Bill Black: In Praise of Sorkin’s Praise of Lowenstein’s Praise of Financial CEOs

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By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives

Roger Lowenstein has just taken the brave step of praising the failure to prosecute elite financial managers for fraud as a demonstration of the greatness of America. Lowenstein declares (1) that Blankfein was right – Goldman really was doing “God’s work,” (2) virtually no financial elites committed crimes, (3) any crimes they may have committed were trivial and played no material role in causing the crisis, (4) those that wish to hold fraudulent elites accountable for their crimes are (a) financially illiterate, (b) paranoid conspiracy theorists equivalent to those claiming the U.S. attacked the twin towers on 9/11, (c) a threat to our democracy and constitutional rights, and (d) engaged in “punishing profit,” (5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights, (6) the FBI is conducting a “serious” investigation of the elite financial frauds (despite points one through four above), and (7) the crisis was caused by “society” – because we’re all guilty no one should be held accountable – except those paranoids who want to destroy America’s greatness by prosecuting financial CEOs on fraud charges.

Wall Street: Not Guilty (May 12, 2011)

Lowenstein’s former colleague at the New York Times, Andrew Ross Sorkin, twittered that Lowenstein was “courageous” and “probably right.”

I join Lowenstein and Sorkin in denouncing the demagogues that denounce America’s financial CEOs for fraud and corruption and those that denounce our economic system for cronyism. My research has detected the ravings of two of the worst examples of this form of parasite. Two of the nation’s leading financial commentators have filled their books and columns with demagogic attacks on the productive class. Here are some of one’s vicious assaults on America’s CEOs and capitalist system.

[Vast] pay-offs for failed executives exposed [American capitalism] as a fraud at its uppermost reaches.

The author goes on to describe how senior corporate officials routinely engage in accounting fraud to make “the number” and maximize their bonuses. He stresses the complicity of the outside auditors and banks in aiding accounting control fraud. He claims that at investment banks: “the system was designed for cronyism” (emphasis in original). Indeed, he offers a comprehensive account of the criminogenic environment that creates the incentive and ability to engage in fraud with impunity. The author claims that the officers that control accounting frauds like Adelphia successfully manipulate banks by creating conflicts of interest because they believe that doing so will make it more likely that banks will fund their frauds – and he charges that our most elite banks are eager to be suborned and to turn a blind eye to the underlying fraud.

The repeal of the Glass-Steagall Act, a Depression-era banking law, had paved the way for commercial banks like Citibank and Bank of America to get into the more lucrative business of underwriting. Adelphia’s Brown shrewdly exploited the banks’ greed. In a memo to bankers early in 2000, which cordially began, ”I hope your New Year is off to a great start,” Brown pitched the co-borrowing idea and pointedly observed, ”All of the lead managers and co-managers of each of these credit facilities are expected to have an opportunity to play a meaningful role in . . . public security offerings.”

In others words, if the banks lent the Rigases/Adelphia money, then Adelphia would spill some gravy onto their investment-banking divisions. When the bankers saw that, their mouths watered. This was exactly the sort of conflict that Glass-Steagall had been intended to prevent. The banks went for it. From 1999 to 2001, three banking syndicates, led by Bank of America, Bank of Montreal and Wachovia Bank, allowed the Rigases/Adelphia to borrow a total of $5.6 billion, a staggering sum. Citigroup, J.P. Morgan, Deutsche Bank and scores of other banks participated.
Anyone looking for mere gaps in the Chinese wall is missing the larger point: banks weren’t trying to separate departments but to integrate them. That was the whole reason they had lobbied for Glass-Steagall’s repeal. Thus, the banks would send teams of 8 or 10 investment bankers and commercial bankers — no distinction was evident, according to Tim Rigas — to Adelphia pitching every financial service under the sun.

Bank of America’s securities unit was so proud of the way it combined its services, which it referred to as ”delivering the one-stop shop,” that it produced a case study for interns in 2001 on how the technique had worked with a particular client. The client was Adelphia. Page after page describes how Bank of America had devised ”an integrated financing solution” for Adelphia, including underwritings, strategic advice, supportive (i.e., positive) research from its analyst and co-borrowing debt. Apparently, the only time Bank of America did not have an integrated approach to Adelphia was when it added up the debt that was disclosed in Adelphia prospectuses.

The author stresses the negative effects of changes in the law that made it harder to bring civil suits against accounting fraud and the anti-regulatory agenda of industry. In the 1990s:

Fueling the permissive climate, the Justice Department showed little interest in prosecuting cases of accounting fraud, which was not considered a major problem. These developments gave executives, accountants, and corporate lawyers a general sense that the risk to themselves had diminished. Veteran investors detected a new swagger in the executive suite.

This is precisely the kind of attack on the Justice Department that Lowenstein decries. It is, of course, inconceivable that the Bush administration would have proven even more opposed to regulating and prosecuting elite white-collar criminals than the Clinton administration.

