[FoRK] Obama's Lost Opportunity: Finance industry reform

Bill Stoddard wgstoddard at gmail.com
Sun May 2 07:14:09 PDT 2010


This part of the interview was particularly interesting:
There's a huge part (of the problem) that is economic ideology. And 
neoclassical economists don't believe that fraud can exist. I mean, they 
just flat out -- the leading textbook in corporate law from law and 
economics perspective by Easterbrook and Fischel, says -- I'll get 
pretty close to exact quotation. "A rule against fraud is neither 
necessary nor particularly important." Right?

Notice how extreme that statement is. We don't need laws. We don't need 
an FBI. We don't need a justice department. We don't even need rules 
like the SEC. The markets cleanse themselves automatically and prevent 
all frauds. This is a spectacularly naïve thing. There is enormous 
ideological content. And it fits with class. And it fits with political 

Do you want to look at these seemingly respectable huge financial 
institutions, which are your leading political contributors as crooks?

Entire transcript follows:

April 23, 2010

*BILL MOYERS:* Welcome to the JOURNAL. We'll get to two big battles in 
Washington in just a moment -- financial reform and the future of the 
internet. But first, I want to thank those of you who wrote after you 
heard me say last week that the JOURNAL will come to an end with next 
Friday's broadcast. It's true, and all of us here were touched by your 
messages of regret.

I will miss the virtual community of kindred spirits that has grown up 
around this broadcast -- viewers like you, as we say, whose unseen but 
felt presence reminds me of why I have kept at this work so long. But it 
has been a long time, and that's why I can assure you that my departure 
is entirely voluntary. Many of you wrote to say you were alarmed at the 
possibility that we are being pushed off the air -- that higher ups or 
dark powers pointed to the door and said, "Go."

You can relax; it didn't happen. I'm leaving for one reason and one 
reason alone: it's time. Believe me, it wasn't an easy decision: I like 
what I do, cherish my colleagues and enjoy your company. But I'll be 76 
in a few weeks, and there are some things I want to do that the 
deadlines and demands of a weekly broadcast make impossible. So for me, 
it's now or never. I informed public television of my decision more than 
a year ago, intending to leave back in December. But my colleagues at 
PBS asked me to extend the series four more months to give them time to 
prepare a new public affairs series. More on that next week.

Now to the big rumble of this week -- and I'm not talking about that 
volcano in Iceland. I'm talking about the fight to reform our financial 

*PRESIDENT BARACK OBAMA:* There is no dividing line between Main Street 
and Wall Street.

*BILL MOYERS:* You probably heard the President speaking in New York 
yesterday, stumping for more regulation of Wall Street:

You've also probably heard about the government's charge that Goldman 
Sachs committed a highly sophisticated fraud. The claim is that this 
kingpin of Wall Street made a bundle by packaging mortgage debt as 
exotic investments some in the firm knew would fail.

That word "fraud" pops up more and more as we dig deeper into Wall 
Street's outrageous behavior during the run up to the great collapse of 
2008. We heard it right here on the Journal, one year ago.

*WILLIAM K. BLACK* Fraud is deceit. And the essence of fraud is, "I 
create trust in you, and then I betray that trust, and get you to give 
me something of value." And as a result, there's no more effective acid 
against trust than fraud, especially fraud by top elites, and that's 
what we have.

*BILL MOYERS:* That was Bill Black, who's no stranger to bank 
investigations. He was a senior regulator for the Federal Home Loan 
Board who cracked down on banking during the Savings & Loan crisis of 
the 1980s.

Just this week, he was on Capitol Hill testifying about another failed 
financial firm, Lehman Brothers.

*WILLIAM K. BLACK* Lehman's failure is a story in large part of fraud. 
And it is fraud that begins at the absolute latest in 2001.

