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.
The Best Way to Rob a Bank Is to Own One – BILL BLACK (1/9)
Bill Black traces the history of modern American financial fraud starting in this episode with the S&L Banking scandal. Bankers continue to loot their banks, customers, and society to this day. Part 1/9 on theAnalysis.news with Paul Jay.
Transcript
Paul Jay
Hi, I’m Paul Jay. Welcome to theAnalysis.news, please don’t forget the donate button and the subscribe button if you’re on YouTube, and be back in a second.
In 2014, a billion dollars disappeared from three Moldovan banks. The Republic of Moldova is a tiny, landlocked country in Eastern Europe. How did a billion dollars do a vanishing act? That’s 12 percent of the country’s GDP.
As the title of Bill Black’s book says, the best way to rob a bank is to own one and that’s more or less what happened in Moldova. The heads of the three major banks created a Ponzi scheme between them, loaning and hiding money with each other, moving it offshore to hide the assets. A carousel borrowing scheme was applied. Loans in one bank were paid off with loans from another. The banking fraud in the United States that led to the crash of 07 and 08 makes the Moldovan scandal look like child’s play.
Here’s the thing, in Moldovia, many of those that were responsible for the fraud went to jail, in the U.S. other than one mid-level trader, it was none that went to jail. Not a single senior executive ever charged in one of the biggest financial frauds ever. Has the situation changed? Could such a scam repeat itself? A docuseries titled The Con breaks down what happened during those years leading up to 2007 08? Here’s a trailer from the docuseries.
Excerpt from The Con
“I’m neither an economist or a scholar. I’m just an average American who lost my home and very nearly my family to foreclosure when the market imploded, and I’ve spent almost every day since trying to find out why. Once the dust settled, it quickly became clear that my story was no different than millions of other Americans. We all thought that we were alone. We all thought that we’d failed, but none of us really knew why. With a gun in her hand, Addie Polk apparently shot herself in the chest as deputies were knocking on her door with eviction papers in hand. 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 a loan 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 my 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.
We were targeting, in many cases, minorities. We were waiting for the leadership to say, go, that never happened. The investigation was suppressed. This was all part of the same puzzle that was falling apart. This is the largest conspiracy of lies in the history of the world. This investigation has just begun.
Paul Jay
Now joining us to discuss the history and present state of what he calls control fraud is Bill Black, who’s in the film and was an adviser to its producers. Bill is an American lawyer, academic, author, and former bank regulator with expertise in white-collar crime, public finance, regulation, and other topics in law and economics. In fact, he’s an associate professor at the University of Missouri, Kansas City in Law and Economics. As I mentioned, he’s the author of the book The Best Way to Rob a Bank is To Own One. Thanks for joining us again, Bill.
Bill Black
Thank you.
Paul Jay
So, let’s start with this term you use, “control fraud’. What is it and when does this start to appear in finance?
Bill Black
Well, it started to appear in finance as soon as there was finance, and it isn’t unique to finance either. It’s obviously an ungainly term. I mean, what the heck is control fraud, and here’s the reason for the ungainliness. The insight we had was that when the people who control a seemingly legitimate entity, whether it’s the government or a nonprofit or a for-profit firm, are able to use that seemingly legitimate entity as a weapon to defraud and predate, and a shield that protects them largely against being held responsible, accountable for their depredations, then you’re going to get massively more harmful forms of fraud and predation. And why control? Because the context we developed it in was the savings and loan debacle and the most notorious fraud there was Charles Keating, and he never held the position with Lincoln Savings, the entity that he was using as his weapon and shield, yet he utterly controlled every aspect of the institution.
Paul Jay
OK, now I assume that a lot of our viewers, especially younger ones, but others as well, have no idea what you’re talking about. What happened during the savings and loan crisis? When was that? And out of that, how did the control fraud appear?
Bill Black
OK, so by the way, as we discuss this, it’s the 30th anniversary of one of the key events in that savings and loan debacle when that Charles Keating, who was the most notorious fraud, Looting his savings and loan, was able to bring together a whole series of senators to try to extort first the head of our agency and then a group of us who were the regional regulators in San Francisco, and they went on.