The author also attacks the private sector. Neoclassical economists have long assured us that fraud is impossible in the securities markets because creditors and investors exercise effective “private market discipline.” Private market discipline is the core function essential to efficient markets and capitalism, but the author claims that private market discipline has become so perverse that the supposed sources of discipline actually aid what criminologists call “accounting control frauds.”

However badly the Rigases behaved, they were helped along the way by lenders and investment bankers, auditors, lawyers, analysts — just about anyone whose job it should have been to protect the public. And this is what truly distinguishes the latter stages of the last bull market: not that a handful of executives got greedy but that the safeguards supposedly built into our financial culture stopped functioning.

The author writes that the Rigases involved facts so egregious that any honest lender should have refused to lend to them.

Even to people familiar with Wall Street scandal, the central detail of this one remains astonishing. Somehow, the Rigases persuaded a network of commercial banks to lend to them more than $3 billion that not only the family, but also Adelphia, a public company with public shareholders, would be liable for repaying. The money was used, in large part, to buy Adelphia securities, which subsequently lost most of their value, as well as to make payments on stock the family had bought on margin. It was also used as a sort of A.T.M. to finance extravagances of the Rigases both small and not so small.

[I]nvestment banks floated billions of dollars of securities to the public with detailed descriptions of Adelphia’s finances that somehow neglected to mention the extra $3 billion of indebtedness. Even the S.E.C. was aware that Adelphia and the Rigas family each let the other borrow on its own credit, an unusual arrangement that, by its very nature, was vulnerable to abuse. But the S.E.C. apparently never investigated it.

And now that the stock market is back in the pink, a collective amnesia has settled over Wall Street, which takes comfort from the notion that the system essentially worked. The only problem is, it didn’t.

The author claims that capitalism has become corrupt because of our elites’ power and class advantages.

[T]he larger truth is that plenty of people were in a position to have blown a whistle and didn’t, for the simple reason that Wall Street during the 90’s operated like a grander version of Coudersport, a place where big fish had license to do as they pleased. ”The failed gatekeeper is a lesson you take away from all of these cases,” says Steve Thel, a Fordham University law professor who specializes in security fraud. ”Auditors who didn’t want to lose a client, bankers who were doing a ton of deals — there was a sense in our society that people who have a lot of money are supposed to have it.”

The same author has written about the major role that fraud played in the current crisis.

[World Savings’] “loan applications [were] so rife with fraud, that the quality of their book was as suspect as WaMu’s.

The author went on to complain about lenders

Peddl[ing] these mortgages with a willful disregard, bordering on fraud, for whether their customers could repay them.

Indeed, the author’s logic compels the view that the loans were on the wrong side of the fraud “border.” As the author describes the lenders, loans, and rating agencies that drove the crisis, the lenders knew that the borrowers could not repay the loans and the credit rating agencies willfully failed to determine whether the loans could be repaid because they would not have liked the answer had they inquired. The author doesn’t conclude that the loans are fraudulent because his analytics are so weak, but the facts he provides are damning. The context is that a rating agency, Moody’s, permitted him to examine an exemplar of a mortgage-backed security (MBS) (whose identity was disguised from the author and referred to as “XYZ”) collateralized by nonprime loans that it rated in 2006. The author notes that all of the loans backing the MBS were subprime – the lenders knew they were loaning money to borrowers with serious credit deficiencies. The author reports that this was only one aspect of why the loans’ were exceptionally likely to default.

Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes.

By 2006, Credit Suisse estimated that half of all loans called “subprime” were also “liar’s loans.” The author does not note that the mortgage banking industry’s own anti-fraud experts reported that the incidence of fraud in liar’s loans is roughly 90 percent. The author also fails to note that investigators found that it was overwhelmingly the lenders and their agents, i.e., the loan brokers, who put the lies in liar’s loans. Instead, he reported that Moody’s: “reject[ed] the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.” The author is also naïve in accepting Moody’s explanation that:

Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.

This is naïve because the author has, elsewhere, noted that Washington Mutual’s loans were “rife with fraud.” Andre Cuomo, when he was New York’s Attorney General, found that WaMu kept a blacklist of appraisers – and that one got on the list by refusing to inflate appraisals. No honest lender would ever inflate appraisals, but doing so optimizes accounting control fraud. Only the lenders and their agents, not the borrowers, can cause widespread inflation of appraisals. This means that the borrowers on liar’s loans commonly had negative equity in their homes from the day they purchased the house – they overpaid for the homes. The lenders and their agents, by inflating the appraisals, deceived less sophisticated borrowers about the value of their homes and placed them in a position where they were highly likely to lose the home and their very limited savings. The lenders and their agents’ primary reason for inflating the appraisal was to lower the reported loan-to-value (LTV) ratio. By falsely reporting a lower LTV ratio the lenders increased the ease of securing “AAA” ratings from a rating agency and the premium they could receive by selling the loan.

The author’s naïve acceptance of Moody’s claims continues in his explanation of why the rating agencies gave ludicrously inflated ratings to MBS “backed” largely by fraudulent loans structured to have exceptionally high default rates.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me.

In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them.

