New research contrasts two very different profiles of human nature
“I still believe, in spite of everything, that people are truly good at heart.” – Anne Frank
“What’s one less person on the face of the earth, anyway?” – Ted Bundy
Why are dark triad people so seductive? Why do they get all the research attention? I asked my colleague David Yaden in his office. Immediately his ears pricked up, and he asked me to send him papers on the dark triad, remarking that he hadn’t heard of the dark triad but that it sounded fascinating (thus proving my point).
When I went back to my office, I emailed some papers to David and my colleague Elizabeth Hyde. In a quick email response, David simply wrote back, “light triad”? Now my ears pricked up. Was there such a thing? Had it been studied?
The dark triad has already been well-studied. First discovered by Delroy Paulhus and Kevin Williams in 2002, the dark triad of personality consists of narcissism (entitled self-importance), Machiavellianism (strategic exploitation and deceit) and psychopathy (callousness and cynicism). While these three traits had traditionally been studied mostly among clinical populations (e.g., criminals), Paulhus and Williams showed that each of these traits are clearly on a continuum—we are all at least a little bit narcissistic, Machiavellian and psychopathic.
While research on dark personalities has certainly contributed to our understanding of the darker side of human nature, and how each of us differs in the extent to which we consistently exhibit dark patterns of thoughts, feelings and behaviors in our daily lives, what about the light side of human nature?
Everyday Saints
Socially aversive people certainly exist, but what about everyday saints? I’m not talking about the person who publicly does a lot of giving, and receives many public accolades and awards for all of their giving (and who constantly gives to others in order to achieve personal success). I’m talking about the person who, just by their being, shines their light in every direction. The person who isn’t constantly strategic about their giving, but who emits unconditional love naturally and spontaneously because that’s just who they are.
So this is what we set out to find out. Through many email exchanges and personal meetings, David, Elizabeth and I looked at existing tests of the dark triad and brainstormed a variety of items relating to the conceptual opposite characteristics of each member of the dark triad, but we created items that weren’t simply the reverse of the dark triad items. Our initial pool of items related to forgiveness, trust, honesty, caring, acceptance, seeing the best in people and getting intrinsic enjoyment from making connections with others instead of using people as a means to an end.
To our surprise (we hadn’t expected there to necessarily be three factors), three distinct factors emerged from our studies, which we labeled: Kantianism (treating people as ends unto themselves, not mere means), Humanism (valuing the dignity and worth of each individual) and Faith in Humanity (believing in the fundamental goodness of humans):
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Credit: Scott Barry Kaufman, David Yaden, Elizabeth Hyde and Eli Tsukayama
After a series of refinements of our initial items (and sophisticated statistical analyses conducted by Eli Tsukayama), we settled on 12 items that capture the essence of this light triad. You can take the Light Triad Scale here (and also receive information on your light vs. dark triad balance).
We have now administered the Light Triad Scale to thousands of people of different ages, genders, races and ethnicities, and the results are far-reaching. First, it is clear that the light triad is not merely the opposite of the dark triad. While the two are negatively related to each other, the relationship is only moderate in size (a correlation of about .50), supporting the idea that there is at least a little bit of light and dark in each of us. In my view, it’s best to view those who score extremely high on the dark triad not as a separate species of human (after all, to have a dark side is to be human) but as magnified and unleashed versions of potentialities that lie within all of us.
With that said, it seems like Anne Frank may have been on to something in the opening quote of this article. We calculated a light triad vs. dark triad balance score for each participant by subtracting each person’s score on the dark triad from their score on the light triad. The average balance score of the entire sample was 1.3, suggesting that the average person is tipped more toward the light relative to the dark in their everyday patterns of thoughts, behaviors and emotions. As you can see in this scatterplot, extreme malevolence is extremely rare in the general population:
What about the contrasting profiles of the light and dark triad? We found that the dark triad was positively correlated with being younger, being male, being motivated by power, instrumental sex, achievement and affiliation (but not intimacy), having self-enhancement values, immature defense styles, conspicuous consumption, selfishness and viewing their creative work and religious immortality as routes to death transcendence. The dark triad was negatively correlated with life satisfaction, conscientiousness, agreeableness, self-transcendent values, compassion, empathy, a quiet ego, a belief that humans are good and a belief that one’s own self is good.
The dark triad also showed positive correlations with a variety of variables that could facilitate one’s more agentic-related goals. For instance, the dark triad was positively correlated with utilitarian moral judgment and the strengths of creativity, bravery and leadership, as well as assertiveness, in addition to motives for power, achievement and self-enhancement. Also, an unexpected correlation between the dark triad and curiosity was found, which was localized primarily to the embracing (“I like to do things that are a little frightening,” “I prefer jobs that are excitingly unpredictable“) and deprivation(“It disturbs me when I don’t understand a solution,” “It bothers me if I don’t know a word”) forms of curiosity.