Paul Jay
What’s the agency?
Bill Black
Well, the agency was called at the time the Federal Home Loan Bank Board, but it was about to change its name to the Office of Thrift Supervision. So that gets a little complicated, and we were in a regional entity that had still another name. So, I’m going to avoid the names so much and describe what they functionally did most of the time in all of this. In any event, we realized that if you controlled the firm first, people wouldn’t believe that you would loot the firm. That seemed crazy to them, but of course, if you think about it, that’s who you can loot with impunity because you know where all the safeguards are. Indeed, you are supposed to be the principal safeguard. It’s like a homeowner who wants to commit insurance fraud, right? You have a code, and you turn off the home alarm system and you take the things out of your house. You can do that very easily. Well, the CEO can do that even more easily, and what we realized was they use seemingly normal corporate mechanisms to do this. They just use accounting to massively overstate earnings, and then under modern executive compensation, that automatically triggers a huge bonus, and the company then pays the CEO and the other officers these huge bonuses.
If you stuck your hand in the till in America as a CEO and took just ten thousand bucks, you’d go to prison for 20 years, but you could take out twenty million, forty million, two billion, through the mechanisms I just explained and never go to jail. This was a really sweet scheme that people had developed, and the way we figured it out is we did autopsies of every failure in the savings and loan debacle. Everybody knew. Everybody told us it’s not fraud, it’s just people “gambling for resurrection”. It was almost a Christian, type of thing, right? The bank was losing money, and so the valiant CEO took high-risk, and sadly, they often lost those high-risk gambles and such. We said no, that doesn’t make any sense, and here are two reasons it doesn’t make any sense. So first, if you were just gambling, you wouldn’t have the pattern of purported success that they were reporting, right? If you’re taking a bunch of high-risk honest gambles, you’d win some big you’d win a few small and you’d lose a lot big. Right.
Paul Jay
Now, the gambles are loans they’re making.
Bill Black
That’s right. The gamble is making riskier loans, went the logic. You would expect to see a pattern like that, some winners, some losers type of thing. Except that everybody that followed this pattern that we identified as actually being looting, looting the savings and loan through accounting fraud, reported winning at first and not just winning, but winning at first, right, and they were literally reporting in places like Lincoln Savings, Vernon’s Savings, which we in the regulatory ranks refer to as vermin. Right, by the time we got through the speaker of the House, Jim Wright’s efforts to prevent us from taking the place over, 96 percent of its loans were in default.
Paul Jay
Give us an idea how many banks were involved and when was this? This is during Reagan.
Bill Black
This is Ronald Reagan. This begins in 1981-ish. So right at the beginning of the Reagan revolution, and it’s facilitated through the first appointee as the top regulator for savings and loans by Ronald Reagan. An academic account economist Dick Pratt, very smart, very quick, clever guy type of thing, but a huge believer in laissez-faire.
He deregulated and he said, hey, we have this, in jargon, it’s called a natural experiment, because there are many different jurisdictions in the United States. 50 different states, and they have different state regulatory patterns. So, we’ll look and find in all of the United States which state has the most successful savings and loans, and then our deregulation will emulate their deregulation where they’ve already deregulated, and they looked and they said Texas, Texas is the model that you need to follow. It’s far and away reporting the best results. Well, of course, it was that’s where the fraud started because that’s where the deregulation started, and the frauds are a sure thing. They are mathematically guaranteed if you follow what we identified as the recipe for accounting control, fraud for looting. If you follow that recipe, it is a sure thing, right? You will absolutely report record profits. They won’t be real, but you’ll report record profits. So, he used the worst possible model for his deregulation and then he deliberately set off what economists called a race to the bottom, which they thought was a good thing because regulation, bad, deregulation, good.
