Bill Black: Dawn of the Gargoyles – Romney Proves He’s Learned Nothing from the Crisis

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

Mitt Romney chose to unveil the economic plank of his campaign for the Republican nomination with a speech in Aurora, Colorado decrying banking regulation. He could not have picked a more symbolic location to make this argument, for Aurora is the home and name of one of the massive financial frauds that caused the Great Recession. Lehman Brothers’ collapse made the crisis acute and Lehman’s subsidiary, Aurora, doomed Lehman Brothers. Lehman acquired Aurora to be its liar’s loan specialist. The senior officers that Lehman put in charge of Aurora, which was inherently in the business of buying and selling fraudulent loans, set its ethical plane at subterranean levels.

Aurora sealed Lehman’s fate by serving as a “vector” that spread an epidemic of mortgage fraud throughout the financial system and caused catastrophic losses far greater than Lehman’s entire purported capital. Aurora epitomizes what happens when we demonize the regulators and create regulatory “black holes.” Romney literally demonized banking regulators as “gargoyles” and claimed that banking regulations and regulators were the cause of the economy’s weak recovery.

On April 20, 2010, I testified before the Committee on Financial Services of the United States House of Representatives regarding Lehman’s failure. I was the witness chosen by the (then) Republican minority because they wished to have testimony from an experienced and successful financial regulator who would pull no punches in critiquing the failures of the Federal Reserve Bank of New York (FRBNY), the Board of Governors of the Federal Reserve (the Fed), and the Securities and Exchange Commission (SEC) with regard to Lehman. The Republicans’ target was the former President of the FRBNY, Timothy Geithner.

My House testimony explained why Aurora was the key to understanding Lehman’s failure and the causes of the financial crisis.

Lehman was a “control fraud.” That is a criminology term that refers to situation in which the persons controlling a seemingly legitimate entity use it as a “weapon” (Wheeler & Rothman 1982) of fraud (Black 2005). Financial control frauds’ “weapon of choice” for looting is accounting.

Lehman’s nominal corporate governance structure was a sham. Lehman was deliberately out of control with regard to “risk” in its dominant operation – making “liar’s loans.” Lehman did not “manage” the risk of making liar’s loans. It engaged in massive, fraudulent transactions that were “sure things” (Akerlof & Romer 1993). The Valukas Report … provides further evidence of the accuracy of George Akerlof and Paul Romer’s famous article – “Looting: Bankruptcy for Profit.” The “looting” that Akerlof & Romer identified is a “sure thing” in both directions – firms that loot through accounting scams will report superb (fictional) income in the short-term and catastrophic losses in the long-term.

The value of Lehman’s Alt-A mortgage holdings fell 60 percent during the past six months to $5.9 billion, the firm reported last week.[1]

This roughly $9 billion loss, in 2008, was an important factor in destroying Lehman, but it represents only losses on liar’s loans still held in portfolio. Aurora specialized in making liar’s loans and Aurora’s loans caused massive losses because they were pervasively fraudulent. Lehman sold tens of billions of dollars of liar’s loans through Aurora and a subsidiary (BNC Mortgage) that specialized in making subprime loans – roughly half of which were liar’s loans by 2006. The purchasers of these fraudulent loans had the legal right and economic incentive to require Lehman to repurchase the loans, which would have far exceeded Lehman’s reported capital. Making and selling fraudulent liar’s loans doomed Lehman. Lehman was one of the largest vectors that spread fraudulent mortgage paper throughout much of Europe and the United States.

Lehman had become the only vertically integrated player in the industry, doing everything from making loans to securitizing them for sale to investors.


Lehman was a dominant player on all sides of the business. Through its subsidiaries – Aurora, BNC Mortgage LLC and Finance America – it was one of the 10 largest mortgage lenders in the U.S. The subsidiaries fed nearly all their loans to Lehman, making it one of the largest issuers of mortgage-backed securities. In 2007, Lehman securitized more than $100-billion worth of residential mortgages.

These demands posed a much larger problem: contagion. Because these CDOs were thinly traded, many of them did not yet reflect the loss in value implied by their crumbling mortgage holdings. If Bear Stearns or its lenders began auctioning these CDOs off, and nobody wanted to buy them, prices would plummet, requiring all banks with mortgage exposure to begin adjusting their books with massive writedowns.

Lehman, despite its huge mortgage exposure, appeared less scathed than some. Mr. Fuld was awarded $35-million in total compensation at the end of the year.

The volume of liar’s loans and subprime loans was everything – as long as Lehman could sell the liar’s loans to other parties. Volume created immense real losses, but it also maximized Dick Fuld’s compensation. Nonprime loans drove Lehman’s (fictional) gains in income and capital under Fuld.

Lehman’s real estate businesses helped sales in the capital markets unit jump 56 percent from 2004 to 2006, faster than from investment banking or asset management, the company said in a filing. Lehman reported record earnings in 2005, 2006 and 2007.

As MARI, the mortgage lending industry’s own anti-fraud experts, warned the industry in 2006, making liar’s loans is an “open invitation to fraudsters.” Even Lehman’s internal studies found, by reviewing only the loan files, exceptional levels of fraud.

Mark Golan was getting frustrated as he met with a group of auditors from Lehman Brothers.

It was spring, 2006, and Mr. Golan was a manager at Colorado-based Aurora Loan Service LLC, which specialized in “Alt A” loans, considered a step above subprime lending. Aurora had become one of the largest players in that market, originating $25-billion worth of loans in 2006. It was also the biggest supplier of loans to Lehman for securitization.

Lehman had acquired a stake in Aurora in 1998 and had taken control in 2003. By May, 2006, some people inside Lehman were becoming worried about Aurora’s lending practices. The mortgage industry was facing scrutiny about billions of dollars worth of Alt-A mortgages, also known as “liar loans”– because they were given to people with little or no documentation. In some cases, borrowers demonstrated nothing more than “pride of ownership” to get a mortgage.

That spring, according to court filings, a group of internal Lehman auditors analyzed some Aurora loans and discovered that up to half contained material misrepresentations. But the mortgage market was growing too fast and Lehman’s appetite for loans was insatiable. Mr. Golan stormed out of the meeting, allegedly yelling at the lead auditor: “Your people find too much fraud.”

After the FBI warned in September 2004, that there was an “epidemic” of mortgage fraud, after Lehman’s internal auditors found endemic fraud in their liar’s loans, after MARI warned the industry in 2006 that studies of liar’s loans found a fraud incidence of 90%, after the bubble had stalled in 2006, and after scores of mortgage banks that specialized in making nonprime loans failed – Lehman significantly increased the rate at which Aurora made liar’s loans. In 2006, Aurora originated roughly $2 billion a month.

BNC was Lehman’s subsidiary that specialized in subprime loans. By 2006, roughly half of its loans were liar’s loans to borrowers with poor credit records.

Lehman’s pattern of conduct seems bizarre because no honest firm would make liar’s loans. The pattern, however, is optimal for an accounting control fraud. The people who control fraudulent lenders optimize their compensation by maximizing the bank’s short-term reported income. The “recipe” for maximizing fictional income (and real losses) has four ingredients:

1. Extremely rapid growth by
2. Making poor quality loans at a premium yield while employing
3. High leverage and
4. Providing only grossly inadequate allowances for loan and lease losses (ALLL)

The officers controlling a fraudulent lender find it necessary to eviscerate the bank’s underwriting in order to be able to make large amounts of bad loans. The managers deliberately create a fraud-friendly culture, and Aurora demonstrated how extreme the embrace of fraud could become.