Interestingly, after we controlled for the more antagonistic elements of the dark triad, the dark triad actually showed positive associations with a number of growth-oriented outcomes. These findings suggest that the callous and manipulative core of the dark triad does not do these individuals many favors. It’s likely that the variance that is left over once the malevolence-related variance of the dark triad is removed is associated with agentic extraversion (the particularly aspect of extraversion associated with assertiveness, which may provide a protective factor for those scoring higher on the dark triad.*
In stark contrast, the overall picture provided by the pattern of correlations with the light triad was quite different than the dark triad. The light triad was associated with being older, being female, less childhood unpredictability, as well as higher levels of religiosity, spirituality, life satisfaction, acceptance of others, belief that others are good, belief that one’s self is good, compassion, empathy, openness to experience, conscientiousness, positive enthusiasm, having a quiet ego and a belief that one can live on through nature and biosociality (having children) after one’s personal death.
Individuals scoring higher on the Light Triad Scale also reported more satisfaction with their relationships, competence and autonomy, and they also reported higher levels of secure attachment style and eros in their relationships. In general, the light triad was related to being primarily motivated by intimacy and self-transcendent values. Many character strengths correlated with the light triad, including curiosity, perspective, zest, love, kindness, teamwork, forgiveness and gratitude.
Note that the flavor of curiosity associated with light triad—stretching(“I actively seek as much information as I can in new situations,” “I view challenging situations as an opportunity to grow and learn“)—differed from the flavor of curiosity associated with the dark triad (primarily embracing and deprivation). Mature defense styles were also associated with the light triad (e.g., humor, sublimation, altruism, anticipation), as were optimistic beliefs about the self, the world and one’s future. Individuals scoring higher on the Light Triad Scale also reported higher self-esteem, authenticity and a stronger sense of self.
In general, the light triad does not appear to be associated with any obvious downsides, with a few possible exceptions depending on the context. The light triad was negatively correlated with the motives for achievement and self-enhancement (even though the light triad was positively related to productivity and competence). In terms of character strengths, unlike the dark triad, the light triad was uncorrelated with bravery or assertiveness. Such characteristics may be important for reaching one’s more challenging goals and fully self-actualizing.
Additionally, in line with our predictions, the light triad was related to greater interpersonal guilt—including survivor(“I sometimes feel I don’t deserve the happiness I achieved”), separation(“It makes me anxious to be away from home for too long”) and omnipotent responsibility(“I worry a lot about the people I love even when they seem to be fine”) forms of guilt. While it may be adaptive to experience these forms of interpersonal guilt for facilitating relationships and repairing damage in a relationship, these forms of guilt may limit one’s ambitions for fear of succeeding while others remain less successful.
The light triad was also correlated with greater “reaction formation,” which is considered by some psychologists as a neurotic defense style (but which I conceptualize in my own work as an aspect of mature altruism). The reaction formation scale consisted of the following items: “If someone mugged me and stole my money, I’d rather he be helped than punished” and “I often find myself being very nice to people who by all rights I should be angry at.” While having such “loving kindness” even for one’s enemies is conducive to one’s own well-being, these attitudes, coupled with greater interpersonal guilt, could make those scoring higher on the light triad potentially more open to exploitation and emotional manipulation from those scoring higher on the dark triad. Indeed, we believe further investigation of the social interactions between extreme light vs. dark triad scorers would be an interesting future line of research.
Conclusion
There are definitely limitations of our studies, and lots of areas for future research extending and developing our work. The 12-item Light Triad Scale should be viewed as a first draft, and our four studies should be seen as more exploratory than definitive.
Nevertheless, we hope our research helps balance the force in personality psychology. Yes, everyday psychopaths exist. But so do everyday saints, and they are just as worthy of research attention and cultivation in a society that sometimes forgets that not only is there goodness in the world, but there is also goodness in each of us as well.
You can read our scientific paper here. Also, you can take the Light Triad Scale here, and also learn about your light vs. dark triad balance.
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*This is in line with recent research on narcissism conducted by my colleagues and I that explicitly separates the antagonistic and agentic extraversion facets of narcissism in predicting well-being. We have found that the agent extraversion aspect of narcissism is particularly adaptive when antagonism is partialed out of the equation.
In part two of the series, Bill picks up the story of the S&L fraud of the ’80s, when bankers were charged and went to jail – unlike what has happened since. Bill Black joins Paul Jay on theAnalysis.news
Transcript
Paul Jay
Hi, I’m Paul Jay. Welcome back to theAnalysis.news. Please don’t forget the donate button and subscribe button on YouTube. Be back in a second.