*BILL MOYERS:* Bill Black is with me now. One of the country's leading 
experts on crimes in high places he teaches economics and law at the 
University of Missouri-Kansas City, and wrote this book, THE BEST WAY TO 

Welcome back to the JOURNAL.

*WILLIAM K. BLACK* Thank you.

*BILL MOYERS:* What did you think of the President's speech late this week?

*WILLIAM K. BLACK* It's a good speech. He's a very good spokesman for 
his causes. I don't think substantively the measures are going to 
prevent a future crisis. And I was disappointed that he wasn't willing 
to be blunt. He used a number of euphemisms, but he was unwilling to use 
the F word.

*BILL MOYERS:* The F word?

*WILLIAM K. BLACK* The F word's fraud in this. And it's the word that 
explains why we have these recurrent, intensifying crisis.

*BILL MOYERS:* How is that? What do you mean when you say fraud is at 
the center of it?

*WILLIAM K. BLACK* Well, first, when you deregulate or never regulate, 
mortgage bankers were never regulated, you effectively have 
decriminalized that industry, because only the regulators can serve as 
the sherpas, that the FBI and the prosecutors need to be able to 
understand and prosecute these kind of complex frauds. They can do one 
or two or maybe three on their own, but when an entire industry is beset 
by wide scale fraud, you have to have the regulators. And the regulators 
were the problem. They became a self-fulfilling prophecy of failure, 
because they, President Bush appointed people who hated regulation. I 
call them the anti-regulators. And that's what they were.

*BILL MOYERS:* This hearing that, where you testified this week, looking 
into the bankruptcy at Lehman Brothers, had something on this.

*TIMOTHY GEITHNER:* And tragically, when we saw firms manage themselves 
to the edge of failure, the government had exceptionally limited 
authority to step in and to protect the economy from those failures.

*BEN BERNANKE:* In September 2008, no government agency had sufficient 
authority to compel Lehman to operate in a safe and sound manner and in 
a way that did not pose dangers to the broader financial system.

*ANTON VALUKAS:* What is clear is that the regulators were not fully 
engaged and did not direct Lehman to alter the conduct which we now know 
in retrospect led to Lehman's ruin.

*BILL MOYERS:* The regulators were not fully engaged. I mean, this is an 
old story. We all know about regulatory capture where the regulated take 
control of the regulators.

*WILLIAM K. BLACK* Yeah, but this one is far worse. That's not very 
candid testimony on anybody's part there. The Fed had unique authority. 
And it had it since 1994 to regulate every single mortgage lender in 
America. And you might think the Fed would use that authority.

And you might especially think that, if you knew that Gramlich, one of 
the Fed members, went personally to Alan Greenspan and said, there's a 
housing bubble. And there's a terrible crisis in non-prime. We need to 
send the examiners in. We need to use our regulatory authority. And 
Greenspan refused. Lehman was brought down primarily by selling liar's 
loans. It was the biggest seller of liar's loans in the world.

And when we look at these liar's loans, we find 90 percent fraud. 90 
percent. And we find that most of the frauds are not induced by the 
borrower, but they're overwhelmingly done by the loan brokers.

*BILL MOYERS:* And liar's loans are?

*WILLIAM K. BLACK* A liar's loan is we don't get any verified 
information from you about your income, your employment, your job 
history or your assets.

*BILL MOYERS:* You give me a loan, no questions asked?

*WILLIAM K. BLACK* No real questions asked. Certainly no answers 
checked. In fact, we just had hearings last week about WaMu, which is 
also a huge player--

*BILL MOYERS:* Washington Mutual--

*WILLIAM K. BLACK* --in these frauds. Washington Mutual, which used to 
make, run all those ads making fun of bankers who, because they were 
stuffy and looked at loan quality before they made a loan. Well, WaMu 
didn't do any of that stuff. And of course, WaMu had just massive 
failures. And who got in trouble at WaMu? Who got in trouble at Lehman? 
You got in trouble if you told the truth. They fired the people who 
found the problems. They promoted the people that caused the problem, 
and they gave them massive bonuses.