The HR lady pulled Michael Walker into a room and told him he was fired.

The reason: Talking to the FBI. It was a violation of the company’s privacy policy.

“I was stunned,” Walker told me. “I couldn’t believe it. But that’s what she said.”

Walker, a “high-risk specialist,” was then walked out of the building as if he were the risk. His job at Aurora Loan Services LLC, Littleton, Colo., ended on Sept. 4, 2008.

His job was to uncover mortgage fraud. But he claims he was fired for doing it. In a lawsuit recently filed in Denver District Court, he claims Lehman’s mortgage subsidiary wanted to remain profitably unaware of fraud.

Aurora [personnel] got paid by loan volume, not by loan quality.

Consequently, Walker and his fraud-seeking colleagues were always busy.

“They just absolutely flooded us with work,” he said. “There was no way we could possibly keep up with it. And that’s what they wanted.

“They were putting the loans into an investment trust,” he explained. “When they became aware of fraud, they had to buy those loans back out of the trust. So it ended up costing them money.”

But Walker couldn’t play this game. A “Suspicious Activity Report” that he filed in 2006 led to interviews with the FBI and the IRS in 2008, and then ultimately to his bizarre dismissal.[2]

Lehman’s senior managers consciously chose to take the unethical path because they knew it generate extraordinary reported income in the short-term, which would maximize their compensation. Prior to becoming one of the world’s largest purchasers and sellers of nonprime loans through Aurora and BNC, Lehman had eagerly embraced fraudulent and predatory lending. The officers who controlled Lehman also showed in this earlier episode that they would choose that short-term reported income that maximized their compensation even when they were warned that it was produced by fraud and abuse of the customers and knew that the loans would produce large losses,

Mr. Hibbert was a vice-president at Lehman Brothers and he’d been sent to meet First Alliance founder Brian Chisick to see if Lehman could form some kind of relationship with the mortgage lender.

[Hibbert] pointed out that “there is something really unethical about the type of business in which [First Alliance] is engaged.”

Mr. Chisick had become one of the biggest players in subprime loans. First Alliance’s annual revenue had doubled in four years to nearly $60-million (U.S.) and its profit had increased threefold to $30-million.

“It is a sweat shop,” [Hibbert] wrote. “High pressure sales for people who are in a weak state.” First Alliance is “the used car salesperson of [subprime] lending. It is a requirement to leave your ethics at the door. … So far there has been little official intervention into this market sector, but if one firm was to be singled out for governmental action, this may be it.”

Despite the warning, Lehman officials recommended a $100-million loan facility for First Alliance. Mr. Chisick turned it down, but he agreed to take a $25-million line of credit and hire Lehman to work with Prudential on several securitizations.

At this juncture, Hibbert’s warnings of a governmental response proved accurate. Various state Attorneys General began to sue First Alliance for consumer fraud. Prudential terminated its ties with the lender.

But Lehman jumped at the opportunity to move in. Senior vice-president Frank Gihool asked Mr. Hibbert to pull together a review of First Alliance for Lehman’s credit risk management team. Mr. Hibbert once again marvelled at the company’s operations and financial outlook. But he also said the lawsuits posed a serious problem. The allegation about deceptive practices “is now more than a legal one, it has become political, with public relations headaches to come,” he wrote.

Nonetheless, on Feb. 11, 1999, Lehman approved a $150-million line of credit, and became the company’s sole manager of asset-backed securities offerings. The bottom line for Lehman was made clear in another internal report: The firm expected to earn at least $4.5-million in fees.
But within a year, the weight of the lawsuits crippled First Alliance. On March 23, 2000, the company filed for bankruptcy protection. Mr. Chisick managed to walk away with more than $100-million in total compensation and stock sales over four years. Lehman, owed $77-million, collected the full amount, plus interest.

First Alliance eventually settled the lawsuits filed by the state attorneys, agreeing to pay $60-million. In the California class-action case, a jury found Lehman partially responsible for First Alliance’s conduct and ordered the firm to pay roughly $5-million.

Romney is Echoing the Anti-regulatory Dogma that Caused the Crisis

Aurora and BNC Mortgage were regulatory “black holes.” The Fed had unique authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to regulate all mortgage lenders and had unprecedented practical leverage during the crisis because of its ability to lend to investment banks and convert them to commercial bank holding companies. Fed Chairmen Greenspan and Bernanke, despite pleas from Dr. Gramlich, refused to use this authority to close the regulatory black hole. Bernanke finally, under repeated pressure from Congressional Democrats, used the Fed’s HOEPA authority in August 2008 – over a year too late to even minimize losses. Greenspan and Bernanke were chosen to lead the Fed because of their intense, anti-regulatory dogma. Greenspan was notorious for his assertion that fraud provided no basis for regulation. He believed that financial markets automatically excluded fraud.

The SEC was equally notorious for its anti-regulatory policies. It created the disgraceful non-regulation regulation of Lehman and its four sister investment banks. The Consolidated Supervised Entities (CSE) program never made the SEC a real “primary regulator.” The SEC is incapable, as constituted, staffed, and led to be a primary regulator of anything – and that includes the rating agencies. “Safety and soundness” regulation is a completely different concept than a “disclosure” regime. The SEC’s expertise, which it has allowed to rust away for a decade, is in enforcing disclosure requirements. The SEC did not have the mindset, rules, or appropriate personnel to make the CSE program a success even if the agency had been a “junk yard dog.” Given the fact that the SEC was self-neutered by its leadership during the period Lehman was in crisis in 2001-2008, there was no chance that it would succeed even if the CSE been a real program.

The reality is that the CSE was a sham. The EU announced that it would begin regulating foreign investment banks doing business in the EU unless they were subject to consolidated supervision by their domestic regulator. The U.S., however, had no consolidated supervision of investment banks. The five largest U.S. investment banks were scared of the prospect of EU regulation. Their solution was for the SEC to create a faux regulatory system. The SEC assigned three staffers to be primarily responsible for each of the five, massive investment banks. In order to examine and supervise an entity of their size and complexity, a realistic staff level would begin at 150 regulators per investment bank.

The SEC’s only hope with respect to Lehman was to form an effective partnership with the Fed. An SEC/Fed partnership would at least have some chance. The Valukas report reveals that the FRBNY staff at Lehman recognized that the SEC’s staff at Lehman’s offices was not capable of understanding its financial condition.

Why We Suffered the Great Recession and Such a Slow Recovery

The primary cause of severe bank failures has long been senior insider fraud (James Pierce, The Future of Banking (2001). We know the characteristics that cause the criminogenic environments that produce the epidemics of accounting control fraud that cause our recurrent, intensifying crises. Two of the most important factors are the “three de’s” – deregulation, desupervision, and de facto decriminalization – and perverse executive, professional, and employee compensation. These two factors were principally responsible for creating the epidemic of mortgage fraud that drove our crisis. Financial regulation was effectively destroyed in the U.S.