So, this is a continuation of my discussion with Bill Black about what he calls control fraud, sort of the modern history of financial fraud in the United States. Once again, Bill Black is an American lawyer, academic, author, and a former bank regulator, which we’ve been talking about, with expertise in white-collar crime, public finance regulation, and other topics in law and economics. He’s the author of the book The Best Way to Rob a Bank is to own one.
He’s an associate professor at the University of Missouri, Kansas City in Economics and Law. Thanks for joining us again, Bill.
Bill Black
Thank you.
Paul Jay
So, if you haven’t watched part one, you should, because there is a compelling story of the massive banking fraud that took place during the Reagan administration and we’re kind of continuing on that conversation. I’ll kind of pick up where we left off with this question. A lot of people actually did go to jail. A lot of senior banking executives went to jail as a result of you and your team’s work and others who were investigating and prosecuting. Yet when we get to the 07 08 crash and another massive banking fraud, the executives do not fear in any way being charged with fraud, going to jail. They were quite right not to fear it because none of them did. So, bring us back to this next chapter of the S&L investigation you were involved with when people do start going to court and going to jail and getting punished, but it didn’t seem to change anything.
Bill Black
Well, it actually changed an enormous amount of stuff, but nothing works forever. When they abandoned the things we did, then you get exactly what you talked about, but they didn’t have to abandon everything that worked. So, what worked? We embarrassed the Department of Justice into prosecuting, and they came up with something clever that was actually good for the world and it was called the Top 100 project. You had to fight for which cases were the top priorities, which caused the most harm, which ones do we have evidence where we can get convictions, et cetera. So, it was a very serious process. Led to the top 100 list, and that was roughly 300 institutions, roughly 600 individuals. Virtually everybody on the top 100 list was prosecuted and we got over 90 percent conviction rate against the most elite defendants.
Paul Jay
So let me just ask one quick question. This took place after Reagan had left office, and it’s now Bush one? In other words, a lot of these people who were Reagan’s friends start getting prosecuted when Reagan is no longer president.
Bill Black
Correct. This occurs under President Bush, the first. Right. These people have the best criminal defense lawyers in the world, America still does something right, and the firm will spend money like water to try to keep them out of prison because they control the firm as well. So, a lot of their legal work is free. We still managed to get that success rate and again, against the most elite folks, and in that era the sentencing guidelines were weaker, but we still got over 80 percent of them getting prison terms. So, we didn’t just convict them, which in itself is a big deal, getting that on their record, but we actually sent them to prison in the overwhelming bulk of those cases. This was so successful that it completely changed the political dynamics.
Our biggest disadvantage, of course, is money, political contributions, and lobbying, which I told you the extraordinary success, a majority of the House of Representatives, five U.S. senators, the Speaker of the House, the ability to prevent. Ed Gray was not able to get a single piece of helpful legislation during his entire term in office. Zero during this crisis, but when we did these convictions, a couple of things happen. First, it was no longer a business page story alone, it was a front-page news story alone. It was a front-page news story because in part of the political counterattack on us. So, once it became a story of political corruption of the Keating Five intervening and removing our jurisdiction, Speaker Wright demanding that gay senior regulators, be fired and such.
The business press was extremely hostile to us, but general reporters, political reporters, hey, we were bringing them a great story, and the nature of narrative is they have bad guys. The bad guys were the executives and their political cronies. That kind of needed a good guys in the story, and they looked around and said, oh, my God, we’re going to have to use regulators as good guys, during this period when regulators were demonized. There’s just an absolute norm by both parties. For a very brief time, regulators became kind of the heroic folks holding back these forces of evil that were ripping you off. We really went after that. We didn’t just make criminal referrals and get these cases. We, and I in particular, collectively spent thousands of hours explaining to the media what the fraud schemes were, who was hurt, how they used political connections. That pays off eventually. If you establish credibility with them, that you’re telling them the truth and that we would explain it in English and in vibrant English so that they could actually have good copy and such. So, there were many more substantive stories explaining the nature of the rip-off. Being Texas, there were all kinds of stuff, including, providing prostitutes to the top state regulator in Texas of savings and loans on a regular basis and doing so on the sister ship to the presidential yacht. Texas had the sister ship to the presidential yacht parked to the Potomac as its lobbying platform, complete with the speaker of the House and prostitutes and such. Well, you tell those stories, and the world starts to perceive all of this a lot differently, and the numbers that they’re ripping them off are so big. Both how much money is going to the top executives, but also how much immense loss to the public in all of this.