*BILL MOYERS:* I watched the testimony where you were present the other 
day in the Lehman hearings. And there was a very moving moment with a 
former vice-president of Lehman Brothers who had gone and tried to blow 
the whistle, who tried to get people to pay attention to what was going 
on. Take a look.

*MATTHEW LEE: * I hand-delivered my letter to the four addressees and 
I'll give a quick timeline of what happened, May 16th was a Friday, on 
the Monday I sat down with the chief risk officer and discussed the 
letter, on the Wednesday I sat down with the general counsel and the 
head of internal audit, discussed the letter. On the Thursday I was on a 
conference call to Brazil. Somebody came into my office, pulled me out, 
and fired me on the spot with out any notification. I stayed, sorry.

*BILL MOYERS:* Matthew Lee, vice-president of Lehman Brothers, fired 
because he tried to blow the whistle. What does that say to you?

*WILLIAM K. BLACK* Well, it tells me that they were covering up the 
frauds, that they knew about the frauds and that they were desperate to 
prevent other people from learning.

*BILL MOYERS:* Matthew Lee told the accounting firm Ernst & Young what 
was going on. Isn't the accounting firm supposed to report this, once 
they learn from somebody like him that there's fraud going on?

*WILLIAM K. BLACK* Yes, they're supposed to be the most important 
gatekeeper. They're supposed to be independent. They're supposed to be 
ultra-professional. But they have an enormous problem, and it's 
compensation. And that is, the way you rise to power within one of these 
big four accounting firms is by being a rainmaker, bringing in the big 

And so, every single one of these major frauds we call control frauds in 
the financial sphere has been-- their weapon of choice has been 
accounting. And every single one, for many years, was able to get what 
we call clean opinions from one of the most prestigious audit firms in 
the world, while they were massively fraudulent and deeply insolvent.

*BILL MOYERS:* I read an essay last night where you describe what you 
call a criminogenic environment. What is a criminogenic environment?

*WILLIAM K. BLACK* A criminogenic environment is a steal from pathology, 
a pathogenic environment, an environment that spreads disease. In this 
case, it's an environment that spreads fraud. And there are two key 
elements. One we talked about. If you don't regulate, you create a 
criminogenic environment because you can get away with the frauds. The 
second is compensation. And that has two elements. One is the executive 
compensation that people have talked about that creates the perverse 
incentives. But the second is for these professionals. And for the lower 
level employees, to give the bonuses. And it creates what we call a 
Gresham's dynamic. And that just means cheaters prosper. And when 
cheaters prosper, markets become perverse and they drive honesty out of 
the market.

*BILL MOYERS:* You also wrote that the New York Federal Reserve knew 
about this so-called three-card monte routine. But that, the man who led 
it, at the time, Timothy Geithner, now the treasury secretary, testified 
that there was nothing he could do.

*TIMOTHY GEITHNER: * In our system the Federal Reserve was a fire 
station, a fire station with important, if limited, tools to put foam on 
the runway, to provide liquidity to markets in extremis. However, the 
Federal Reserve, under the laws of this land was not given any legal 
authority to set or enforce limits on risk-taking by large financial 
institutions like the independent investment banks, insurance companies 
like AIG, Fannie and Freddie, or the hundreds of non-bank financial 
firms that operated outside the constraints of the banking system.

*BILL MOYERS:* Now, what I hear is the gentleman who was then chairman 
of the New York Fed, saying, I, we had this job to do, but we didn't 
have the authority to do it.


*BILL MOYERS:* We were the fire truck, but we didn't have any water in 
our hose.

*WILLIAM K. BLACK* Yeah, this was pretty disingenuous, because other 
portions of his testimony, he explained why there was this gap. And he 
said it was because we repealed Glass-Steagall. Well, the Fed pushed for 
the repeal of Glass-Steagall.