The primary function of financial regulators is to serve as the “regulatory cops on the beat.” “Private market discipline” was an oxymoron – financial firms are supposed to provide the discipline by denying credit to poorly managed and overly risky firms. They are supposed to be impervious to fraud. The reality is that they fund the frauds’ rapid growth. Fraud begets fraud. George Akerlof warned of this perverse “Gresham’s” dynamic in his famous 1970 article about “lemon’s” markets. When fraud provides a competitive advantage market forces become perverse and drive ethical firms from the marketplace. Effective, vigorous financial regulation is essential to break this Gresham’s dynamic. The regulatory cops on the beat must take the profit out of fraud.

There are several reasons why the economic recovery is weak and there is a great danger of recurrent recessions. My colleagues on this blog have explained the macroeconomic reasons so I will concentrate on the regulatory barriers to recovery. Suffice it to say that my colleagues have shown that the recovery is not weak primarily due to credit restraints by banks on lending to corporations. The regulatory barriers to recovery are the opposite of what Romney asserts. Financial regulation in the U.S. remains extraordinarily weak. President Obama has largely kept in power and even promoted Bush’s financial wrecking crew. Larry Summers and Timothy Geithner are fierce anti-regulators. The Republicans have blocked vital appointments to the Fed – under the claim that a Nobel Prize winner in economics lacks sufficient expertise to serve on the Fed. The Republicans, while claiming that Fannie and Freddie pose a critical risk to the nation; have blocked the appointment of a superbly qualified head of the agency that is supposed to regulate Fannie and Freddie. The Republicans have blocked the appointment of Elizabeth Warren to head the Consumer Finance Protection Bureau. Warren (a) warned of the coming nonprime disaster, (b) is superbly qualified to lead the bureau, and (c) is a remarkably pleasant and unassuming Midwesterner. The head of the SEC was named based on her experience as a failed leader of self-regulation. Bernanke named as the Fed’s top supervisor an anti-regulatory economist with no experience in examination or supervision. Bernanke then, absurdly, claimed that his appointment made the agency more inter-disciplinary. The reality is that it simply made theoclassical economists dominant in the one senior professional post that previously provided the Fed with an alternative policy perspective and real expertise. Attorney General Holder has largely continued the Bush administration’s policy of allowing the elite bank frauds to proceed with impunity.

The Republicans are trying to force severe cuts in the already inadequate budgets of the financial regulatory agencies. The flash clash revealed that the SEC does not have the internal capacity to monitor or even study retrospectively hyper-trading, which has become increasingly dominate. The SEC will not be provided with sufficient budget to even develop a system to monitor and study hyper-trading. The commodity markets are being subjected to exceptional manipulation. The Commodities Futures Trading Commission (CFTC) has announced that it cannot afford to develop the systems essential to detect and track commodity speculation. Instead of demanding that the CFTC develop such an essential system the Republicans are seeking to slash the CFTC’s already grossly inadequate budget.

Romney’s claim that this group of understaffed and funded regulators led by senior anti-regulators constitutes “gargoyles” that have terrified the systemically dangerous institutions (SDIs) that dominate our finance system is ludicrous. There isn’t an SDI in the U.S. that fears its regulators. The regulators are like gargoyles – they may scare children but one soon learns that they are immobile stones that do not see, bite, or even growl. They are perches and canvasses for pigeons and their droppings.

Epidemics of accounting control fraud cause severe economic crises and harm recoveries in myriad ways. First, fraud causes far more severe losses. Second, fraud erodes trust because the essence of fraud is the creation and betrayal of trust. Trust can take many years to recover. The number of middle class Americans willing to invest in the stock market has still not recovered from the Enron era frauds. Third, as Akerlof & Romer (1993) warned, accounting control fraud epidemics can cause bubbles to hyper-inflate. Severe bubbles make markets grossly inefficient. Japan demonstrates that it can take over a decade for the prices to fall to levels where the markets will “clear.” The catastrophic nature of the losses and their concentration in financial institutions leads to the temptation to change the accounting rules to cover up the banks’ losses. We refused to do so during the S&L debacle and the result was a prompt recovery. We, like Japan, gave in to the banks’ demands during this crisis and the result is an impaired recovery. Fourth, the endemic mortgage fraud by lenders led to endemic foreclosure fraud because fraudulent lenders (a) keep extremely poor records and (b) a number of the largest servicers are staffed with personnel from the firms that made the fraudulent loans. The foreclosure fraud is harmful both because it defrauds the innocent and because it shields the most abusive borrowers from prompt foreclosures. Fifth, the fraud and the hyper-inflated bubble lead to a severe drop in private wealth and demand and household pessimism. The household sector has not been able to provide the demand to produce a strong recovery. Sixth, because we pretend that insolvent banks are healthy and keep them under the leadership of the inept and even fraudulent managers who caused them to become insolvent we end up with Japanese-style crippled banks that prefer to clip coupons rather than make commercial loans.

Romney is replaying the absurd and harmful propaganda of 1986-1987. S&L regulation was critically weak, which is what made the S&L industry so criminogenic. The industry trade association, however, claimed that regulation was oppressive. We, the S&L Federal Home Loan Bank Board Chairman Edwin Gray with any funds and any additional regulatory powers to counter the accounting control frauds that were running wild. Instead, in the Competitive Equality in Banking Act of 1987 (CEBA), Congress mandated “forbearance” designed to gut our power to close the frauds. This was not Congress’ intent – they did not consciously seek to aid the frauds. The worst S&L frauds, however, formed what a prominent CEO called a “Faustian bargain” with the S&L trade association to counter our proposed legislation. The result of that Faustian bargain was that language was inserted in our proposed bill that was framed by the frauds’ lobbyists for the express purpose of making it far more difficult for us to close the frauds. Until we took on their political patrons and spent months explaining to members of Congress, their staffs, and the media how the proposed amendments would damage our ability to act effectively against the frauds these claims that the regulators were ogres were taken as true by most politicians. All their political contributors said it was true. The reality was, of course, the opposite as virtually everyone now agrees. S&L regulation had been nearly non-existent. With the aid of Representatives Gonzalez, Leach, Carper, and Roemer and Senator Gramm (yes, that Senator Gramm!) we were able to make subtle changes in the CEBA bill that undid the worst of the frauds’ amendments.

Will the Obama administration be willing to fight like we did to save the effort to put the fraudulent S&Ls in receivership, remove the scam accounting rules, toughen regulation, and prosecute the fraudulent senior officers? Or will it give in to Romney’s propaganda and its desire to raise vast sums in political contributions from finance executives by weakening the already criminally weak Dodd-Frank Act? The administration’s most recent action has been to delay adoption of the rules implementing the Act. It wants banks to be able to continue the disastrous practices that made the crisis worse and that the Dodd-Frank Act sought to prohibit.

Here are the key passage and question arising from Romney’s speech:

Almost everything the president did had the opposite effect of what was intended,” Romney said. “He said, okay, we’re not going to re-regulate the banking sector. Well, what he caused was the banking sector to pull back, and that’s the very sector that’s got to step forward to help get the economy on its feet again.