Remember this. In fact, it had begun with Jimmy Carter at the national level before Ronald Reagan. Both parties really believed in this deregulation stuff. So great, Texas is deregulated already, now the United States at the federal level will deregulate even more than Texas. That will set off a race to the bottom where Texas and California will try to deregulate even more and for good reason. In the United States, we have this doctrine called supremacy of the federal government, which means that we can preempt any state efforts to get in the way. So, if the feds deregulate, the state can’t do anything to you, but if the state can’t do anything to your savings and loan to either help you or hurt you, why should you make political contributions to the state banking chairman of the Senate or House answer. You wouldn’t, so that was a powerful incentive to keep the flow of money to the key committee chairmen to deregulate, and California and Texas won the race to the bottom, and these two states produce 60 percent of the total losses out of the savings loan debacle of the 1980s and 1990s.
So good policy, right, in all of these things, in our jargon, I have a doctorate in criminology and I study elite fraud and corruption principally within those fields. This is going to mean what we call a criminogenic environment, and that’s a direct steal from natural science, where we talk about pathogenic environments, an environment, like a cesspool that produces lots of bacteria and viruses and such and causes lots of infections where you get the same thing happening throughout whatever portion of the economy you deregulate.
In particular, finance is most susceptible to this. So they deregulated at the worst possible time in the worst possible way, and they said simultaneously, they put in writing, we don’t have to worry about no stinking fraud. Fraud is inherently trivial. Right, and I’m not overstating. I mean, it’s not the exact words, but I’m not overstating.
Paul Jay
Who said that?
Bill Black
The head of the agency [Dick Pratt], a top academic economist, expert in finance, said.
Paul Jay
Well, were they in on it? The fraud?
Bill Black
What my saying is of this era, it always is. The sad fact is you didn’t have to bribe anyone. They really believed in laissez-faire, so to skip ahead a few years, there’s this road to Damascus experience. Apparently it’s a big biblical day in our talk. His successor, Ed Gray. Now, his successor is a personal family friend of both of the Reagans, Mrs. Reagan as well. Critical to his survival, and he’s a PR guy, right, that’s his thing. So, in the midst of the worst financial scandal in U.S. history at the time, President Reagan says, let me put a PR guy in charge, because what the hell, right? And the trade association, which political scientists rated the third most powerful in the United States. It was called the League of Savings Institutions. They go and tell Ed Gray, you’re getting this position because of us. We lobbied with the administration and we lobbied to get you because we were sure you would do what we want done, they tell him this and he tells us the senior staff. So, this is the world, and then two things happen. First, the examiners, the examiners are the people that actually go out into the field and they don’t just look at what the institution writes in propaganda policies and such. They look at what’s actually happening. They’re the people closest, and it turns out to that to be able to run the scams I’m talking about, you have to destroy what’s called the loan underwriting process. Now, that’s insane because the loan underwriting process is what makes banks profitable, honestly profitable.
Paul Jay
They evaluate the risk.
Bill Black
Should we take it and if so, at what price? Right. So, it’s the most critical thing that you would never do if you were an honest banker, which is of course how spoiler alert, we’re going to convict of felonies over a thousand elites, out of the savings and loan debacle, completely different than what’s going to happen in the great financial crisis. OK, so Ed Gray comes in and the first thing he does is he listens to the examiners.
They put in every month these Significant Supervisory Cases, and this is the coming problem. There are roughly three thousand savings and loans and the number in this SSE case book grows from around one hundred to around five hundred. OK, and they are short write-ups, but Gray reads them religiously and he goes. Oh, shit. None of this is running the way the economists claim it’s running, it’s a coming disaster, and then he has the peak of his road to Damascus experience. This wonderful, laconic Texan, with a pronounced Texas twang, no art at all, in a Texas accent, but he knows his stuff about underwriting and such, and he drives and he’s taking pictures like the eight-millimeter stuff in those days. This is 1982-ish, 1983-ish. So, he’s driving for miles with the camera stuck out and narrating as he’s going along. In an utterly no inflection voice. He’s not excited, Gray calls it financial pornography, watching it because it’s mile after mile after mile of real estate developments that aren’t really being developed where they are just wasting all the material. You can see it rotting on the ground and it goes on for over an hour driving around this huge complex, even goes up in a plane and does the same thing looking down. Many of these things were so bad that they never got beyond the concrete pad for the home.