The first clause is absurd. Moody’s did have “access to the individual loan files.” The claim that Moody’s was rating the bonds, not the underlying assets, is absurd. The bond derives its value (and risks) from the underlying mortgages. The only way to reliably evaluate the credit risk of a nonprime MBS was to review a sample of the loans. The author concedes that all Moody’s had to do to get access to the underlying mortgages was to say it would not rate securities unless it could sample loan quality.

The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody’s, S.&P. and Fitch say that they are tightening procedures — they will demand more data and more verification and will subject their analysts to more outside checks. None of this, however, will remove the conflict of interest in the issuer-pays model.

The only reliable way to determine the credit risk of mortgage loans is to review a sample of the loans. Fitch finally did so, in November 2007 (a non-random date – the secondary market in nonprime loans had collapsed and there were no more fees to be received by inflating credit ratings). Fitch reported:

Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.

[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools.

Fitch also explained why these forms of mortgage fraud combine with “layered risk” to cause severe losses.

For example, for an origination program that relies on owner occupancy to offset other risk factors, a borrower fraudulently stating its intent to occupy will dramatically alter the probability of the loan defaulting. When this scenario happens with a borrower who purchased the property as a short-term investment, based on the anticipation that the value would increase, the layering of risk is greatly multiplied. If the same borrower also misrepresented his income, and cannot afford to pay the loan unless he successfully sells the property, the loan will almost certainly default and result in a loss, as there is no type of loss mitigation, including modification, which can rectify these issues.

Note that Fitch, like Moody’s, places the onus for fraud solely on the borrowers rather than the rating agencies’ customers. This is understandable, but false. Because the author naively assumes that Moody’s could not review a sample of loans so that they could determine their credit risk the author does not ask the central analytical question – why did the rating agencies consistently refuse to sample the asset quality of nonprime loans that were known to be pervasively fraudulent. If the rating agencies had reviewed a sample of the loans we know what they would have found – exactly what Fitch found. That would have made it impossible to rate the securities above a “C” rating – virtually certain to default. The author explains the rating agencies’ perverse incentives to give the desired “AAA” rating.

A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating.

The author does not understand the logic of facts he reports, but those facts explain why the rating agencies adopted the financial version of “don’t ask; don’t tell.” The one thing they could never do was actually review the credit risk of the securities they were rating. If they looked, they would document the endemic fraud and never get paid. If even a few rating agencies reported that fraud was endemic among liar’s loans the entire secondary market in nonprime loans would have collapsed and the rating agencies’ most lucrative source of fees would have disappeared.

Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.

The author disagrees sharply with Lowenstein. He believes that the lenders and rating agencies saw the “classic signs” of a bubble before the bubble collapsed. The author, however, again displays naiveté about ARMs.

Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — “teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.

The author neglects two critical aspects of “teaser” ARMs. First, the lenders “qualified” borrowers on the basis of their purported ability to repay the initial – far lower – “teaser” interest rate. An honest lender would not do so because it would ensure extreme default rates. Second, the very low rates delayed the defaults, optimizing and extending accounting fraud. The facts that the author report are not “classic signs of a bubble” but rather classic signs of accounting control fraud.

While the author does not use the phrase, the facts he report demonstrate that the investment and commercial banks that created the nonprime securities deliberately and successfully generated a Gresham’s dynamic (bad ethics drives good ethics out of the marketplace) among the rating agencies by “shopping” their business to the least ethical rating agency.

But in structured finance, a handful of banks return again and again, paying much bigger fees. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.

And it seems to have helped the banks get better ratings. Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.’s defaulted eight times as often. One interpretation of the data is that Moody’s was far less discerning when the client was a Wall Street securitizer.

The author reports that Moody’s created an absurd empirical methodology to justify claiming that pervasively fraudulent loans would have only minimal defaults. “Nonetheless, its credit-rating model continued to envision rising home values.” As long as home loans increased forever the borrowers could simply refinance their loans. The industry saying is: “a rolling loan gathers no loss.”

Sorkin, who so courageously championed Lowenstein’s column denying the existence of fraudulent lending and sales on nonprime securities and praising the “serious” prosecutions of fraudulent lenders, should turn his wrath to another author who has taken the opposite position. This author has been very harsh in his critique of the Department of Justice, complaining:

If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.

The same author has disparaged Attorney General Holder’s announcement that the Department of Justice has made such investigations a top priority, as evidenced by “Operation Broken Trust.”

[A]fter you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”?

Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)

That’s because in the two years since the peak of the financial crisis, the government has not brought one criminal case against a big-time corporate official of any sort.

Instead, inexplicably, prosecutors are busy chasing small-timers: penny-stock frauds, a husband-and-wife team charged in an insider trading case and mini-Ponzi schemes.

This is the first of a multi-part response to Lowenstein’s column. The remaining columns will address why control fraud drove the current crisis and respond to Lowenstein’s strawman arguments. The sources of the quotations used in this column, from Messrs. Lowenstein and Sorkin, are provided here.

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58 comments

  1. Mogden

    I’m not sure that there’s anything left on this topic that could shock, outrage, or offend me more than I already have been. I literally have no confidence whatsoever in the supposed leadership of this benighted country.