The question to President Obama is: “Was Mr. Romney correct when he said that you decided not to ‘re-regulate the banking sector’?” And the follow-up question, if your answer is “yes” is: “If the Great Recession and the epidemic of bank fraud is not sufficient for you to reregulate the banking sector – what will it take?” Secretary Geithner and Chairman Bernanke state that the unregulated banking sector caused catastrophic losses and, but for extraordinary government intervention, would have caused the Second Great Depression. Effective banking regulation is essential to protect the public and honest banks. Both parties’ economic policies, however, are dominated by theoclassical economic dogma. Breaking the death grip of this criminogenic dogma on theory and policy is the economic profession’s most pressing need. Economists, and the politicians who find parroting their anti-regulatory policies so useful in raising campaign contributions, are the greatest threat to the economy.

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  1. DownSouth

    Bill Black said:

    Lehman was deliberately out of control…


    Lehman’s senior managers consciously chose to take the unethical path because they knew it generate extraordinary reported income in the short-term, which would maximize their compensation. Prior to becoming one of the world’s largest purchasers and sellers of nonprime loans through Aurora and BNC, Lehman had eagerly embraced fraudulent and predatory lending. The officers who controlled Lehman also showed in this earlier episode that they would choose that short-term reported income that maximized their compensation even when they were warned that it was produced by fraud and abuse of the customers and knew that the loans would produce large losses…

    Thank you Bill Black.

    There’s been a plethora of lawyerly arguments appearing on the NC comment threads of late claiming that it is impossible to determine another person’s intent, despite the fact that people and juries across America make this determination every day. To wit:

    Anonymous Jones says:

    May 13, 2011 at 1:15 pm

    Mistakes are not lies.

    Uninformed or mistaken opinions are not false statements made with deliberate intent to deceive.

    You discredit yourself with your choice of words, and it is terribly unfortunate because your ideas are so wonderful to read.

    This is not a subject susceptible to reasonable debate. The constant accusations around here (which are dependent upon knowing someone’s else intent, which, without a mens rea machine, is impossible) I find to be very tiresome.

    Is it not enough to destroy a man’s argument? What goal is served by making accusations regarding his intent that you do not, and *cannot*, support? It saddens me, and it devalues your overwhelmingly worthwhile contributions.

    Links 5/13/11

    Other commenters immediately chimed in to form a chorus of hardy support of Anonymous Jones’ assertion, to which part of my reply was:

    Establishing intent is very important. “The reason for the insistence on a duty to forgive is clearly ‘for they know not what they do’ and it does not apply to the extremity of crime and willed evil,” Hannah Arendt writes in “The Human Condition”. She again addresses the issue in “Eichmann in Jerusalem: A Report on the Banality of Evil”:

    “Foremost among the larger issues at stake in the Eichmann trial was the assumption current in all modern legal systems that intent to do wrong is necessary for the commission of a crime. On nothing, perhaps, has civilized jurisprudence prided itself more than on this taking into account of the subjective factor. Where this is absent, where, for whatever reasons, even reasons of moral insanity, the ability to distinguish between right and wrong is impaired, we feel no crime has been committed.”

    And just by coincidence, Matt Taibbi speaks to the importance of proving intent in his article “The People vs. Goldman Sachs” from today’s “Links”:

    “The question is, now that we’ve seen this report, there are a bunch of story lines that seem to be at least as egregious as Abacus. Are they going to bring cases?

    Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like ‘scienter’ and ‘loss causation’ — legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you’ve just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it’s a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you’ll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states….”

    In summation, I’ll make three quick points:

    1) As Arendt says, intent is a “subjective factor.” But in your defense of the bankers and their political water boys, you are demanding a standard of proof that, because intent is a subjective factor, is impossible to be met.

    2)This is not a courtroom. So is your invocation of all this legalese in order to exculpate the bankers and their puppets even appropriate?

    3) I think a little biblical wisdom (from which originates the very idea that intent is important) is in order here:

    “You will know them by their fruits. Grapes are not gathered from thorn bushes nor figs from thistles, are they? ▬Matthew 7:16

    1. Carole Lindholm

      Thanks, DownSouth. Keep shining a light on the criminals, as well as their defenders. I noticed recently, when you disappeared for a while, the pro-bankster crowd was coming out of the woodwork.

      Then when you reappeared, it was like the Exterminator had arrived with a giant bottle of Raid, and the roaches were scurrying into their cracks. :)

      But of course they’re still out there, lurking in the wings, waiting for their next chance to strike, like coiled rattle-snakes.

    2. Dan Duncan

      Downsouth, this is pure bullshit.

      You are conflating criminality with a philosophical difference of opinion. What’s more you’ve completely distorted the position of Anonymous Jones.

      Anonymous Jones did not make his statement defending the criminality of Goldman or Lehman. And you are a flat out liar for insinuating that he did.

      AJ made the statement in connection with the writings of Milton Friedman. He actually went as far as to say Friedman was wrong.

      But, he said, “mistakes are not lies. In other words, don’t confuse an erroneous belief with an intent to lie. He went on to say in essence: “Just demolish the other person’s argument on its merits. But cut the shit about pandering to dishonesty, because it diminishes what are otherwise ‘wonderful ideas’ on your part.” [And let me stress: The part about “wonderful ideas” comes strictly from AJ…because unless block quoting Hannah Arendt constitutes an “idea”, I don’t think you are capable of even a bad idea, let alone a “wonderful” idea.]

      And believe me, I’m the last person to defend Anonymous Jones. I’ve been at the receiving end of many unfavorable comments written by AJ. [So on that note, you and AJ share a common bond.] But I can tell you first hand, he’s not some Lehman/Goldman apologist.

      As I conclude, I realize–I shouldn’t be so dogmatic. Maybe you’re not a liar, Downsouth. Maybe you’re just too stupid to put things in proper context.

      After all, the point of all this is that it is wrong to confuse a ponderous inability to think clearly with an actual intent to be a liar. So please accept my apologies.]

      1. DownSouth

        No Dan, it is you and Anonymous Jones who are “conflating criminality with a philosophical difference of opinion.”

        What you are arguing is that because we can’t convict someone like Milton Friedman of lying in a criminal courtroom, we can’t convict him of lying in the courtroom of public opinion either. And that, my friend, is “pure bullshit.”

        To reiterate, what Anonymous Jones said was “…knowing someone’s else intent…without a mens rea machine, is impossible.”

        But we determine other people’s intent every day, both in criminal courtrooms and in the courtroom of public opinion. So the distinction you raise between “criminality” and “philosophical differences of opinion” is nothing but a smoke screen, because we make determinations regarding people’s intentions in both realms every day, and to argue otherwise is “pure bullshit.”

        1. Anonymous Jones

          How did I get involved with this?????

          Determining something “beyond a reasonable doubt” is *NOT* “knowing” something! This is not subject to reasonable dispute. I’m sorry.

          You do realize that many people have been wrongfully convicted, right? Not just their intent was misjudged, but their actions as well?

          Sometimes I wonder if you are all there. I’ve just pointed out the limitations of not just your knowledge, but all knowledge, and now I’m indistinguishable from Dan Duncan and his blathering idiocy?