Paul Jay
How much?
Bill Black
Collectively about one hundred and fifty billion dollars, but then Keating unintentionally did us a further service. Our problem, both in law and in PR, was that there’s not much identifiable individual victims and we know that statistics don’t move people. Narrative moves people. People that can identify with. Victims they can identify with, which, of course, every lawyer knows. As a prosecutor, you present the victim if they’re alive and the jurors relate to that type of thing. But deposit insurance means nobody gets a bill, that says you’re going to have to pay two-thousand dollars because of the screw-up at Lincoln Savings. So, the taxpayers don’t really know directly what’s happening. Keating decided to rip off uninsured people. Because of a regulatory crackdown, he couldn’t rip off the insured people quite as much for a while, and so he targeted uninsured people to sell worthless junk bonds of his holding company out of the branches of the savings and loan, so the people would think it was safe. On top of that, he decided to target this good Catholic, alleged good Catholic retirement communities in California and did this to tens of thousands of people. Now, they suffered real losses, and now we had over thirty thousand identifiable victims. So, we could go and look among them as to who had the best narrative.
Paul Jay
OK, let me just make sure that our viewers are following. These are people who do not have their junk bonds insured by the federal government as other people with savings accounts did. So, when they lost, they lost.
Bill Black
They lost personally and there was no insurance fund to bail them out, and they lost a much bigger portion of their savings, often all of their savings, because they get a bait and switch operation. Lincoln Savings Insured Entity would advertise for, fully insured certificates of deposit. The type of thing where it’s a two-year term, so you get a slightly higher interest rate. People would call in from the retirement community and say, hey, I’m interested. Then comes the switch now that you baited them. Oh, if you’re interested in a higher yield, why not look at the bonds of our holding company? They’re backed entirely by all the assets of Lincoln Savings, and they pay a higher interest rate. So that’s how the basic game worked, right. They discovered that 18-year-old boys were the ideal folks, because disproportionately the people living still in these very elderly communities were women.
Paul Jay
Eighteen-year-old boys are trying to sell the stuff?
Bill Black
Not trying, succeeding. They had contests. Bond buster T-shirts. Weekly rewards.
Paul Jay
Was Keating the only one doing this or was some of these other SNL types?
Bill Black
Keating was the only one doing this particular one. At the end of the year, at the Christmas party, they did a skit mocking the elderly victims of all of this. They were 18-year-old boys, they don’t know anything about finance, there’s no training. They’re lied to by Keating’s executives. So, a number of them put their grandmothers in this as well, and mothers. So, it’s a mixed thing, but as I say, this gives us over thirty-thousand people we can choose in the story. So, we led with the woman who was, I think, in her early 60s, who explained to the nice young eighteen-year-old that she was trying to save for a wheelchair accessible van because her daughter was in a terrible accident and was a quadriplegic, institutionalized, and the only sort of real joy she still had in life was driving down the coast road in California, where you can actually smell the ocean and such. The nice young eighteen-year-old man boy who, by the way, were picked to be clean-shaven, well-dressed, and exceptionally polite. That was their key training. In other words, they were the grandson they all wish they had.
Paul Jay
I was about to say the perfect grandson.
Bill Black
All of this stuff is very carefully planned and scripted. They literally use scripts. Then they have entrepreneurs innovate, find even better ways to rip people off, and then they revise the script in a sort of a quasi-evolutionary struggle. So, she tells a nice young man about this and he says, well, then you should put all of your retirement in the bonds of the holding company. So, you lead with a witness like that. It’s all over, because for the first time, there was a human face on the victims, and the human face was your grandmother. Again, the super Catholic who famously gave a million dollars of our money, not his to Sister Teresa, even ripped off a convent through the sale of these worthless bonds. So, these are people who are depraved, in psychology terms, it’s a dark triad. They combine psychopathy, Machiavellianism. And extreme narcissism, so that changed things enormously. Those hearings, because who watches C-SPAN disproportionately? Older Americans. Who was targeted? Older Americans.
Paul Jay
When you say $100 billion of public money went to bail this out, what would that be in today’s dollars.
Bill Black
$225 billion. It was $150 billion. Actually, it would be at least $300 billion. It’s big but let me give you a preview of what’s going to come. The loss of GDP out of the great financial crisis, the best estimate is $41.7 trillion. The American kind of trillion, which is a thousand billion, not the Brits type of thing. It’s staggeringly different scale of these things. It was terrible. It was widely considered the worst financial scandal in U.S. history, but it didn’t even cause a mild recession, most economists think.
Paul Jay
We started this segment with you saying out of these convictions, some things were put in place, and the reason we get this crash, the big fraud in 07, 08, is these things were removed. So, what are these things that were put in place that were removed?