  2. Fitz-Lloyd Smith

    “Roger Lowenstein has just taken the brave step of praising the failure to prosecute elite financial managers for fraud as a demonstration of the greatness of America. Lowenstein declares (1) that Blankfein was right – Goldman really was doing “God’s work,” (2) virtually no financial elites committed crimes….etc…”

    At least this should make Anonymous Jones and his ilk happy, if nothing else.

    1. Anonymous Jones

      Oh, Fitz! Oh, the ignorant!

      Show me one post that I ever defended a *banker* or denied the obvious reality that many (though perhaps not all) of those involved in the upper management of the *big banks* were engaged in control fraud.

      The false dichotomy rages on. Just because I know many of these people, and know how incompetent (and delusional about their own competence (born on third base and such…ok, maybe they advanced from second on an error)) so many of them are does not mean that I don’t recognize that many are engaged in defrauding others.

      It’s so awesome that I push back just a little on the bullies collecting at this site (and if you examine the record, I was much more harsh on the Dan Duncans and eric andersons of the world), and I’m suddenly the defender of the rapacious elite and the rotten edifice they’ve managed to collectively perpetuate in this country (though I would argue mostly in spite of their own incompetence).

      You know, I just realized, maybe I’m the ignorant one! Maybe I’m a paid shill for the bankers and didn’t even know it!!! That would explain a lot. Or not…

      Next!

      1. Fitz-Lloyd Smith

        Anonymous Jones: “blah blah blah.. the rapacious elite and the rotten edifice they’ve managed to collectively perpetuate in this country (though I would argue mostly in spite of their own incompetence)….blah blah blah”

        Incompentence. Incompetence. Incompetence….

        Horseshit.

        Next!

        1. Up the Ante

          He appeared to be saying they are essentially incompetent, as in no true ability.

          He does not appear to be doubting their intent. Two different things.

      2. alex

        Anonymous Jones: “Show me one post that I ever defended a *banker* or denied the obvious reality …”

        Clearly Citizen Jones you fail to appreciate the perils of counter-revolutionary thought. It’s insufficient to not support the Ancien Régime. A lack of revolutionary zeal is even more pernicious than outright support. Suppose, for example, you commented that Blankfein or Dimon once came home from a hard day of impoverishing the people and chose not to kick his dog. Harmless you say, for his other crimes (of which you’ve spoken loudly) are so many. But you would be wrong! For even the merest suggestion that he might, perhaps even by accident, not do evil with his every breath could be a tactic to spread your counter-revolutionary sentiments by planting the seeds of doubt in your fellow citizens minds.

      3. alex

        Anonymous Jones: “I just realized, maybe I’m the ignorant one! Maybe I’m a paid shill for the bankers and didn’t even know it!!! That would explain a lot.”

        Keep away from me, Smith. I’m an agent of Goldstein. I didn’t know it myself. Thoughtcrime is so insidious. It just creeps up on you. My daughter found it out. Very proud of her. Very grateful I’ve been discovered before it’s too late. They won’t shoot me, will they, Smith?

        1. anon2

          Umm, let me guess. The reason you *always* jump in to defend Anonymous Jones is because you’re one person using two pseudonyms?

          Wow, that’s pretty clever.

        2. Fitz-Lloyd Smith

          But I’m really on your side Alex A. Jones, my man!!

          Why, earlier this evening, after a hard day’s work at one of the I-banks downtown, ripping off widows and orphans, well, on the way home I encountered this homeless person, and what did I do? Did I give him $1 like a bleeding heart liberal, revolutionary leftist psychopath? F**K no! I took out my switchblade, proceeded to stab him in his one good eye, then stole his coffee cup full of change.

          So you see, my man, all jesting aside, we both work for the same team! So let’s cut out the nonsense and gimme five, dude!!

  3. Tao Jonesing

    **shrug**

    Whatever.

    Persuasion (in the form of propaganda) is not about logic or facts. It’s about repeating the same lie often and from every corner.

    Write as many columns as you want, Prof. Black, but you will accomplish nothing. Unless and until you call out liars for lying, people will just believe that there’s a difference of opinion, and that you’re a nitpicker.

    Good luck, though. You’re the Obi-Wan Kenobi of the financial Jedi.

    1. alex

      “Prof. Black … you will accomplish nothing. Unless and until you call out liars for lying …”

      Black is not only willing to call people liars, but criminals. The fault is not his, since AFAIK he doesn’t control a chunk of the MSM.

      If the MSM honestly wanted to report on even the possibility of wide-scale fraud, Black would be on every news and business show and interviewed by every major paper. He is _the_ goto guy for expertise on financial fraud. He’s been there, done that, and has better creds than anyone else I can imagine.

      Perhaps the reason for the fall of the USSR was that they tried to quash samizdat. The fact that officialdom tried to quash it gave it a certain cachet, and suggested that it might be true. Far more effective to use the American approach. Let a thousand samizdat websites flourish and just ignore them.

      1. Up the Ante

        “Black is not only willing to call people liars, but criminals.”