          Listen, your knowledge is limited. The knowledge of *all* humans is limited. This is *NOT* the same thing as me telling you that you should not act reasonably on the basis of your limited knowledge. I *NEVER* said that. I *NEVER* said we shouldn’t have courtrooms and make decisions on the basis of the limited evidence presented. We have to move forward based on what we have, not what we don’t have. I was just saying that we don’t *know* someone’s intent, not that we can’t have an opinion on it or make decisions based on that opinion.

          You didn’t “know” that person was lying. You had an opinion based on the limited evidence available that he was in fact saying something with the intent to deceive. This may seem like a unimportant distinction to you, but I disagree. And I have yet to hear a counterargument that makes me rethink my opinion that this distinction is important.

          I mean, seriously, I just wanted to point out that as long as you acknowledge the limitations of your knowledge, you are less likely to make egregious mistakes as a result of overconfidence. Is that really as evil as you seem to think it is?

          1. DownSouth

            Anonymous Jones said: “Determining something ‘beyond a reasonable doubt’ is *NOT* ‘knowing’ something! This is not subject to reasonable dispute. I’m sorry.”

            The cognitive dissonance inherent in that passage boggles the mind.

            Epistemology, which has been the topic of heated dispute by the world’s greatest thinkers since at least the time of Plato and Aristotle, and with no definitive resolution, is something which I have no interest in debating with you. And there’s really no need, for all that’s necessary is to point out your gross hypocrisy. Here’s the nut of it: for someone who touts the limits of humans’ ability to know with such conviction, you surely do seem to “know” a lot. And this is especially the case when it comes to flouting sure truth in defense of the kleptocrats.

            Take, for instance, when Hugh wrote on an earlier comment thread that:

            It wasn’t mistakes and bad judgment that got us into the mess we are in. These weren’t bugs. They were features. Our elites didn’t accidentally happen to rob us blind.

            To which you responded:

            Anonymous Jones says:

            May 10, 2011 at 2:53 pm

            …you are ascribing intent to a creature that does not exist. There was no conspiracy on the grand scale you imagine; humans are not smart enough or capable enough to pull that off …


            …So, yes, it was a feature, but a feature in the sense that it is a “feature” that water runs downhill. People like money. They tend to spend their time on potential changes that would increase their wealth. They tend to ignore potential changes that would decrease their wealth. Water runs downhill. That’s the state of the world.

            So what you and Dan Duncan “know” is sure truth, “not subject to reasonable dispute”? But what other people “know,” well that’s an entirely different matter, isn’t it?

            There’s actually a word to describe the sort of behavior that you and Dan Duncan exhibit so bounteously. It’s called egotism:

            We call egotism the attitude, subconsciously conditioned as a rule, to which we attribute excessive value to our own instinctive reflexes, early acquired imaginings and habits, and individual world view. Egotism hampers a personality’s normal evolution because it fosters the domination of subconscious life and makes it difficult to accept degenerative states which can be very helpful for growth and development. This egotism and rejection of disintegration in turn favors the appearance of para-appropriate reactions… An egotist measures other people by his own yardstick, treating his concepts and experiential manner as objective criteria. He would like to force other people to feel and think very much the same way he does.
            ▬Andrew M. Lobaczewski, Political Ponerology

          2. nonclassical

            Anonymous J,

            “Does the bell ring in the forest..?”….

            answer is, none of us are omnipotent, though we can infer
            omnipotent theory=abstraction..

            since none of us is omnipotent, we can’t tell if anyone else
            is listening…which does not devaluate “truth”…rather, states human limitation.

          3. Just Tired

            AJ – The only thing that you forgot to mention is that this all depends on what the definition of is is.

    3. A Good Bankster

      Thank you for offering me this opportunity to discuss my work in the Mortgage Department at Goldman Sachs in 2006 and 2007, when I was a Managing Director in the Structured Products Group. I worked at Goldman from 1993 until March 2008, when I left to start my own Death Derivatives Advisory Fund (marketed for widows and orphans to help securitize longevity risk).

      I take great pride from having worked for Goldman Sachs for almost fifteen years, and greatly admire the firm’s integrity, commitment to client service, and ethics.

      During 2006 and 2007, I worked on the Asset-Backed Securities, or “ABS”, desk in the Structured Products Group. ABX index was the type of thing which you invent telling yourself: “Well, what if we created a “thing” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?”

      The primary products I traded and risk-managed were the then-newly-created Asset- Backed Securities Index, or “ABX,” and credit default swaps in individual securitizations, also known as “single name CDS.” I managed to sell a few of these to widows and orphans that I ran into at the airport, apparently Belgians adore synthetic ABS CDO2. As a market-maker, we were continuously asked to provide liquidity for customers, which frequently required the firm to participate on the other side of transactions on a “principal” basis. For example, when a client wanted to buy protection on a particular securitization, we would offer a price to sell that protection. If the client chose to execute the transaction at that price, we would take the other side of the trade.

      From time to time, as a result of client-driven trades, our team’s book accumulated long and short positions. For example, from the inception of the ABX Index in January 2006 through November 2006, customers interested in selling the ABX outnumbered buyers. The trades we made to meet client demands during that period naturally caused the book to develop a long position in the ABX Index and a smaller short position in the single name CDS.

      In late 2006 and into early 2007, I developed a negative view on the likely direction of the subprime market. I said to myself: “that business is totally dead, and the poor little subprime borrowers will not last too long!!!”

      In line with my view, our desk began to accumulate short positions, purchasing protection on individual securities through credit default swaps, largely from external CDO managers who asked us to bid for these positions.

      These positions became extremely profitable as the market deteriorated. Watching the index fall was a little like Frankenstein turning against his own inventor.

      No one from senior management told me to make a directional bet against the subprime market. There was no intent to defraud clients, nor was there any intent to make billions by betting against our own clients. Rather, during the 2006-2007 period, regardless of whether our books were long or short, the consistent theme from management was to reduce risk in our books.

      I am very proud of the accomplishments of the ABS Group during my tenure there. We provided significant liquidity to our clients in a difficult and challenging market while also managing to post a profit during this period.

      To conclude, I repeat what I said above: I take great pride from having worked for Goldman Sachs for almost fifteen years, and greatly admire the firm’s integrity, commitment to client service, and ethics.

      1. DavidE

        Those positions wouldn’t have been so profitable if AIG had been allowed to fail. Why should the U.S. government have bailed out Goldman Sachs, John Paulsen, Deutsche Bank? It’s an absolute disgrace that the CDS holders got paid. If they got 20 cents on the dollar, that’s more than they deserved. But Paulsen insisted they couldn’t take a loss.

        1. ambrit

          Mr Bankster;
          I believe the proper Latin spelling is ‘Semper Phooey.’ The double ‘o’ is pronounced as if under an umlaut.

        2. A Good Bankster

          Brother Lloyd,

          How can we get rid of that pesky DownSouth?

          Did you see the way he disrespected AJ?

          I’d like to feel good again about being a bankster!

      2. nonclassical

        towit-an assertion on the personalized nature of “truth”, is
        subject to the validity of “truth”..

    4. ajax

      I think it’s pretty weird how Securities Laws seem to be
      made so complex (maybe on purpose?)

      There was a case that went to the Supreme Court in 2005,
      Dura Pharmaceuticals, Inc. v. Broudo . It was a
      shareholder class-action lawsuit. The issue of
      “loss causation” had to be addressed, seemingly because
      that’s the way the Securities Laws are written. The
      investors lost their case in the end. Wikipedia has an
      article on the Private Securities Litigation Reform Act.