*BILL MOYERS:* Glass-Steagall was the act that was repealed in the late 
nineties that separated regular banks from investment banks, right?

*WILLIAM K. BLACK* Correct. So this is a deliberately created regulatory 
black hole, created by the Fed. And then the Fed comes into the hearing, 
eight years later, and said, we were helpless. Helpless to do anything, 
because of a black hole we designed.

*BILL MOYERS:* Well, it doesn't stop there, because as I listened the 
other day, I heard that the Securities and Exchange Commission knew that 
Lehman was repeatedly ignoring its own risks, but it did nothing. Here's 
what the new chairman of the SEC, Mary Schapiro, had to say the other 
day, about why the commission fell down on the job. Take a look.

*MARY SCHAPIRO:* The SEC didn't have the staff, the resources, or quite 
honestly, in some ways, the mindset to be a prudential regulator of the 
largest financial institutions in the world. It was such a deviation 
from our historic disclosure-based and rules-based approach to 
regulation to come in and be a prudential supervisor. The staff was 
never given the resources. This program peaked at 24 people for the 
entire universe of the five largest investment banking firms in the world.

*WILLIAM K. BLACK* Well, this is another example, the self-fulfilling 
failure. This wasn't done under Mary Shapiro's watch.

*BILL MOYERS:* Right--

*WILLIAM K. BLACK* This was Chris Cox, who was Bush's appointment. And 
he's the one who decided, we're only going to send 24 people to deal 
with all of the largest investment banks in the world. Now that's a 
farce. And everybody knows it's a farce. He didn't want effective 
regulation. We both spent time, considerable time, in Texas. And you 
know, the joke, one riot, one ranger, right?

*BILL MOYERS:* Texas ranger, right.

*WILLIAM K. BLACK* Treasury Secretary Geithner testified that in the 
circumstances they were dealing with at Lehman, "We were on the brink of 
the destruction of the entire global financial system." And then 
Chairman Bernanke testified how many people the Fed sent to Lehman to 
prevent us on the brink of global collapse.

*BILL MOYERS:* And how many?

*WILLIAM K. BLACK* Two. They have a staff of thousands. This is criminal 
negligence except, because he's a federal employee, we can't charge him 
with a crime.

*BILL MOYERS:* Let's talk a moment about the government's allegations 
against Goldman Sachs. I mean, I get dizzy just reading about it. But 
the Wall Street Journal reporters did a terrific job this week of trying 
to sort it out. And they say, "It centers on a deal Goldman Sachs 
crafted, so that the hedge fund king, John Paulson, could bet on a 
collapse in housing prices." Is that your reading of it?

*WILLIAM K. BLACK* Yes, I mean, the complaint actually focuses on lying 
to investors. So it's a very traditional securities fraud complaint.

*BILL MOYERS:* Not about Paulson, by the way. He's not mentioned in the 

*WILLIAM K. BLACK* No, but that's really interesting. And as to whether 
he will be mentioned eventually in this complaint, because Paulson has 
lots of potential liability on this one. John Paulson was allowed by 
Goldman, indeed encouraged by Goldman, to create a "Most Likely to Fail" 
list. So he took, within a particular category, the absolute worst 
stuff, because he wanted to bet that the stuff would fall in value. And 
they were certain to fall in value in terms of the economics.

*BILL MOYERS:* Wasn't he betting that people wouldn't be able to pay 
their mortgages?

*WILLIAM K. BLACK* Not even necessarily that, because most of these are 
liar's loans, again. And they will not pay, right? It's not an issue of 
liar's loans, will it work or will it not work. It's only when will it 
blow up. A liar's loan will blow up. If housing prices keep going up for 
three years hugely, then they will blow up in the fourth year.