Bill Black
OK, so just to fill in one loop before I get there, I noted that the key thing was changing the politics. It wasn’t just the prosecutions. It was our civil suits which were not against the bank. They were against the executives. A huge change from the great financial crisis and our enforcement actions, which were overwhelmingly against the individuals again. Once we did that, we again followed the same policy of putting it in plain English because we were drafting those, not the Justice Department, and explaining them in plain English and the importance. The combination of all these things is you got a story when there was an indictment, you got a story when the trial began, you got a story when key evidence occurred. This was regional and local and national news often, and you got a story when you got a conviction, and you got a story when they went to the prison. Drumbeat type stuff. As a result, the politicians, as soon as we filed the civil action before any proof began rushing to return political contributions. The advantage we had turned jujitsu like into a liability. We knew we had one when one particularly sleazy member of the House, totally cynical, began wearing a pin, literally six inches in diameter that said jail the SNL crooks.
Paul Jay
Huh? Who was that?
Bill Black
He was…I’m blanking. He was swept up in the postal scandal and had to resign in disgrace [Dan Rostenkowski]
Paul Jay
What happened to Keating?
Bill Black
So, we eventually were able to get a conviction of Keating as well. We also did a removal on prohibition actions and brought huge civil suits against him, but also against all the major entities that contributed to his effort, like the outside auditors and such.
Paul Jay
Did Keating go to jail?
Bill Black
Keating went to jail.
Paul Jay
For how long?
Bill Black
I think three years, three and a half years type of thing. Just a footnote, but as a criminologist, I don’t want people to rot in prison. In fact, I want relatively shorter sentences. I’m not just talking about white-collar types. I think over incarceration is a major problem. Here’s the key thing, among the key things, to my knowledge, not a single person that we successfully prosecuted in the savings loan debacle appeared in any future thing like the great financial crisis. I’ve asked prosecutors who are more familiar with the Enron era, and they believe the same thing, that nobody that they prosecuted in the Enron era showed up again.
Now we get to the great financial crisis. So first, what people need to know is a great financial crisis is really the third act of the savings and loan debacle. In 1990, where all good financial frauds began Orange County, California, our examiners identify a novel. Think of this. They’ve never seen this before and they get it right away. They say this doesn’t make sense unless they’re engaged in fraud in essentially the same way we’ve seen in the savings and loan debacle, but they’re using a new fraud ammunition. The fraud ammunition in the second phase of the debacle was commercial real estate. Commercial real estate, you might think of it, as wholesale as opposed to retail home loans, more like retail. Much, much smaller. Commercial real estates are often $100 million a pop. It’s actually easier to run scams in commercial real estate. But this new system in Orange County was using home loans. The key thing it was doing – they weren’t called this yet in the industry, they wouldn’t be called this for something like five or six years – was what we now call liar’s loans, where you don’t verify the borrower’s income.
There was a new element and that was predation. Targeting blacks and Latinx folks. Now, big commercial loans, $100 million a pop, they aren’t making those to people of color all that much, right? So, it had lots and lots of problems, but racial and ethnic predation wasn’t on the list of that problem, but this new scheme did, and therefore it overwhelmingly used, and this is an incredibly critical thing that almost nobody talks about, loan brokers. Using loan brokers. There are two Nobel Prize winners in economics, George Akerlof and Paul Romer, who wrote one of the most important economic studies ever, “Looting: The Economic Underworld of Bankruptcy for Profit” in 1993, using as their primary example exactly what we’ve been talking about.
They worked with us and said, you folks are right. The other economists are wrong about this honest gambling stuff, and they even adopted the same language as the sure thing and such. Akerlof gets the Nobel Prize in 2001. Romer gets it in 2018, so this is not exactly chopped liver, right. In that article, which they published in 1993, they said explicitly loan brokers are terrible and everybody has known for years that they’re terrible. They have perverse incentives to do terrible things. What do they give you if you’re running the kind of fraud schemes I’ve been talking about? This accounting control fraud or looting. They give you plausible deniability. The really dirty trick things the loan broker does instead of your employees, and you go they promised me they wouldn’t do things like that.
This is how it worked, you created enormous incentives and the loan brokers key in the first fraud, first deceit. The Financial Crisis Inquiry Commission, the inevitable commission to look at the causes of the great financial crisis quotes, and indeed you can hear they’ve got the full tape recording of the interview, the key guy who trained people. He said, our fundamental deceit, which we organized everything to get you to deceive you about is that we work for you. The borrower. Our interests are directly antagonistic to you. We screw you, that’s how we make money. That is the business plan of a loan broker. Screw customer, paragraph one. Paragraph two, repeat endlessly.