      Concerning the PSLRA, Wikipedia writes:
      “Its principal authors in the House were Representatives Thomas Bliley, Jack Fields and Chris Cox. Senators Chris Dodd and Pete Domenici sponsored the legislation in the Senate.”

      By contrast, the elements of common law fraud or
      of common law perjury are easier to understand.
      Why Securities Law is so complex beats me.

  2. rafael bolero

    I am neither a business person nor an economist, but, Yes, we know: you make a republican/conservative career fastest by just saying clearly you will help the rich get the rest of the money as fast as possible; being from WI, I cite Walker and Ryan as younger examples of just this. If you are a more skilled orator, like Obama, or another kind of corporate democrat, you make it clear privately, kind of say the opposite in public using code for the rich, or just avoid the topic, and avoid Eliz Warren, who MIGHT do something, assuming she cannot also be captured or subsumed. So, we know this article’s point, and W. Black has been a great teacher, one of the most helpful. What is the solution?– is what I’d like to know. The blatant backing of continued non-regulated financial looting, by politicians like McConnell, is now so public and shameless, it is “naked,” indeed.

    1. DownSouth

      I see three possible outcomes, unless something totally new and unknown—-call it cultural evolution if you wish—-appears out of the blue:

      1) Sham democratic revolutions like the French, Russian, German Nazi, Chinese, or a majority of those that took place in connection with the disintegration of the former Soviet Empire. (Most of the latter merely exchanged the chains of state socialism for the chains of state capitalism, a mere changing of the guard of autocrats.)

      2) Honest democratic (or at least partially honest democratic) revolutions like the American and New Deal.

      3) Slow descent into social disintegration and chaos, Mexico perhaps being the current leading contender in this category.

      1. Mickey Marzick in Akron, Ohio


        SHAM democratic revolutions versus HONEST democratic revolutions…???

        You want to tell us what’s the difference? Your criteria for such a distinction?

        What was so HONEST about the American Revolution? Or why were the French and Russian Revolutions a sham? And then lumping these two with the German Nazi?

        And please, I want to hear what you have to say – not some quote from Arendt ON REVOLUTION…

        1. DownSouth

          If you rule out the use of citations and references, such as those by Arendt, that makes my task almost impossible, doesn’t it? Because the reality is that I haven’t conducted the in-depth historical investigations that Arendt and others have. And even if I had, that would just entail an entirely new layer of citations and references. So I will just ignore that request and proceed as usual. If you believe the references I cite depart from factually reality, it is of course your prerogative to challenge them on that basis.

          You’re also setting up a straw man. I did not say “HONEST democratic revolutions.” What I did say was “Honest democratic (or at least partially honest democratic) revolutions.” There is a difference, as the first implies an absolute, and the second a continuum.

          • You ask, “What was so HONEST about the American Revolution?”

          Needless to say, a person could write volumes on that, and also on what was not so honest about it. But let me just cite one highly important development, because it was key to breaking the back of aristocrat-Christian collusion, as well as offering some immunities within the American body politic to future fundamentalists that have appeared on the political stage, whether they advocated using the long arm of the law to impose Christianity or some other “secular” stealth religion like liberalism-capitalism or Marxism:

          The Virginia event, by common consent, was the most decisive element in an epochal shift in the Western world’s approach to relations between civil and religious spheres of life after fourteen centuries. Often cited is the summary by Winfred E. Garrison:

          “For more than fourteen hundred years…it was a universal assumption that the stability of the social order and the safety of the state demanded the religious solidarity of all the people in one church. Every responsible thinker, every ecclesiastic, every ruler and statesman who gave the matter any attention, held it as an axiom. There was no political or social philosophy which did not build upon this assumption…all, with no exceptions other than certain disreputable and “subversive” heretics, believed firmly that religious solidarity in the once recognized church was essential to social and political stability.”

          For those who like to speak of an “Age of Constantine” that began in the fourth century, there is reason to regard the Virginia act as the key moment of the end of that age and the beginning of a new one. Virginia was the oldest of the Atlantic coast colonies of Britain; in the late eighteenth century, it still had the most people. The Establishment there was that of the Church of England, favored in Britain as New England Congregational establishments, of course, were not. Several other colonies—-notably Rhode Island and Pennsylvania, which had been founded on largely Baptist and Quaker models—-never had an established church, so they may have had reason to claim priority on disestablishment and on promoting religious freedom. It was precisely because Virginia was the key Establishment colony that the Establishment had defenders as notable as Patrick Henry and George Washington; that there had to be an argument for removing ecclesiastical privilege and ensuring free exercise of religion; that comparable notables, such as Thomas Jefferson and James Madison, did the arguing; and that the Assembly, after struggles and maneuvers, passed the bill with such a decisive majority that people can see the Virginia Statute as a hinge between ages.

          A second reason for celebration after two hundred years is that the statute and its precedent had an effect on the First Amendment to the Constitution, and thus on the measure that did acquire legal status and still has it.
          ▬Martin E, Marty, “The Virginia Statute Two Hundred Years Later”

          • Then you ask “why were the French and Russian Revolutions a sham?”

          As to the French Revolution, I will cite as evidence this from Hannah Arendt’s On Revolution:

          However, no sooner had Robespierre risen to power and become the political head of the new revolutionary government—-which happened in the summer of 1793, a matter of weeks, not even of months, after he had uttered some of the comments which I have just quoted—-than he reversed his position completely. Now it was he who fought relentlessly against what he chose to name ‘the so-called popular societies’ and invoked against them ‘the great popular Society of the whole French people’, one and indivisible. The later, alas, in contrast to the small popular societies of artisans or neighbors, could never be assembled in one place, since no ‘room would hold all’; it could exist only in the form of representation, in a Chamber of Deputies who assumedly held in their hands the centralized, indivisible power of the French nation. The only exception he now was ready to make was in favour of the Jacobins, and this not merely because their club belonged to his own party but, even more importantly, because it never had been a ‘popular’ club or society; it had developed in 1789 out of the original meeting of the States-General, and it had been a club for deputies ever since.

          As an interesting aside, the implication of this is that the Reign of Terror (5 September 1793, to 28 July 1794) was not visited upon France by the French common man, or any “excess of democracy,” as the mythmakers would have us believe, but by the French elite.

          Now as to the Russian Revolution, let’s just compare the fruits of the Russian Revolution with those of the American Revolution. The “must read” from yesterday’s “Links” was this excellent article about the state of psychiatry in the United States. But as dysfunctional as the situation is in the United States, with many or even most psychiatrists flirting with neoclassical, laissez-faire capitalist absolutism, it is, nevertheless, nothing like what happened to psychiatry in Russia and its conquests following the Russian Revolution:

          In 1950, the Russian Academy of Sciences determined everyone would follow the theory of the Moscow professor Andrei Snezhnevsky, which held that “anybody could suffer from ‘slowly progressing schizophrenia’. One could suffer from it without knowing, but once Snezhnevsky or one of his followers had ascertained that you were ill with it, you had to be locked up and knocked down with sedatives immediately, or the disease would ‘progress’….dissidents are simply locked up in a psychiatric institution and said to be insane.”