Paul Jay
And these are all phony loans for building these things.
Bill Black
Right, we call them Martian landing pads. Gray, who’s this ardent anti-regulator; He really loves Ronald Reagan and Mrs. Reagan, goes this is obscene and it’s going to produce a catastrophe. It is my duty, though, I hate it, to try to do everything I have to throw myself in front of this bus. He predicts to us that it will destroy his career both in business and in politics. He’s like 52 prime, super high in a significant position, a riser, and a personal friend, as I say, of the folks, and he knows it’s going to piss off the Reagans. He starts re-regulating. Charles Keating, alleged super Christian, who’s actually a massive fraudster, is an incredible lobbyist, and since he’s looting Lincoln Savings, what does he care? He knows the institution is going to fail if you spend an extra 20 million on lobbying. So what? So he lobbies like crazy. He hires Alan Greenspan as a lobbyist. Alan Greenspan personally walks around the Senate recruiting the five U.S. senators who will become known as the Keating Five when they meet with us on April 9th, 1987, to try to extort us to not take enforcement action against Lincoln Savings on behalf of and I quote “our good friend Charles Keating” type of thing. When Gray begins this reregulation, this majority at the express request of Charles Keating’s lobbying effort. Keating was a top 100 granter, a donor to Reagan and Bush. He was very politically connected. A majority of the House of Representatives co-sponsored a resolution telling us to stop the re-regulation. The entire leadership of both parties in the House signed that. So think of this, you’ve got the president against you, Vice President Bush is running the financial deregulation task force. He hates you, the chief of staff, the former Marine, the former head of Merrill Lynch hates you and is against you. OMB is trying to destroy you. OMB files a criminal referral against Ed Gray on the grounds that he’s closing too many insolvent savings and loans.
Paul Jay
And how many had he closed by that point? But they were insolvent.
Bill Black
Yes, but you have to understand the highest priority of the Reagan administration vis a vis the savings and loan debacle at all times, the red line was that you could not say it’s going to require a federal bailout, because that would mean the federal deficit was really $150 billion bigger and of course, President Reagan’s top priority was getting the tax cut, and the argument against it was the deficit swelling, and so if they had to admit that the deficit was really much larger, they might not get the tax cut.
Paul Jay
The hole of the bank debt was about 150 billion bucks?
Bill Black
The hole in the insurance fund, so the industry was insolvent on a market value basis by roughly $150 billion, and there were $6 billion in the insurance funds still. So, we went to work every day wondering whether there was going to be a nationwide run for five years.
Paul Jay
How much of this was public at this time?
Bill Black
It was not made public because this was the red line, right? Gray knew that if he crossed this red line he’d be removed immediately. So, we just didn’t talk about how much it was ultimately going to cost, we just went about trying to make sure it cost as little as possible.
Paul Jay
So, thousands of banks are involved in fraud?
No, three hundred savings and loans were growing more than 50 percent annually, and we’re following this looting strategy of fraud, but Gray’s first action, which was before he saw the Texas guys tape, the financial pornography, just reading the examiners Significant Supervisory Cases. The first thing he did, which was in November of 1983, which was essentially when the deregulation that his predecessor had put in place was kicking in, Gray stopped any new savings and loans from starting in California, Texas, and Florida, and the frauds, were almost always real estate developers who were failing, and of course, the dream of every real estate developer is to own their own captive lender like a bank or a savings and loan, because that’s what you need as a real estate developer– funding. If you have your own bank or savings and loan, that’s never an issue type of thing. So, this was like the dream of all time for these sleazy developers.
Paul Jay
And whose money is in these savings and loan?