        Good, good. Let us hope the next segments will start with these “characters”:

        “(5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights,”

      2. Tao Jonesing

        Black spends far too much time asserting that people like Sorkin are “naive” when, in fact, they are accomplices after the fact.

        Sorkin is who Black is attacking head on, and because of that any ancillary attack on the criminals who perpetrated the control fraud will be completely glossed over by most people.

        Black needs to treat the defenders of the criminals as criminals, otherwise the masses will lose sight of the crimes. That’s why I say Bill Black is completely ineffectual: he is trying to engage intellectually with people who have no intellectual integrity.

  4. mannfm11

    I can’t wait to read the next segment. I was in the mortgage business in DFW when the S&L’s went wild down here. I actually worked for Lamar Saving in their conventional loan department as a loan officer just before they went down. My experience in the mortgage business was that loan pools were audited by the entity doing the buying and that originators had to buy improperly packaged and approved loans back. If this practice had been maintained, the rating agencies would have never seen one of these pools. The agencies were negligent in giving their ratings, but the fraud went from origination to underwriting at the wholesaler to a blind eye to the end assembler of the pool. There isn’t any trouble finding the crook, just look in the files for the names of the broker, underwriter and who was running the ship at the wholesaler and the sponsor of the pool. Criminal and civil negligence in the issuance of marketable securities or whatever these pieces of crap were is an absolute minimum even a blind squirrel could find. I bet there was $50 billion minimum pulled out of this mess by these purveyors of fraud. .

    1. Leviathan

      Excellent points. So the lack of prosecution is either sheer laziness or a realization that, should they reveal the extent of the cancer, everyone would wonder why the f* no one saw fit to reign this in while it was going on.

      1. Francois T

        “everyone would wonder why the f* no one saw fit to reign this in while it was going on.”

        As a matter of fact, people would, at last, seriously question the legitimacy of the political elites.

        For obvious reasons, this is the last thing on Earth these asshats want. Check this excellent post by pow wow to see how they (in the US Senate) really operate. The first part is about the War Powers Act, but the important explanation in the second part totally explains the way our political elites despise us. The mind recoils in horror.

      2. Up the Ante

        “So the lack of prosecution is either sheer laziness or ..”

        No. Marching orders.

  5. bmeisen

    Torrid refutation and condemnation. Deep bows and helmet tips.

    It’s been clear that the perps strategy has been to blame the poor who compulsively sought to live beyond their means and lied lied lied on their mortgage applications, enabled by the socialist fools at Fannie Mae and Freddie Mac. If there was fraud it was among the bottom-dwellers/feeders, not in the boardrooms.

    Thanks to Yves, Black and others I am prepared to believe that at some point, say 2003, there weren’t enough mortgages, subprime and otherwise, in the pipeline to satisfy the banksters demand. Rather than slow down and turn to other, less profitable financial products a few of them guessed that they could take matters matters into their own hands and satisfy their own demand. Originators like Countrywide, insurers, trustees, and the ratings agencies didn’t complain, perhaps because MERS made the transfers unbelievably easy. The nightwatchmen slept and the army was off in Iraq. It deal worked beyond their wildest dreams and soon everyone was doing it.

    Sorkin baffles me. How can readers of TBTF be impressed. He missed the story, or intentionally omitted it to make sure that the banksters would continue to talk to him.

    1. Steve

      Good point. Journalism is about access. No access, no story.

      Sorkin and his ilk are at the tail-end of the parade. It’s easy to blame pariahs like Ken Lewis and Dick Fuld. But it’s quite another thing to challenge seated CEOs and politicians who can retaliate.

      I generally prefer less regulation. But I was shocked to see a Congressman call Elizabeth Warren a liar on national TV (CNBC) this morning. The Congress and the press have been bought by the banks. We see proof of this every day now. The difference is that, in the past, the banks operated subtly. Now their henchmen see no need for camouflage.

      1. Francois T

        “Journalism is about access.”

        Correction if I may: Establishment journalism is about access. No access to the powerful of the establishment, no story, hence, no fame and fortune for the, ahem, “journalist”.

        Real journalism is about cultivating mid-level sources who know where are the Hansel & Gretel crumbs that leads to the pot of gold; digging through realms of documents the Go-vermin and Korporations do not want you to see anyway.

        One doesn’t even have to guess what kind of journalism prevails in DC.

        Remember Izzy Stone…

          1. alex

            Actual investigation is hardly limited to guerrilla journalism (not that there’s anything wrong with guerrilla journalism). Woodward and Bernstein (back when Woodward was a real reporter) and numerous other investigative reporters followed the crumbs to get the real story.

      2. Yves Smith Post author

        Steve,

        Can I prevail upon you to provide the link to the CNBC segment? I’d like to see the context.

          1. Francois T

            Republicans are so lucky to have to deal with so many clueless useful idiots within their base. All this guy did was parroting meaningless (read: devoid of any logic) talking points on how evil and Machiavellian Liz Warren is.

            GOP is lucky, but, truth be told, they have a fantastic enabler called Barack Obama: You do not go from moribund to administering a shellacking in 2 years without significant help from your “opponents”.

