Next, Black provides an incredibly concise blueplrint of how that criminality works. First, there's the basic mechanics of the money-making scam:
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.
Then, there's how you pull it off:
BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?
WILLIAM K. BLACK: Yes.
BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?
WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.
The one more element I would add to this mix is confusion. What Black is doing is shedding light, bringing clarity. He is describing things in black-and-white terms, and that is entirely appropriate. But this massive fraud was enabled precisely because of moral confusion, because of a repeated and habitual blurring of the lines. As I've said before, only a very small percentage are truly without conscience. What allows them to do so much damage in an institutional setting is the capacity to influence and corrupt everything around them, and this requires a blurring process that obscures the bright lines of right and wrong.
At the broadest level, this is obviously facilitated by conservative ideology in its various forms, most obviously figures such as Rand and Hayek. But it is also facilitated by moderate ideology, such as Rubinite/Clintonite/Obamaite neoliberalism, which turns its back on the moral progressive traditions that have created what is best about America. Not only did the neoliberals collude with conservatives to do away with regulations, and celebrate unbridled greed on the front side (never undersetimate the importance of a moral tone, or lack thereof), they obfuscated, excused and justified on the backside, as when Obama has repeated made the point that those who took out loans they couldn't pay are also to blame, and shouldn't be helped. So far, his repeated insistence on this has been far more vigorous than any efforts to relieve the plight of millions of innocents who have lost, or are close to losing their own homes.
Of course, we know that the vast majority of such people had no idea what they were getting into. They were not intentionally taking out loans they couldn't repay. That would make no sense. They were trying to realize the American Dream. And they were easy marks for a system set up to pray on them, as Black makes clear. It's how the biggest scores could be made:
BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?
WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.
BILL MOYERS: Yeah. Liars' loans--
WILLIAM K. BLACK: Liars' loans.
BILL MOYERS: Why did they call them liars' loans?
WILLIAM K. BLACK: Because they were liars' loans.
BILL MOYERS: And they knew it?
WILLIAM K. BLACK: They knew it. They knew that they were frauds.
WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.
BILL MOYERS: You think they really said that to borrowers?
WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.
BILL MOYERS: Ninja?
WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.
BILL MOYERS: You're talking about significant American companies.
WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.
BILL MOYERS: Which company?
WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.
The standard narratives you will read describe a process whereby financial instruments just sort of evolve. A natural unfolding of the creativity of the marketplace, as neoliberals like Obama just love to enthuse about. Not at all, says Black. Our, sure, there's creativity, all right. But there was nothing benign, much less uplifting about the process:
BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?
WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."
BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.
WILLIAM K. BLACK: Right, and the investment banker that - we call it pooling - puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.
BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.
WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...
BILL MOYERS: But you're saying our system became a Ponzi scheme.
WILLIAM K. BLACK: Our system...
BILL MOYERS: Our financial system...
WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."
In short, the only reason that there were, indeed, a whole lot of people intentionally or inadvertantly mis-representing their ability to repay on the front end--which could only cause them devastating loss in the end--was that there was an entire industry dependent on them doing so.
There's an old rule of thumb that I always rely on: When one person screws up, first thing you do is look at them and ask "What did that one do wrong?" When a thousand people screw up, first thing you do is look at the system, and ask "Why did the system screw up?"
Same principle with the Palm Beach Butterly Ballotss that helped "elect" Bush in 2000. Blame 18,000 people, and you get a psychopathic president in the White House. Blame the system, as you should, and you have a moral imperative for a limited revote (as had happened before in a presidential election) and the rule of law is preserved.
There is much, much more in this interview, you should go read the whole thing for yourself. But I want to highlight just two more things from it.
First, is the rather self-evidence fact that Geithner is part of problem, and absolutely needs to go:
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion - a trillion is a thousand billion - $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this. [clip]
TIMOTHY GEITHNER: I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.
WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.
Could there be clearer proof of Geithner's unfitness for the job than his own testimony?
Well, now that you mention it, yes there could be. As the Law and Order spin-off series would have it, there's Criminal Intent. As in continuing a deliberate coverup. Which is what Black goes on to argue that Geithner is involved in now.
Which brings me to my second parting point, which is the rather self-evidence fact that Geithner is part of problem, and absolutely needs to go--first with some important historical context for how you are supposed to respond to major financial mega-scandals:
WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?
What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: You are.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.
No fricken kidding!
One again we are faced with a situation where Obama-style "pragmatism" is anything but. What he means by "pragmatism" is political compromise with those who are the cause of our problems in the first place. And in this case--as in many others--they are not only the cause of the problem, they are outright criminals of the first order.
p.s. Way back last fall, when Congress was first being panicked into writing a big blank check, Black teamed up with James Galbraith to write up a simple set of guidelines about how to do a bailout right, "Bailout Plan: Trust But Verify." Click the link to read the whole thing. It's quite brief and to the point. I'll just list the elements involved:
1) A disclosure clause....
2) A pricing clause....
3) A fraud clause....
4) An enforcement clause....
5) An arbitrage clause....
6) A transparency clause....
7) A crony clause....
8) A modification and disposal clause....
It's easy to understand why no such set of elemtns were part of the Bush/Paulson Plan.
It's absolutely criminal that the same can be said about Obama and today's Democratic Congress. |