Bill Black
Well, overwhelmingly ours, right? They are deposits. In America as opposed to other countries the liability side of a bank is almost entirely deposits and in the American context, almost all of those deposits are fully insured by the federal government. So, who’s on the hook really? The taxpayers are on the hook. Europe has many more large loans, typically from other banks. That is uninsured hot money, as it’s called. So, you can see Gray is going to commit political and career suicide and knows that he’s going to commit it. The trade association, of course, instantly turns against him as well. So, if you look at the correlation of forces as the military talks about it, it’s everybody on one side against Gray and pretty much Gray on the other. So obviously, we’re going to lose, and here’s the remarkable thing, yeah, we lost personally. We’re unemployable in government, but we stopped this raging epidemic of fraud and the new entrants. Gray by saying no more of these real estate developers are going to come in the door in California and Texas and Florida, he prevented it from becoming any kind of even mild recession, much less a great financial crisis. That’s just the second stage.
The third stage turns out to actually be the great financial crisis, and for that, you have to know what Gray’s big legacy was. Gray did something really simple. He knew, as I said, that the two great disasters were California and Texas, so he asked everybody he had respect for who were the two top financial supervisors in America, and then he personally recruited them, and appointed them in California and Texas.
The guy in Texas was Joe Selby, who had twice risen through the ranks at the Office of the Comptroller of the Currency, the acting comptroller of the Currency, but of course, he would never be made head because you’d have to be politically powerful to get that kind of thing. So getting him was a real coup and he put him in the absolute worst place, which was Texas. Selby was from Texas. Selby knew that this was going to end disastrously for him because Selby was gay, and the speaker of the House, the Democratic speaker of the House, Jim Wright called up Ed Gray and demanded that Gray get rid of Selby on the grounds that Selby was a homosexual. This is how recently these things were that badly screwed up. Even after we brought Charles Keating down, he sued, and one of his lieutenants began a deposition demanding to know who the employees at the Federal Home Loan Bank of San Francisco, where I was the top lawyer by then, were homosexuals. Under the allegation that gays are secretive, and they must have a secret conspiracy against Charles Keating because he’s a Christian. The chief judge, based on what we call a proffer by the lawyer that says, I have a good faith basis for this conspiracy. I’m not just making this shit up right – the judge, the chief judge in Arizona, which is where Lincoln Savings Home was, the parent company, allowed those questions. Now, after that good faith basis, the second question of that lawyer was, have you ever heard a rumor about who might be gay at San Francisco Bank, which is kind of inconsistent with a proffer. Our moderately senior supervisor who is being deposed came back at lunch break in absolute tears. She was just completely broken down by this outrageous treatment, and so this is the first I hear about it and I say the deposition is over, we are going to go for emergency writ in front of the judge, and of course, we destroyed them in that. They had absolutely no basis, but at that hearing, they started the hearing by making a motion to exclude me from the courtroom.
The lawyers for the Keating lieutenant say you shouldn’t allow Bill Black to be in this room, and the judge said that may have worked with Danny Wall, Gray’s infamous successor who caves into Keatings demands and extortion, but it is not going to work in this courtroom, and then because he’d been lied to in the proffer, he basically chopped the heads off these folks. That lieutenant I saw in other depositions. I went up to him and told him how scurrilous I thought he was. He said, I can’t be bigoted. I’m black. Well, I guess you proved it. Again, people forget how recently this kind of homophobia was absolutely dominant and could destroy executives. The point is, Selby prevented a Texas disaster from becoming a Texas catastrophe, knew it would lead not under Gray, but under his successors to his being smeared and fired and did it anyway for America. Mike Patriarca, a name people have not heard was his counterpart in California that I worked with, and he stopped the first aspect that I’ve talked about, this looting.
Now, I want to transition to the second aspect, which Patriarca also stops, and that is what becomes the great financial crisis, which actually is the third act of the savings and loan debacle of the early 1990s. This is literally true, Orange County, California, is the financial fraud capital of the world, not America, the world. We were out there and California had jurisdiction over it, and so the examiners came to us. Again, the examiners are the hero of this story, and they said there’s a new scam, and you’ve got to stop it.
Paul Jay
What year are we in?
Bill Black
This is 1990. All right, there’s a new scam and you’ve got to stop it now. So in 1990, we are still dealing with the second act of the savings loan debacle, the looting that I was talking about, and we are incredibly overwhelmed.
Is anybody charged at this point?