Paul Jay
So just to understand, they are giving mortgages to people.
Bill Black
No, loan broker can’t give a mortgage, they’re a middleman.
Paul Jay
OK, they’re brokering a mortgage for a mortgage company, a bank.
Bill Black
For a bank.
Paul Jay
For a bank, and they know the person will never be able to keep up with the payments. So whatever equity the person has, they’re going to lose.
Bill Black
Yes, but equity is not the issue. That’s one of the leading myths that people focus on equity. So, a very poor person might have $2000 in equity. Sure, they’ll be happy to steal the $2000, but that’s not where the money is. We haven’t discussed the second part of fraud in the loan underwriting process. I didn’t do it in the first segment either, but what the critical fraud was to massively inflate the appraisal. So how do you massively inflate appraisals? They do it in a really elegant fashion to use the concept of elegance in mathematics that old people like me were taught right. I tell you what the number needs to be, I tell you what the purchase price is. I tell you, hey, there’s a rush on this. Give me an oral estimate of value. You give me the oral estimate, let’s say that the sales price was $200,000 and the oral estimate is $190,000. I tell you, don’t bother you complete your work. Probably a stiff you on your feet, too. In fact, we have surveys that indicate that was the norm about 68 percent of the time in those circumstances, but what I sure as hell do is blackball you going forward. So, you blackball the most ethical people so that you can select the least ethical appraisers who are willing to be extorted. So, it’s an outright extortion racket, which, by the way, is a federal felony. Just like when the loan broker fills in a false income number that’s a federal felony. So, it is incredibly bizarre since we have good evidence on how incredibly common this became in the great financial crisis to do both of those things, to extort appraisers, to inflate appraisals and to massively inflate the borrower’s income, that economists still go fraud.
Excerpt from The Con
“The first question the task force set out to answer was how so many houses all over the city were selling at prices much higher than they were really worth. The appraisal was not only, you know just a little beneath or a little above, it was thousands, tens of thousands above. Then the government appraisers would go out with us and they would appraise some and say, you know there’s just no way. This this is total. This is total falsification here. The first appraiser to actually come clean we had been looking for payoffs and we could not find any payoffs and he explained to us that it was actually repeat business.
Bill Black
He worked with others in a systematic way to commit a series of crimes, just like the mob. I think there’s no question when it comes to the grander and bigger national conspiracies to sell people loans that they shouldn’t have been sold and then to package those loans into securities that could have been proven by hard work and a commitment to see the investigation through, to take this on the same way that we did in Akron. Unfortunately, all the federal investigations and I’m aware of stopped at the level of the mortgage broker. Or maybe they threw in an appraiser who provided a false appraisal of the property, but they never used the opportunity to move up the chain to get to the folks that were actually the masterminds of this conspiracy.
Frankly, what should have happened in 2010 is some CEO should have gone off to jail. And RICO is a statement basically saying this is a criminal enterprise and we’re going after this for what it really is. It’s a criminal enterprise. It isn’t a lone actor. It isn’t one or two bad apples in the barrel. This is a whole barrel of bad apples, coconspirators working together to inflict damage on our society.
So, I think RICO makes a very, very dramatic statement. I mean, you have to have a visible deterrent for bad behavior. There has to be some price to pay for criminal behavior, otherwise, we’re in total chaos. You can’t just apply that to violent crimes and that type of crime genre. You’ve got to apply it to the most sophisticated criminals in the world who are white collar criminals. They’re deterrable, in my view, because they don’t like to go to jail. You take a violent career criminal, and they live in jail. They thrive in jail some of them. White collar criminals don’t want to go to jail. So, deterrence does have its effect in the world of financial crimes and white-collar crime.
Paul Jay
This is the early 90s. Now, the brokers making his fee and the higher the appraisal and the more the loan, the bigger his fee. What’s in it for the banks at this stage?
Bill Black
The bankers. The question is never what is in it for the bank, because this is looting. What’s in it for the bank? That’s the remember the title “looting the economic underworld of bankruptcy for profit.” So, what’s in it for the bank? Bankruptcy eventually, many years later. What’s in it for the banker? That’s the profit part of that title. So always ask the right question in that regard, but we haven’t yet even mentioned the largest source of income to the borrower, to the loan broker.