But they will blow up. So he was betting against something that he knew 
was going to blow up. He didn't necessarily know the timing, but he 
proved to be right about the timing, because we know from the SEC 
complaint that he was in a rush to get this. He knew that the housing 
collapse was imminent. And he had to get this deal done right away. And 
Goldman Sachs felt the same thing. So they went and they got themselves 
a dupe, ACA. And they told the -- ACA is a group that puts together and 
supposedly checks the quality of mortgages. Not very well, as it turned 
out, of course. An investor would obviously want to know that this 
portfolio was picked to fail. Instead, they were told, according to the 
SEC complaint, "No, no, no, no. There's no John Paulson out there. 
There's only ACA, and it's in your corner. And it's picking a portfolio 
most likely to succeed." Now if John Paulson knew that Goldman was 
making those representations, then John Paulson knew those 
representations were false. And that could make him an aider and abettor.

*BILL MOYERS:* So tell me where the fraud might be in there, if the 
government proves its case.

*WILLIAM K. BLACK* Well, the fraud is, I'm representing to you, the 
potential investor, that a competent professional independent firm, ACA, 
looking after your interests, has picked this portfolio because they 
believe it's most likely to succeed. When in fact, the portfolio was 
selected overwhelmingly by Paulson and was selected because it was 
deliberately chosen to fail.

*BILL MOYERS:* The complaint names only one person, Fabrice Tourre, if I 
get the name correct.

*WILLIAM K. BLACK* That is correct.

*BILL MOYERS:* Who was 27 at the time. Would he have been acting without 
supervision on a deal of that enormity?

*WILLIAM K. BLACK* Oh, not even close. And this was-- this was part of a 
package of about 18 deals as well. So as big as this package was, and it 
was huge, the overall package was absolutely the type of thing that 
received personal attention of the leaders, the absolute top leaders at 
Goldman Sachs. So it's very curious to me that the SEC has failed to 
name the higher-ups.

*BILL MOYERS:* Why did it take so long for the Securities and Exchange 
Commission, the SEC, to kick into gear on this? I mean, have they kicked 
into gear?

*WILLIAM K. BLACK* Well, they haven't kicked into gear fully, or they'd 
be naming Blankfein and other senior leaders of Goldman. And they've, as 
you just mentioned, they've only gone after a junior person. And there 
would be, if they were really in gear, there would be criminal charges 
here. And if they were really in gear, there'd be a broad investigation, 
not just of Goldman, but of all of these major entities.

In the last three weeks, we have finally done a half-baked 
investigation, mind you. Not -- nothing like we did in the Savings & 
Loan days -- of Washington Mutual (WaMu), Citicorp, Lehman, and Goldman. 
And we have found strong evidence of fraud at all four places.

And we have looked previously at Fannie and Freddie and found the same 
thing. So the only six places we've looked, at really elite 
institutions, we've found strong evidence of fraud. So where are the 
other investigations? Why are there no arrests? Why are there no 

*BILL MOYERS:* Well, Bill, where are the other investigations? Why have 
there been no arrests? Why have there been no convictions?

*WILLIAM K. BLACK* Because we have still Bush's wrecking crew in charge 
of the key regulatory agencies. Why are they still in place? They have 
abysmal records as major causes of this crisis.

*BILL MOYERS:* You talk about the Bush appointees still being there, but 
Goldman's former lobbyist, his treasury secretary, Timothy Geithner's 
chief of staff, the head of the Commodity Futures Trading Commission, 
Gary Gensler, who may soon have new power over derivatives, worked for 

So did the deputy director of the White House National Economic Council, 
the under Secretary of State is a former Goldman employee. Goldman's 
hired Barack Obama's recent chief counsel from the White House on his 
defense team. I mean--

*WILLIAM K. BLACK* Don't forget Rubin.

*BILL MOYERS:* Robert Rubin, whose influence is all over the place, who 
used to be--

*WILLIAM K. BLACK* It's his protégés that are in charge of economic 
policy, under Obama.