Oh, yes, hundreds, but you’re right to ask. It doesn’t happen immediately and I’ll bring you back, but I’ll tell that story briefly. No one was being charged in the 1980s. There wasn’t even a criminal referral system that was coherent. So first under Gray. Gray said, look, here are two top priorities. One, get the frauds out of controlling the savings and loan because as long as they’re in control, the losses are going to mount exponentially. Two, once you get them out, hold them personally accountable wherever possible by criminal prosecution. Also by lawsuits, not against the savings and loan, lawsuits against them, where you grab their funds.
So that’s what we did. So we figured out we had to develop a criminal referral system. So we started making referrals and soon we were making thousands of referrals. We decided to make them public every month. Well, this is back in the day when there were actually more reporters in places and pretty soon places like The Washington Post noticed. There are five thousand criminal referrals and only three prosecutions. What the hell’s going on? And they would start writing stories.
Paul Jay
Criminal referral means your agency tells the Department of Justice there’s a case here. It’s a referral to the DOJ. Am I right?
Bill Black
That is correct, And the FBI. They’re not just, hey, we think we got a problem. We had criminal referral coordinators and they met periodically with their counterparts, the FBI and Department of Justice. We got feedback on every major referral and then we would retrain folks about, OK, this is what they want, they think is weak. This is the strong part, and it got better and better. Continuous improvement regime and B school type jargon. These became superb. In major cases, the text was 40, 60 pages, and 200 to 400 pages of attachments with all kinds of easy things about how to find the most useful stuff. We really set out the entire path to make the prosecution successful.
Paul Jay
So, hundreds of these types of referrals and how many actual charges at that point.
Bill Black
So, thousands of these referrals and in the mid-1980s, essentially two or three prosecutions. The attorney general actually puts in his memoir that they just got tired of getting bashed with all of this. When a new guy comes in after the disgraceful Danny Wall, who gave in to the pressure of the five senators and the speaker of the House. The new guy was Tim Ryan. This is Bush one appointing Tim Ryan to be the new head of the agency. A very bright lawyer, and he hires a very aggressive litigator as his person because as he explains to me personally, he met with Bush and Bush said, corruption-george-h-w-bush
OK, new regime. He gets appointed in like 1992-ish and such there are over 20,000 thousand criminal referrals, by then there were 30,000 criminal referrals. By then there were a meaningful number of prosecutions, but Tim Ryan also sacrificed his career for the public knowingly, and what he did is bring an enforcement action. We massively increased enforcement actions as well. He brought an enforcement action against the son of a sitting president of the United States of America, and he’s been unemployable since.
Paul Jay
Which one?
Bill Black
Neil Bush. He’s the guy that brought that enforcement action and everybody knew what was going to happen if he did that, he was a super-fast tracker.
Paul Jay
If you go back to Gray and the gentleman you’re talking about now and you and your team, if all of you had caved to the pressure, what would have happened?
Bill Black
Something akin to the great financial crisis would have happened in the mid-90s.
Paul Jay
Which means these banks would have all failed, the federal insurance plan would have to have stepped in at the rate of.
Bill Black
Oh, it couldn’t have. They would have had to bail out the insurance plan, not in terms of billions, which they did eventually, but in trillions of dollars.
Paul Jay
Now, the Reagan administration, the professionals even on Wall Street, they must know this is how it’s unfolding, and you said earlier they don’t want this to go public because how do you do a tax cut in the midst of all this? So, I mean, it’s really part of the fraud that this keeps getting covered up.
Bill Black
Yeah, but I would go easy on the idea that they knew, right? Remember, the conventional wisdom that I gave you from Dick Pratt was well fraud by elites can’t ever be serious.
Paul Jay
Right, one person doing a $20 check is serious.
Bill Black
Well, they look like us, they can’t be real crooks. They dress nicely. They speak well. They can’t be real crooks; they can’t cause real problems.
Paul Jay
But when Gray gets his head around how serious this is and he’s a friend of Reagan. He must tell Reagan. So, from at least that point on.
