenson: Oh, how convenient?
Bill Black: So the revolving door is in fact turbo charged. But in seriousness, it depends on who you pick and what orders you get. Do not forget the president is the key person in all of this. So in the Savings and Loan crisis, the first President Bush did lots of terrible things. He ran the Financial Regulation Taskforce under Reagan when he was the vice president. He reappointed the sleazy head of the agency that we ultimately through our testimony in front of congress caused to resign in this space.
But with all of those things, once this guy did resign (his name was Danny Wall by the way) President Bush appointed someone who was quite competent, Tim Ryan. He kept the toughest lawyer he knew who was a partner of Covington. And his name is Harris Reinstein. And those two folks, with us, led a crackdown of unprecedented dimensions on the Savings and Loan frauds where we produced not only the criminal referrals and all the support that produced these record convictions of the elite threats that lead that crisis. But also massive increases of enforcement action and such. Because the mandate from the president, as Tim Ryan told me personally, was I am instructed to put prominent heads on plates. In other words, I am to fix the optics and the substance. I am to go after the most elite criminals and make them my priority. And that is exactly what we do. We hyper prioritized the cases.
And indeed, Tim Ryan took it so seriously that he took some enforcement action (we took an enforcement action) against the sitting president of the United States that same of George Bush, I, son, Neil Bush. And as a result, Timothy Ryan is now dead to the Republican Party. They will not reappoint him. They refused under the second President Bush, of course. He was not about to reappoint the guy who had been so successful as someone aiding prosecution and bringing enforcement actions against the banksters, right.
So the first President Bush, all he had to do was to pick two lone winners including those of those Covington and give them the same instructions his dad gave. Go after the top people. Instead, both Bush II and Obama gave obviously the opposite take. We need to be very cautious here. And as I said, this was reinforced by Bernanke and in particular reinforced by Geithner who became President Obama’s principal economic advisor and certainly his principal banking advisor.
Chris Martenson: Now this is all really gelling into a pretty complete story. You do such a great job telling it. And I want to jump the end in just a second. But first, would it be wrong for me to suspect then that if there is obvious major felonies being committed rather brazenly and repeatedly, how much trust should I put into something less felonious like the numbers that banks report or that even any corporations are reporting now from an accounting standpoint? There has been – how far should – is there anywhere when I can begin the stories that I am told? Or is there the chance that pretty much everything is – we are in the Wild West here. And to the extent that people can lie, cheat and steal, they are. And there has been relatively toothless enforcement. So how much can we trust in this story?
Bill Black: Well you cannot. I mean that is the point I keep emphasizing. The weapon of choice in banking fraud is accounting. So deliberately overstate asset values. And so the Nobel Prize winner in economics, George Akerlof and Paul Romer, also a very prominent economist in 1993 wrote the article Let the Piles Summarize That We, the Economic Underworld of Bankruptcy for Profit. This is when the CEO loots the bank. So there are many frauds in which the bank loses money, right. And so one of the lines in that article, that is the famous 1993 article, is we begin by emphasizing the point that is critical and obvious that we emphasize it because it is has been so completely ignored. Every dollar by which you inflate and asset inflates capital by a dollar and creates an additional dollar you can steal. So timing is everything.
And so yes, they lied and they lied to the extent of trillions of dollars. They lied and made stuff that was really in the trade, right. So the bankers are actually calling these things toxic in their internal memorandum. And they are simultaneously rated Triple A, which is supposed to mean that they are equivalent to United States Treasury and are “risk free” by which they mean credit risk. That is preposterous, right, absolutely preposterous. They knew from their industry’s own experts in reports in writing in early 2006 that went to every mortgage lender in America that the incidence of fraud in liar’s loans was 90 percent – 9 – 0. Nobody ever made a bank like a liar’s loan. This has nothing to do with trying to help minorities, right. This is just pure fraud looting as Akerlof and Romer as control fraud as we refer to in criminology. And what did they do in response? What did the industry do in response to reemphasize that these had a fraud incidence of 90 percent? They greatly increased the number of these loans such that by 2006, 40 percent of all the mortgage loans made that year were liar’s loans. That means in 2006 alone, there were more than 2 million fraudulently originated loans. And, of course, something on the order of 85 percent of them were resold to the secondary market. As I emphasized, you can always sell them to the secondary market through fraudulent reps and warranties, there are not any fraud exorcists. Once they start out these originated fraudulently, they can only fraudulently. Then those people package them. Got the Triple A fraudulently and then resold them with false reps and warranties. So fraud begets fraud.
Chris Martenson: Let me get one step further on that because I cannot wait to ask you this question. Because this has been a – here is a sneaky suspicion I have had. Because I have been waiting – I am aware of how many of these fraudulent documents and loans were originated. And I was waiting for the losses to really start to appear. And many of them did not really materialize like I thought. But you follow this train. You say Bank of America has got 50 billion of these things. They sell them to Fannie/Freddie.