            Enough said!

          1. readerOfTeaLeaves

            This appears to be an example of why people don’t go into government service. If Warren has to be slimed as somehow

            1:00: “…she’s testified multiple times that in terms of the mortgage settlement, she’s claimed that she was simply an advisor, she was giving advice.”
            1:07 “Now it’s clear, and it’s been publicly released, that -uh- they put together a PowerPoint presentation on the terms of the settlement. Now, in terms of advice it-it seems the result was (that) it’s the explicit -uh- outline of -uh- the settlement agreement that -uh- we’re hearing about in the press.”
            1:28 “It-it (I) question the veracity of her former testimony in relation to the reality that we now see, -uh- in terms of the release of this PowerPoint presentation with the terms of the settlement.”

            The CNBC host is confused, and basically asks, So you’re saying that creating a PowerPoint presentation equates to lying?!
            He seems to think this is the case.
            Not to Redmond: as of today, no one can use PowerPoint to offer ‘advice’; using PowerPoint will henceforth call one’s veracity into question.

            The Congressional shill then goes after Dodd-Frank, claiming that the fact that the funding of the CFPB, by evading Congressional sticky fingers, is somehow ‘evading Congressional oversight’. He’s claiming that Warren is making the CFPB into some ‘enormous power, an agency that has similar budgets to the SEC’ is somehow an uncontrollable beast, concentrating power in the hands of a single individual.

            Wow, this guy is one the one hand a complete dittohead for finance, and on the other a guy who is so ideological that he can’t see what’s in front of his nose.

            Sinister.

            It’ll be interesting to see how credible he is up against Warren and a solid set of facts.

      3. readerOfTeaLeaves

        As a result of comments on this thread, I opened C-Span in a browser window to follow the Elizabeth Warren hearings today.

        I hope others are also watching.
        I have not seen it all, but the pieces that I’ve observed …. well, old Joe McCarthy himself could not have done a more bullying, thuggish job of insulting Elizabeth Warren.

        Currently, the Chair is pitching a hissy fit about the fact that Warren could not accommodate his schedule for yet an eighth time. It’s just unbelievable.

      4. Up the Ante

        “The Congress and the press have been bought by the banks. We see proof of this every day now. The difference is that, in the past, the banks operated subtly. Now their henchmen see no need for camouflage.”

        To read the first 50 or so pages of The Best Way to Rob a Bank is to Own One is to experience “the horror” of Apocalypse Now.

        After all, look at the fraud that Vietnam became.

        Mr. Brando knew exactly what he was saying to his fellow Americans.

  6. Graham Crowden

    “True, we have got into the habit of admiring colossal bandits, whose opulence is revered by the entire world, yet whose existence, once we stop to examine it, proves to be one long crime repeated ad infinitum, but those same bandits are heaped with glory, honors, and power, their crimes are hallowed by the law of the land, whereas, as far back in history as the eye can see — and history, as you know is my business — everything conspires to show that a venial theft, especially of inglorious foodstuffs, such as bread crusts, ham, or cheese, unfailingly subjects its perpetrator to irreparable opprobrium, the categoric condemnation of the community, major punishment, automatic dishonor, and inexpiable shame, and this for two reasons, first because the perpetrator of such an offense is usually poor, which in itself connotes basic unworthiness, and secondly because his act implies, as it were, a tacit reproach to the community. A poor man’s theft is seen as a malicious attempt at individual redress . . . Where would we be?”

    “Where would we be? Note accordingly that in all countries the penalties for petty theft are extremely severe, not only as a means of defending society, but also as a stern admonition to the unfortunate to know their place, stick to their caste, and behave themselves, joyfully resigned to go on dying of hunger and misery down through the centuries forever and ever . . . ”

    Louis-Ferdinand Céline (Journey to the End of the Night)

    1. jim

      From Dealbook

      “How an Inquiry of Goldman Might Play Out”

      http://dealbook.nytimes.com/2011/05/23/how-an-inquiry-of-goldman-might-play-out/?partner=yahoofinance

      “The device most commonly used these days to deal with corporate criminal liability is a deferred prosecution agreement, under which a company admits that violations occurred but any charges are dismissed once it completes the conditions of the agreement, like adopting internal reforms and appointing an outside monitor.

      Whether that would satisfy prosecutors, who are under pressure to pursue criminal charges against Wall Street for the financial crisis, or be acceptable to Goldman, which has resisted all claims that it acted improperly, is very much an open question.”

      Gotta love that — the criminals get to decide whether essentially no punishment is an “acceptable” outcome for them.

      1. JustMe

        From Why Isn’t Wall Street in Jail? by Matt Taibbi, Rolling Stone, 3/3/11:

        – snip –

        Aguirre, listening in the crowd, couldn’t believe Khuzami’s brazenness. The SEC’s enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC,” Aguirre says. “Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”

        – snip –

        Note all the DOJ “sheriffs of Wall Street” end up going to work for Wall Street, including ex-AGs like Mukasey going on to the green green pastures of corporate monitoring.