*BILL MOYERS:* So is this administration, which still has some Bush 
holdovers in it, and now has a lot of Goldman people in it, is this 
administration going to be able to pass judgment on Goldman Sachs?

*WILLIAM K. BLACK* Well, so far, they haven't been able to do it. They 
can't even get themselves to use the word fraud.

There's a huge part that is economic ideology. And neoclassical 
economists don't believe that fraud can exist. I mean, they just flat 
out -- the leading textbook in corporate law from law and economics 
perspective by Easterbrook and Fischel, says -- I'll get pretty close to 
exact quotation. "A rule against fraud is neither necessary nor 
particularly important." Right?

Notice how extreme that statement is. We don't need laws. We don't need 
an FBI. We don't need a justice department. We don't even need rules 
like the SEC. The markets cleanse themselves automatically and prevent 
all frauds. This is a spectacularly naïve thing. There is enormous 
ideological content. And it fits with class. And it fits with political 

Do you want to look at these seemingly respectable huge financial 
institutions, which are your leading political contributors as crooks?

*BILL MOYERS:* TheHill.com website says Goldman Sachs is uniquely 
positioned to fight this case, that it spent $18 million over the last 
decade lobbying members of Congress, and put millions more in their 
campaigns. I mean, you've said elsewhere. That's smart business, right, 
to invest in the politicians who are going to be investigating you?

*WILLIAM K. BLACK* I would tell you, the Savings & Loan crisis, our 
phrase was, "The highest return on assets is always a political 

*BILL MOYERS:* Well, all right. You're a member of Congress. The Supreme 
Court has said, "Goldman Sachs can spend all it wants in November to 
defeat you." Are you going to take them on?

*WILLIAM K. BLACK* Absolutely, but I would never be elected to Congress 
because of that. So let me -- in terms of that Supreme Court decision, 
if corporations are going to be just like people, let me tell you my 
criminologist hat. Then let's use the three strike laws against them. 
Three strike laws, you go to prison for life, if you have three 
felonies. How many of these major corporations would still be allowed to 
exist, if we were to use the three strike laws, given what they've been 
convicted of in the past?

And in most states, they remove your civil rights when you're convicted 
of a felony. Well, let's take away their right to make political 
contributions that they're found guilty of a violation.

*BILL MOYERS:* Bill, are you describing a political culture, that is 

*WILLIAM K. BLACK* It's deeply criminogenic. And this ideology that both 
parties are dominated by that says, "No, big corporations wouldn't 
cheat. Fraud can't happen. Market's automatically excluded," is insane. 
We now have the entitlement generation as CEOs. They just plain feel 
entitled to being wealthy as Croesus with no responsibility, no 
accountability. They have become literal sociopaths. So one of the 
things is, you clean up business schools, which right now are fraud 
factories at the senior levels, right?

They create the new monsters that take control and destroy massive 
enterprises and cause global economic crises, cause the great recession. 
And very, very close to causing the second Great Depression. We just 
barely missed that. And there's no assurance that we've missed it five 
years out.

*BILL MOYERS:* This brings us back to what the president said this week. 
He said the crisis was born of a failure of responsibility from Wall 
Street to Washington. You've just described that. That brought down many 
of the world's largest financial firms and nearly dragged our economy 
into a second Great Depression. But he didn't name names. He doesn't say 
who specifically was responsible. You have. But the president doesn't 
name names.

*WILLIAM K. BLACK* No, and one of the most important things a president 
has is the bully pulpit. We have not heard speeches by the president 
demanding that the frauds go to prison. We have not heard speeches from 
the attorney general of the United States of America, Eric Holder. 
Indeed, we haven't heard anything. It's like Sherlock Holmes, the dog 
that didn't bark. And that's the dog that is supposed to be our guard 
dog. It must bark. And it must have teeth, not just bark.

*BILL MOYERS:* Bill Black, thank you for being back on the Journal.

*WILLIAM K. BLACK* Thank you.

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