Loan brokers gets two fees potentially. One fee is a percentage of the deal. So, as you say, if I can induce people to buy homes at overpriced levels, way in excess of market value, I get more money as part of my standard cut, but the second one goes much more to this predation, the really nastiest aspects. So, the loan broker every day, sometimes multiple times a day, gets what’s called a term sheet from the bank that he works for and the term sheet says these are the terms on which we’re willing to make the loans. There’s a lot of wink, wink, nod, nod, but let’s just stay with those forms. You are forbidden to show the term sheets to the borrower by contract. Your contract as a loan broker. All right, so this is definitely designed to make the world opaque, to maximize predation, and by the way the same scam exists in car financing. So, you should never get your car financing from the auto place that sells you. So, the form says we’re willing if they have the following characteristics, to make the loan at nine percent, however if you can induce them to overpay, and they agree to pay a 10 percent interest rate, then we will pay you a kickback. Of course, the bigger you inflate, are successful in inflating, the bigger your kickback, so your interests are completely contrary to that of the borrower as loan broker. And how often were they able to induce people to overpay? Almost exactly 50 percent of the time where we have data. Which is to say they all typically would and that this thing that I’ve just described, the kickback is statistically bigger. In fact, it’s materially bigger than your regular fee. Even only succeeding half the time it is. This is where the real money was, in screwing your customer.
Paul Jay
At this stage of this don’t people have to be making payments for them to make their money? Does the broker get a front-loaded chunk of dough for signing the person?
Bill Black
Let me now explain accrual accounting to you. So, under generally accepted accounting principles and the international financial reporting system, firms use what’s called accrual accounting. This this is your credit card, that they counted as an asset as soon as you use your credit card, even though you haven’t paid them because you’ve undertaken an obligation. So, I think what you were getting at are the exploding rate ARMs [adjustable-rate mortgages] that will develop years after this. So, we’re starting in 1990 now. We’re going to go forward to about 2004ish when exploding rate ARMs start. By the way, they discovered originally that consumers hated them, and didn’t want them, and so they engineered an entire campaign to figure out how to sell this. So, the idea of blaming this on the homeowners is also bullshit. OK, exploding rate ARMs is you start out with a rate, sometimes you start out with an even super teaser rate that might be as low as 1 percent. Then you qualify the borrower on the basis of that absurdly low rate. So, at that really low rate, of course, your monthly payments wouldn’t have to be as big, and so you would have sufficient income to repay it at 1 percent. But it’s not going to be one percent. It’s going to be 1 percent literally for one month of a 30-year mortgage, and then there’s a second rate and that rate might be three percent and the three percent you pay for, then it gets complex, but let’s say two to three years and ignore the complexity. Then at year three-ish to five-ish, the rate will explode, and it’ll be 6 percent. Which is roughly you’re going to double the monthly payment.
This dramatic increase in mortgage fraud cases was the canary in the mine. It was the warning. This was money chasing people. This was not somebody looking for a loan. It was all designed to maximize profits for all of the different players. The person who sold you alone made more money if they sold you a higher rate loan. They were sold a lot. They’re selling to their very clients these loans that they know are a disaster. I lost my home not because of money, because of fraud. I don’t believe Addie Polk took out the mortgage on her home. I don’t believe she signed any documents. They just generated all this junk, took home huge bonuses, and then when it collapsed, they said, oh, not us. This notion that the financial crisis was there wasn’t fraud and there wasn’t crime is absolutely wrong. It’s dead.
Paul Jay
All right, let me see if I’m understanding this. So, the broker and the banker who’s on the bank side of this, they’re getting fees based on a promise of payment that they all know is bullshit, that it will never actually get paid because they never qualified the loaner of having the money to pay this, but their fees are based on a projection that’s fantasy.
Bill Black
You were fine until the they’ll never be able to because it’s a little more complicated than that, of course, but you’ll like it. Stick with me. OK, the point is that even when you’re paying 1 percent in cash, instead of what will be the fully amortized rate of 6 percent in the hypothetical I just gave, you get to for accounting purposes, treat it as six percent, because they’re on the hook for the six percent and so you get to recognize currently as income the difference? Even when you’re paying the one percent you get to count it as six percent.
Paul Jay
Jesus.
Bill Black
Baseball has been very, very good to me.
Paul Jay
Haha. All right answer.
Bill Black
In the trade, this is referred to as phantom interest, and so places like Countrywide, near the end, roughly a third of all their income was phantom interest. Now, the reason I intervened about will they ever pay it back is you’re missing one central dynamic. If this fraud scheme simply collapsed within months, it wouldn’t be anywhere near as lucrative, and so they make it far more lucrative. Now, one of the reasons they come in with the exploding rate ARMs is part of the process of delaying default because you only have to get, much less cash up front. So, your default will occur later, but the second and far bigger one is the strategy of just paying an incredible amount of money to loan brokers, and that’s the key thing people need to understand. Wall Street is brilliant about one thing. It’s not cheap when it comes to bribing people. Right, they are quite willing to kick off significant amount of money. So, again, the testimony of this guy who trained the loan brokers for much of the nation is that the quintessential prior job to being a loan broker was flipping burgers?