        It’s kind of perfect — Mukasey stops the FBI from going after Wall Street fraudsters when he’s AG, and now as a corporate monitor he can get paid big bucks to overlook them again. Nothing to see here, move on.

  7. jake chase

    It is probably much worse than even Prof Black imagines. Are the financial statements of any large publicly traded corporation anything but fiction obscuring massive fraud? You certainly cannot tell what is going on by reading them. Of course, for the biggest companies it doesn’t matter, because the Fed through the banks is an endless source of bailout money. As in the child’s game of musical chairs, all is well until the music stops.

  8. Searing Indictment

    Will it be a bloodless coup? Four more years of the Patriot Act, war forever!, austerity measures, prison construction and more foreclosures. Crumudgeon:

    “Overthrow the government …. and put these people in jail.” – Paul Craig Roberts 5/23/11

  9. NOTaREALmerican

    The sycophants sing the praises of the nobility. The peasant dumbasses worship their nobility. The nobility live well. It’s always been good to be “the king”.

    Reform happens with revolution. As long as the bread is filling and the circus is entertaining there’s no need for a revolution.

    Here’s hoping the revolution happens after I’m dead.

  10. Hugh

    Lowenstein and Sorkin are apologists of and propagandists for kleptocracy. They are soldiers in a class war prosecuted by looters against us the lootees. Their careers are based in their entirety on directing the attention, and anger, of ordinary Americans away from the great economic crimes of our times, indeed the largest in human history.

    It is so important to understand that these two, and people like them, are not just obnoxious corporate shills making outrageous statements. They are not irritating but innocent. They are aiders and facilitators of crimes that have damaged the lives of hundreds of millions, destroyed the lives and livelihoods of tens of millions, and killed hundreds of thousands. We really need to keep in mind the enormity of the crimes they are defending and what it says about who and what they are.

  11. Jack Straw

    My experience in this is at the bottom, or near botton, of the food chain. I know a lot of honest people, and virutally all of them have “situations” where they are waiting out the statutes of limitations (civil and/or criminal). I would also add that the honest people not only had no incentives to point out fraud (that is, NOBODY got paid more than once – you weren’t going to be around for a second time), the other disincentives were especially harsh. And actual “fraud detection bonuses,” say $500, were introduced in maybe 2007? Internal fraud investigations were exceedingly unpleasant, and simply not on the up-and-up, as there was no interest in getting to the active, knowing agents, but rather messing with the should-have-knowns and calling it a day.

    One thing the industry – broadly contrued with all the ancillary players included – was brutally efficient at was eradicating integrity wherever it might rear its head.

    IMO, Prof. Black understands exactly what was wrong, and it was very simple, and it played out in millions of different situations and relationships:

    1) bad loans made people more money than good loans;
    2) good loans had many undesirable business characterists – low fees, low rollover, customers who could easily shop (Prof. Black points this out in le show when he says the market – and i took it to mean this particular market – was especially competitive);
    3) fraud detection amounted to CYOA and push the risk to someone else, hopefully someone over whom you had power to destroy (WaMu and eAppraisIt is only the most high-profile case, this existed EVERYWHERE, and may well have been most expertly executed within a mid-western wiseman’s empire);
    4) Fluctuating business volume makes proper and proportionate staffing THE major business risk of the smaller players and is an especially under-appreciated aspect of the nuts and bolts of actual real life frauds, because the agents of fraud had a keen instinct about how to exploit this. Give me day of the week, time of day, time of month, whether it is the end of mar, june, sept and Dec, and I could chart the likelihood of egregious fraud – like 100% of the time. I know this to be true just as it is known there is no difference between good flan and bad flan.

    It bears repeating, nobody got paid to identify fraud. They got paid to appear like they cared (formal compliance), but ultimately push the judgment call to someone else (substantial evasion). The no-doc loan was once explained to me as “you don’t know how awesome it is that we no longer have to photoshop sh*t. I’ve got 4 more production days a month now.”

    My problem with calls to prosecute is that nobody is ever named, nor are the details ever particularized. This is do-able. From my POV, the only thing I quibble with Prof Black about (actually, more than a quibble) is that his round with S&L prosecution wasn’t harsh enough. Too many of those rogues are at the heart of this round, and will be in the middle of the next round. He admits as much with the Ameriquest story.

    I realize his focus is on the higher ups – and I agree with that – but we are going to suffer from the millions of lower-downs out there who expect every job they get/have to have an ulterior scam that they have to actively advance, participate in, cyoa from, or otherwise keep their mouths shut about.

    I really wish it wasn’t this depressing. Much as I admire Prof. Black, IMO, he is still misunderestimating the problem.

    1. readerOfTeaLeaves

      I realize his focus is on the higher ups – and I agree with that – but we are going to suffer from the millions of lower-downs out there who expect every job they get/have to have an ulterior scam that they have to actively advance, participate in, cyoa from, or otherwise keep their mouths shut about.

      I think you’ve nailed a key problem.