          Up until his death in 1987 Snezhnevsky denied that his theory was being abused by the Soviet regime. But his former assistants now admit, that he knew “all too well” what was going on… Western literature on psychiatry was forbidden in the Soviet Union, psychiatrists who stood up against the political abuse of their science ended up behind bars or were themselves declared to be “insidiously schizophrenic”.
          ▬Robert von Voren, A Mess in Psychiatry”

          When I came to the West, I met people with leftist views who unquestioningly believed that communist countries existed in more or less the form expounded by American versions of communist political doctrines. These persons were almost certain that psychology and psychiatry must enjoy freedom in those countries referred to as communist, and that matters were similar to what was mentioned above. When I contradicted them, they refused to believe me and kept asking why, “why isn’t it like that?” What can politics have to do with psychiatry?


          Any scientific papers published under such governments or imported from abroad must be monitored to ascertain that they do not contain any data which could be harmful to the pathocracy…

          The entire operation must of course be managed in such a way as to avoid attracting the attention of public opinion in countries with normal human structures. The effects of such a “bad break” could be too far-reaching. This explains why people caught doing investigative work in this area are destroyed without a sound…


          Controls are exceptionally malicious and treacherous in the psychological sciences in particular… Written and unwritten lists are compiled for subjects that may not be taught, and corresponding directives are issued to appropriately distort other subjects. This list is so vast in the area of psychology that nothing remains of this science except a skeleton picked bare of anything that might be subtle or penetrating.
          ▬Andres M. Lobaczewski, Political Ponerology

          1. DownSouth

            This documentary, Human Resources, also explains how state socialism, almost indistinguishable from state capitalism, emerged out of the Russian Revolution. Also note the comparison Chomsky draws between Leninism and fascism:

            Michael Albert: …if you work in an environment that is so fragmented that so robs you of dignity and so robs you of the expression of your own capacities then they’ll be diminished, you’ll be deadened, you’ll be bored. You will be reduced in your potentials and you are not too likely to take issue in other domains either. This is why Taylorism is pursued. This is why fragmenting of work is pursued. It weakens the workers, not just on the job, but in their communities too, which is what you want to do so that they don’t take more of the income for themselves thus reducing profits for the elite. So it’s perfectly sensible policy, perfectly sensible approach, a devil’s approach, but a perfectly sensible approach from the point of view of those at the top who are trying to stay there and who are trying to advance. Moreover, if they don’t they just get wiped out, so it’s not even really an option. What you have to do is to create a new kind of economy in which these kinds of situations and these conditions don’t restrict our options.
            The corporate person, the corporate entity, is it pathological? The answer is yes. Why? Because it drives toward profit regardless of the broader implications. It doesn’t matter if your drive toward profit induces pain and suffering, generates black lung disease in a mine or pollutes the environment or literally destroys the society. It doesn’t matter. You’re forced by the nature of the social relations inside and among corporations, the market system, to pursue, to accumulate, to pursue profits.

            Moderator: If hierarchy is the defining characteristic of scientific management, it should not be surprising that it was met with great praise, not only by the capitalist world, but by fascists and authoritarian communists. Mussolini set up a propaganda arm of his government to promote Taylorism while Lenin wrote in Pravda in 1918 that “We must introduce in Russia the study and the teaching of the Taylor system, and its systematic trial and adaptation.” As in America, workers in Russia were unimpressed by scientific management. A major contributing factor to the Kronstadt Rebellion of 1921 was the introduction of Taylor’s techniques. Immediately after the rebellion was crushed, a government document on rationalization spoke of “the instinctive mistrust of all workers toward all kinds of experiments directed at extracting greater productivity from them.” Workers at Kronstadt had envisioned a decentralized system where they would actually own and control their own work and resources, but Lenin had something different in mind. “Socialism,” Lenin wrote, “is merely state-capitalist monopoly which is made to serve the interests of the whole people and has to that extent ceased to be capitalist monopoly, the new means of control having been created not by us, but by capitalism in its military-imperialist stage.”

            Noam Chomsky: The Lenonist system was one of the greatest blows that socialism suffered in the 20th century, maybe second only to fascism. As Lenin took power, one of his first acts along with the Trotskians was to destroy the socialist institutions that had arisen in the pre-Bolshevik period—-soviets, factory councils, constituent assembly which was dominated by left social revolutionaries, largely peasant based. And of course they went to war against the anarchists, a major war to try to wipe them out.

          2. DownSouth

            Noam Chomsky interview continued:

            When the Soviet Union collapsed; I actually wrote an article saying this was a victory for socialism, a small victory for socialism. I just couldn’t get it published. Nobody knew what I was talking about. The world’s two major propagandists, the West and the Soviet Union, they both decided to use the term socialism to refer to the totalitarian system of the Soviet Union. I mean the West did it to discredit socialism, the Bolsheviks did it to gain the credit associated with genuine socialism. What when the world’s two great propaganda systems agree, it’s going to be very hard for people to extricate themselves from it.

  3. DownSouth

    I wish that someone would do the same sort of in-depth analysis on sovereign loans that Black has done on mortgage loans.

    Black articulates concepts like “Making and selling fraudulent liar’s loans” as being an integral part of spreading “fraudulent mortgage paper throughout much of Europe and the United States.”

    I would argue that these same concepts articulated by Black in regards to the mortgage debt debacle apply equally to the sovereign debt debacle.

    1. Siggy

      In the instance of sovereign loans the fraud is in the representation that the sovereign is capable of servicing the debt. That may have been the case when the debt was originally sold into the market. Persistent over borrowing reaches a point were it becomes unreasonable to assume that the sovereign will, in deed, be able to service the debt.

      While the sovereign is engaging in a misrepresentation, if not fraud, when it says that it can service the debt, newly issued or existing; the buyer of the debt is an equal participant in that he should have been discerning enough to see that the proposed new debt was unserviceable.

      Greece, and its fellow travelors, are at that point were they cannot fully service existing debt. The proposed bailouts entail extension of term and additional loans to bridge the current short fall in debt service. Greece cannot now service the proposed new debt. The only recourse is for Greece to repudiate existing debt to the extant that a balance that it can service.

      You can cite Hannah Arendt all you want, I enjoy your citations and marvel at your ability to marshall them up for our consideration. But then, I also believe that Hannah Arendt’s writing is largely borderline philopsy. But, for your comments here, I give full marks.

  4. Bravo

    Just as Michael Walker was escorted out the door for finding too much fraud, similar job loss pressure is applied to those too few regulators in the system who have the backbone and the guts necessary to pinpoint and then refer to the FBI, the fraud that has taken place at both the closed institutions in this crisis and the many that are still operating, albeit broke, thanks to the accounting shenanigans that have saved them. So long as our system allows banking interests to buy the political influence needed to pressure the regulatory heads into squelching those in their regulatory armies who step out of line against the interests of their “client”, the banking industry, it is difficult to argue that more regulation in and of itself will be the whole answer. The regulatory system itself must be improved to provide sufficient reward, recognition, and job protection for those working in the loan file trenches every day. They are the ones who see the fraud first hand and have the knowledge and wherewithal to refer cases to the FBI/SEC for prosecution. And getting those agencies staffed and funded with qualified and motivated people, is yet another issue. While Romney is indeed clueless, a sea change in attitude and leadership at the regulatory agencies would be a good start, starting with the OCC.