They wanted people who know nothing about finance. That had never had a professional job and professional mentoring about what it means to be someone who serves a customer, because that would all just get in the way. What they wanted was your income in the United States flipping burgers full time would have been somewhere around $17,500, if you got some overtime type stuff. The average loan broker got $150,000 the first year if they survived. So, in a single deal with what we call a jumbo, a really large mortgage like in California, $600,000 or $800,000 mortgage, you could through the kickback and the regular fee, get more money than you had made the entire year before flipping burgers. Just one of those deals.
Paul Jay
They must be trying to identify sociopaths.
Bill Black
That’s exactly what they’re identifying. What they do and this is in the books, they hire 30 and you come back a month later and one is left. They put them in to a dog-eat-dog contest. Then they keep doing it until they have staffs and as I say, then they develop scripts and then they find better ways and they improve the scripts, or they create more sophisticated scripts about this is how we approach women of this age. This is how we approach black males of this age group type of thing. This is what works best. The loan brokerage account. The United States is notorious for not having branch banks in the poor neighborhoods. So, loan brokers, sometimes they had no office other than their home, but usually they’re in storefront places, in poor places. They’re of the neighborhood, and again, this guy that trained folks explains that his model, that he trained people that blacks should screw blacks and Latinx should screw Latinx, and you have to be a capitalist first. That’s a quote from him. It’s not some screed by a Marxist publication, and this is a guy who loves the “free market” explaining all of this.
Paul Jay
Just let me add that when this broke in Baltimore, Wells Fargo was involved. They got hold of some of the internal emails of Wells Fargo and they were out and out racist, the way you’re talking about, overtly targeting black people and then talking about the people in the most racist, derogatory terms and in fact, wouldn’t even try to sell some of these liar loans, as you say, to white people. They were explicitly told, don’t sell to white people. It’s just for black people.
Bill Black
Yeah. So, I mean, this was just hardcore stuff and to skip forward, as you’ve mentioned, I’ve been very active in The Con. Well, The Con tells the story of the great financial crisis for the first time. It’s the first documentary treatment that actually tells the truth about these things and with a real emphasis on this form of predation, but also the liar’s loans and the fraud and the looting nature of it. So almost every documentary presentation about the great financial crisis is just absolute nonsense. It has nothing to do with what actually happened in many cases. Some of them are fun, but they don’t really relate to the substance.
Paul Jay
OK, Bill, so we’re going to end this segment and we’re going to show a clip from the film The Con. I introduced this in part one. Bill was an adviser and is in this film The Con, and they’ve very generously given us some clips we can show. So, I’m going to end this segment with a clip from The Con and then we’ll do a part a Part three with Bill and continue the story. So, thanks for now, Bill, and thank you for joining me on theAnalysis.news, and we’re going to end with a clip from The Con.
Excerpt from The Con
Addie Polk was specifically targeted for who she was because she was living in a poor area. She didn’t have any direct descendants. She was widowed, and she was a minority. You can go in mostly poor minority neighborhoods and you would have people canvasing the neighborhood, knocking on doors, putting fliers in your mailbox saying we can help you. We can get that roof fixed. We can get you new windows. Sometimes they would have information on your house, but you didn’t give them. They would just look up your house. That was commonplace. “The weak, the meek and the ignorant are our best targets.” That’s the words they put on paper to describe those folks. So that has meant that the quintessential victim, if you wanted a single face that face, would be of an elderly black woman. That’s the quintessential victim of predation in the financial sphere.
Keep in mind, when you had all of these little mortgage companies, these people had to find their victims because they had to keep things going into the pipeline. They had to keep up a certain number. It started in the inner city, but like anything else, when it was getting good and the money was in, then it branched out and everybody became fair game. This is why we have to stop seeing each other by color, because if it starts over there, it’s going to come over here sooner or later. As a result, it’s now a national problem because everybody knows somebody who lost their home. The system said that poor and minorities are disposable. The system says that that was simply the cost of doing business. The mortgage company said after Addie shot herself, we’ll forgive the loan. You should have never made the loan. You should never have made the loan. We’ll forgive the loan, but she shot herself already, people can say all lives matter. I say black lives matter not because white lives don’t matter, but because traditionally when something like this occurs, no one comes to help. Black Lives Matter, Addie Polk matters. Anyone else who has lost their home, who have lost their life, they matter. I hope, I pray that we can come to some sort of common ground. That people need protection from those who are seeking to make profit. People need protection.