Next thing we know, Black Rock is in there with the Federal Reserve helping the Federal Reserve decide which tranches of MBS to go out and buy. And the Federal Reserve vacuums up 1.25 trillion or thereabouts of these mortgage backed security pieces of paper. Here is the question. What is the chance that the Fed preferentially or accidently (but I am going to think preferentially) went out and vacuumed up some of the worst of these things so that they could die quietly on its balance sheet rather than do damage to bank balance sheets?
Bill Black: Oh, it is absolutely preferentially. That is what they recognized. All the verbiage is about providing liquidity. But the reality was often buying the crap loads for well above market price. Now, if you sit long enough on real estate, of course, market prices will tend to increase. Now that is still to an economist a loss. But the Feds always use economics as a pretense. They understand why it is really an economic loss. But they are very good at using the same thing.
Accounting, accounting, accounting is where the games are played. And by right, introduced talking about control fraud in the private sector. But control fraud also exists in the governmental sector and the non-profit sector. And this is simply an example of people lying. No, they are not getting personally wealthy off of it directly. Indirectly as you say, the Bernankes and the Tim Geithners do, in fact, revolve the door and go in the prominent position in finance even though they are the greatest regulatory disasters in history. And remember, Bernanke was quite an active republican. And President Obama reappointed Ben Bernanke to run the Federal Reserve. Just like Alan Greenspan was heavily connected to the Republican Party. But Bill Clinton reappointed Alan Greenspan.
Chris Martenson: Yes. Yeah, well obviously there is enough here to say that the story we are told in public is not actually what is driving the motive and the narrative behind the scene. So I am so thankful to you for helping us understand what is going on behind the scene. And then the final question is just this. I do not know if there is a good answer or not. But Bill, in the idea of say – here is the question. Where is the hope in this story? What can we do, the people listening to this, besides wait for this rotten mess to come crashing down so we can hopefully rebuild it in a better way? Is there anything we can actually do here besides watch, get out the popcorn and hope for the best?
Bill Black: Yes, but you are also – I think your bottom line is correct. We phrased it the same way. We have to be ready with our friends when the next crisis hits. Because you are going to need the next crisis to have any political risk. Right now, we have every candidate from one of the two major parties saying as soon as they get in they will repeal all the new regulatory steps, right. And they control the house and the senate. So there is no way that you are going to get effective new laws past.
So what could you do? Well you could do what we did. Again, the Reagan and first Bush Administration had been terrible – terrible with regards to banking fraud. We, on a regulatory basis, simply went after them. And the Department of Justice eventually went after that. And we turned around the political contributions because we exposed that, of course, these top primary politicians were taking significant money from places that were felons. And we said, why are you doing this? And the press took to that. And politicians will say it is a world crisis, but only once prosecutions began started to rush to give back the political contributions and apologize for taking the money. So their great asset became a liability.
So Loretta Lynch could prosecute. The banking regulators could become real regulators. Now Obama had made sure that he does not appoint folks like that. But President Reagan thought he had done the same thing. And then Ed Gray gave the anti-governmental folks, appointed as head of the savings and loan regulatory agency basically had this change. And say we say that they are frauds and they are destroying the industry. We have to go after them. And so you could have a change like that in the BC or federal regulators.
By the way, the only real person like this has been the people running the New York offices. These are the State of New York. And guess what just happened? Governor Cuomo has just issued new EDEX [PH] saying you cannot even issue a subpoena without our personal approval. And the head, the acting head of the New York Regulator of Financial Institutions just resigned this week because of that political interference.
Chris Martenson: Yeah. Yeah, it is – I remember when Eliot Spitzer was about to bring a big – I believe it was a RICO [PH]. But it was a big, big suit. And just magically, the FBI came up with some tape recordings of him with an escort and the whole thing fell apart. And I thought that wow. That is a pretty big coincidence. A lot of coincidences seem to happen around when you are trying to investigate big money in this way. So I guess New York is continuing with that line – that approach to this all, I guess.
Bill Black: Well it is both ways. So Eliot Spitzer was known as the most vigorous opponent of financial fraud in America and with vastly fewer resources than the Department of Justice and the Securities and Exchange Commission. Time after and time after telling him he embarrassed them by taking the lead and getting better relief. And so it was an example of the old Washington joke. If the SEC chairman was in a room with Eliot Spitzer and two of his worst enemies in the world, but he only had two bullets in the gun, who would he shoot? And the answer, of course, was he would should Spitzer twice.
Chris Martenson: Yeah.
Bill Black: They hated him. They hated him in the Washington ranks because he consistently embarrassed them when they tried to do nothing or a slap on the wrist. And he would release these employer memorandums from the bankers where they said these extraordinary things. And they made it clear that they were frauds under this very fancy veneer, right. It is like some of the Scandinavian furniture. It looks really beautiful. But it is a veneer that is really a 32nd of an inch thick. So the first time your two year old runs into it, it does not look so great anymore.
Chris Martenson: Oh, goodness. Bill, I could talk to you all day. I have so many more questions because this is an area I am consciously and actively tracking all the time. That is all the time we have for today. But I really want to thank you so much for the work you are doing and for being so clear, eloquent and, of course, diligent in tracking all of these things because it absolutely needs doing. And here is to hoping for some semblance of common sense, reality and maybe even justice to come back into the story someday. So thank you for your time.