      1. Paul Tioxon

        Seriously, the down stream at the base of the pyramid. I am glad Madoff got locked up, but I’m even more happy the Feds just rounded up a dozen of the Philly Mob, who have wreaked more havoc on this city, businesses, trade unions, neighborhoods than Tim Geithner could ever dream up doing deliberately. Since locking up a number of people back in the day of the Pecora commission did not deter the ruling class from making a come back, I am not sure how politically useful it is lock up Jamie Dimon or whoever, that will be soon replaced. Radical change to the system to put the mechanism of the state bureaucracy beyond their reach of aggrandizement is what will stop the cyclical nature of boom/bust looting/raiding that capitalism is predicated upon. I see no reason why the DoJ will not prosecute, waiting for the right media moment, as part of the political management of the retention of state power. There is someone who will take it in the neck that will provide useful campaign fodder, at just the right moment.

  12. D. Lowell

    Elizabeth Warren called liar by congressman. It happened as I found it on gogle.

  13. Lloyd C. Bankster

    I have a solution that should satisfy Rep. Patrick McHenry, R-N.C., chairman of the Oversight Committee’s subcommittee on TARP. Get rid of Elizabeth Warren, then release Bernard Madoff from prison. Let him set up the Consumer Financial Protection Bureau, working in consultation with Jamie Dimon, Lloyd Blankfein and the Long Island serial killer.

    That should bring a smile to pig McHenry’s face, it might even cause him to start oinking and dance an Irish jig. And I’m sure Sorkin and Lowenstein would join along; both in dancing and helping to sell this fetid pool of carrion and turds to the gullible public.

    On the remote chance they did have reservations (what? about dancing in step, the Long Island serial killer or Blankfein?), anyway, one phone call would take care of it.

  14. Up the Ante

    ” .. private market discipline has become so perverse that the supposed sources of discipline actually aid what criminologists call “accounting control frauds.” ”

    Orwell’s doublespeak tells us that the discipline is “good”, and the “efficiency” is theirs.

    “(5) the prosecutors who refuse to bring criminal charges where they find elite frauds are the heroes safeguarding our democracy and constitutional rights,”

    Just stock ’em at the Judicial Committe level and they’re good to go, center of the storm.

  15. Elliott X

    In case anyone is interested, exiledonline is linking to this article, under the headline: “eXiled Hero Bill Black Rips A Well-Deserved Asshole In Professional Suck-Ups Andrew Sorkin & Roger Lowenstein”

    Click on that, and it takes you to NC

  16. Namazu

    I don’t know what constitutes a cover article in the Internet age, but Lowenstein might have top-ticked the market to day when he submitted his final edits. Journalistic herding behavior seems more pronounced since the advent of the 401K plan.

  17. Virginia

    “Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes.”

    Ohhhh Pleeeeeze… These banksters and their pals act like stated income gets them off the hook! They didn’t need paperwork – they don’t need it now with modifications. They have back door keys to everything you or any American with a credit card in their wallets owns, saves, buys, invests, owns, spends, earns… right down to the last penny. And this is shared information if you belong to the bankster “club” and have their patented, trademarked and licensed software programs that they make $$trillions selling worldwide.

    Wise up America – once you are in their system – you are in for life and once we start exposing the Mindbox and other software programs they use – you’ll see that they really have no need for paperwork. Which means they knew or should have known – and did know – whether or not to make the loan and they did it anyway. THEY DIDN’T NEED NO STINKIN’ PAPERWORK!

  18. Russ

    Excellent article. I saw Mr Black on PBS and his narrative of the financial crisis being caused by fraud is a beacon of truth in the morass of mainstream corporate propaganda.

    Kudos for this “Truth Bomb”.

  19. unanimous

    im sorry. i took a left turn at sarcasm street, went down wonky lane, and got lost in the middle of verbiage square.

    mr black needs to treat me like a jury member and not some snarky hipster.

  20. Ted

    He nailed it with the Cuomo WAMU and the appraisal management company Eappraiseit and inflation of values that caused the meltdown.

    To be sure, LSI, an appraisal management company owned by LPS hired compromised and inept appraisers at reduced fees (no independent appraisers would work for them) to inflate values all over the country – similar to the WAMU and EAppraiseit fraud uncovered by Cuomo that had over 200,000 fraudulently inflated valuations all over the country from early 2006 to 2008. Eappraiseit admitted this in a deposition. All it takes is one fraudlently inflated appraisal to raise values in a neighborhood – and Eappraiseit did over 200k!! That one AMC alone could have inflated home values all across the country and it’s my belief these appraisal management companies were the cause of the meltdown through fraudulent inflated valuations.

    The crazy thing is, although they’re known fraud perps, the government and the GSE’s have rewarded them by policy that all retail loans going through the GSE’s must go through these bank owned AMC’s !! The AMC’s have a monopoly on the appraisal market now and fraud is on the rise. Competition with independent appraisers that don’t need AMC’s was stopped by this policy and the banks are now free to control values, again.

    I really wish the AMC’s role in inflated values so that the investment banks could prosper were investigated for their role in the meltdown. This LPS/LSI investigation is a start.

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