Bill Black
No. Your point is absolutely logical, and I went to Ed Gray to make exactly that point. I said, you’re a personal friend. Tell him, and he said, you don’t understand, it’s impossible. I guarantee you, he’s right, because I know Ed Gray, not because I know Ronald Reagan. If Ed Gray says it was absolutely impossible, it was.
Paul Jay
Yeah, but from what I’m learning about Reagan. I’ve just been interviewing the guy Matt Tyrnauer who did this four part series called The Reagans for Showtime and reading some other stuff. Reagan didn’t want to hear what he didn’t want to know, not because he didn’t know, but he didn’t want to hear what he didn’t want to know.
Bill Black
Yeah, but what does he know about banking?
Paul Jay
Nothing, he just knows that the people that help make him president want such and such, so he doesn’t go against them.
Bill Black
As human beings, we are primed for those people that help us the most. They’re the last people in the world we see as cheats and fraudster’s, and Charles Keating was one of his leading donors.
Paul Jay
Was Keating part of that kitchen cabinet that helped get Reagan to run?
Bill Black
No, but Ed Gray was at the savings and loan that was at the heart of the San Diego savings and loan that was at the heart of that kitchen cabinet.
Paul Jay
Because, I mean, they deliberately created Ronald Reagan to be a front man for their agenda.
Bill Black
But again, that’s the point, right? So, Don Regan is his consiglieri. Don Regan is the self-professed Marine tough guy who his first words out of his mouth when he meets Ed Gray is you’re going to be a team player, aren’t you? And felt that he could intimidate folks and by the way, the very first thing the Bush administration did within months, its first major legislative proposal, was to make sure that this could never happen again. Now, this is not the crisis. This is Ed Gray. Could never happen again.
Paul Jay
Really?
Bill Black
Yeah, so the first thing the legislation did– we were an independent regulatory agency and they eliminated that and made it a bureau within the Treasury – a member of the executive branch, so that there could never be someone independent using their judgment again, I’m quite serious. That’s the first thing that they decided to get away with. So, again, you get this immensely successful prosecution. Let me make clear how successful this was. Our key strategic disadvantage, of course, was money. In the form of lobbying, in the form of political contributions. That’s how the terrible things were happening. That’s how at the behest of Charles Keating, the most notorious fraud in America, our jurisdiction in San Francisco, was removed over Keating, at the demand of the five senators and the speaker of the House, Jim Wright, and the cowardice of Gray’s successor, Danny Wall. For the first time in U.S. regulatory history, he removed the jurisdiction at the demand of the crooks because we had insisted on going forward with our recommendation that it be taken over by the federal government and we had made a criminal referral.
Paul Jay
And you’re including these senators in the crooks, these five.
Bill Black
Well, they were assisting the crooks. You can see my notes of the meeting, which is what made it something before the Senate Ethics Committee. Ultimately the only way to get them to back off was to tell them we were about to make a criminal referral and do they really want to be going full force for a massive felon.
Paul Jay
OK, we’re going to end this here and do a part two and I don’t know how many other parts, but we’re going to let this story unfold. And in the next part, I’m going to start by asking Bill, a thousand prosecutions or more. Some people actually went to jail out of all this, and by 2007, 2008, as this whole subprime of the crisis that unfolds, another massive essentially financial fraud, the people involved are not very worried about going to jail. So why when so many people eventually did go to jail, do the next crop of these fraudsters seem absolutely unconcerned that this is going to come down on their heads. So we’ll take that up in the next part with Bill. Thanks for joining us on theAnalysis.news. Thank you, Bill, and look out for part two of our series.
The Shattered Arguments for a New Glass-Steagall
Investment banking isn’t risky. What’s dangerous is creating stand-alone firms that can’t diversify.
The 1999 repeal of Glass-Steagall was unfairly blamed in the aftermath of the 2008 financial crisis. Some people—apparently Mr. Cohn among them—mistakenly believe that investment banking is so risky that it should be once again kept separate from commercial banking. The truth is exactly the opposite: Traditional investment banking entails very little risk. The danger is stand-alone investment banks that are not diversified enough to survive a shock.