    1. Seattle Andrew

      There is similar job pressure on journalists, who are often pressured to maintain and develop institutional relationships with fraudulent firms because they rely on them for day-to-day news. The attitude is, as Emerson put it, “When you strike at a king you must kill him.” Nothing less than a grand expose leading to criminal charges is worth damaging the cozy institutional relationship. The practical assumption is that the system is working. If regulators have decided not to enforce the law these companies must not be criminal. I’m sure no-one on Naked Capitalism is expecting the press to do its job, but – like the ratings agency fiasco – institutional pressures at major news organizations played their part in making conditions ripe for crisis. Essentially, journalists are helping to create an environment where whatever the institutional structure that they participate in at any given time will be perceived as normal. They are fundamentally enabling rather than adversarial.

  5. RueTheDay

    I posted this in the links section yesterday, but I’ll repost here:

    It’s Allan Meltzer, distinguished economics professor at CMU, making an ass out of himself by saying that the main reason we have a weak economy today is because of “uncertainty over Obama’s tax and regulatory policies”.

    Now we have Romney, the GOP frontrunner for 2012, publicly decrying bank regulation.

    It’s as if 2007-2009 never happened. There’s a concerted attempt to re-write history going on as we speak. The storyline goes something like, “The financial crisis wasn’t as severe as the media wants you to believe. To the extent that there even was a financial crisis, it was caused by government forcing banks to make loans to people who couldn’t pay them back. If the government just let all of the banks go bust with no bailouts, the problem would have resolved itself much faster. Today’s sluggish economy is not due to the aftermath of the financial crisis, it’s due to Obama’s policies and the uncertainty they’ve created.” This is all hogwash of course, but the really shocking thing is how well it seems to resonate with the working class masses who should be outraged at what transpired and directing the bulk of that outrage at the private sector banks that caused the crisis. Instead they’ve adopted the surreal view that it’s all the government’s fault and that the solutions is to cut taxes for the wealthy and get rid of regulations that constrain bank risk-taking. Absolutely bizarre.

  6. Parvaneh Ferhadi

    «The regulators are like gargoyles – they may scare children but one soon learns that they are immobile stones that do not see, bite, or even growl. They are perches and canvasses for pigeons and their droppings.»
    Nice. And they get dropped on a lot.

    1. Cynthia

      Unless Mitt Romney believes that Wall Street bankers are throwbacks from medieval times, incapable of distinguishing a real threat from an imaginary one, he should know better than to believe that they’ll be too spooked to issue any loans on Main Street if bank regulators were viewed as having the regulatory power of stone-stiff gargoyles hanging above the main entrance to the SEC headquarters. But it seems to me that Mitt Romney must be the medieval throwback here, otherwise he would know that gargoyles, despite looking very threatening, are too stiff and motionless to bark at bankers, much less bite them. So it looks like an Obama vs Romney presidential election will give us a choice between electing a dumb president and a dumber one!

  7. Cris Kennedy

    Bill Black (and subsequent commentators) seem to have forgotten that without Glass-Steagall no amount of assiduous regulation will prevent fraud.

  8. Cynthia

    Both political parties have been bought off and are now fully owned by the Big Banks, so of course Mitt Romney is no different from Barack Obama in that he will lie through his teeth about how more stringent banking regulations are hindering the Big Banks ability to help get our economy, and particularly our jobs market, out of a steep and prolonged recession. But our biggest problem isn’t that banking regulations have become too stringent. Our biggest problem is that too many of our bank regulators are letting our biggest banks get away with engaging in criminal activities.

    But this is because our bank regulators have also been bought off and are now fully owned by the Big Banks. So until we make it illegal for the Big Banks to buy off our politicians and our bank regulators, our politicians will continue to lie through their teeth for the Big Banks and our bank regulators will continue to let them get away with engaging in criminal activities. But we won’t see an end to any of this bankster-backed corruption at the political level as well as at the regulator level until we stop letting the Big Banks buy off and fully own all of our judges, from the district court level all the way up to the Supreme Court!

  9. Schofield

    Ah Mr “American Dream” Romney doing his mindless cheer-leading for a blind greed that turns the Invisible Hand into a Sleight-of-Hand not a Helping Hand. What a huckster!

  10. Schofield

    How can the American Revolution be seen as a true revolution when it has lead to a supposedly “free” market in which the politicians sell-out the citizens to the highest bidder?

    1. aet

      The American revolution ended more than two hundred years ago.

      “True” revolution? Best to first tell us what a ‘false” revolution is, and how ‘revolution” became so laden with conditions to be fulfilled before it can be called “true”.

      Revolution is itself a value-neutral occurrence, except for those participating, or for the heirs of such.
      And for them, “revolution” = politics: now what would “true” politics be, as distinct from “false” politics?

      True and false are attributes of statements, not political activity. Unless “politics’ is only a matter of statements-but politics is much more, it is the very stuff of our lives. Can lives themselves bebe labeled “true” or ‘false”? Not for me – and so it is with revolutions, too.

  11. Susan

    How are sovereign loans and bailouts different from corporate raiding. The destruction of a country can drag on for decades whereas the destruction of a corporation might take less than a year? Romney is an expert. Not clueless.

  12. Jack Straw

    Just as Leo Bloom discovered for a Broadway show’s finances, others did for the mortgage industry: making bad loans was more (far more) profitable than making good loans, as long as you limit yourself to short term volume fees and stick somebody else in the long position.

    Prof. Black unfortunately has a habit of overstating the regulatory success of the S&L clean-up, even while stating the undisputed facts. For some reason, he sees that era as having been arguably successful, when it seemed more like a broadcast that the cops were using Nerf bullets, and in the future we could expect them to just point their fingers and whisper “bang.”

  13. Deloss

    Professor Black and many readers forestalled the remark I was going to make: the word “gargoyle” in this context makes no sense. I assume “Mitt” (or “Mutt” as I affectionately call him) was groping for “ghoul” or “vampire,” failed to find either, and so came up with the bizarre hybrid.

  14. maude

    Looking back at my brief employment at Aurora Loan Services (3 wks) I could say the gods were watching out for me as I quit in disgust after I realized that the place was poorly managed. From afar with additional knowledge, I see that the poor management was a feature, not a bug.

  15. Schofield

    We are now into our second major depression in eighty years as a consequence of unfettered free markets. How big a clue does this Mitt Romney fantasist character need before he gets the message?

  16. DavidE

    I believe that Mr. Black’s article is generally accurate. I think he places too much of the responsibility of Lehman’s demise at Mr. Fuld’s hands. Fuld was just the front man for the gang of crooks that was entrenched in Lehman’s management. Let’s put it this way. Dick Fuld wasn’t capable of losing $150 billion on his own. You can’t lose that kind of money without a team effort.

  17. Jim

    “Lehman’s senior managers consciously chose to take the unethical path because they knew it generated extraordinary reported income in the short-term, which would maximize their compensation.

    Bill, here is the question/issue which bothers me:

    Taken our present cultural situation, isn’t your attempt to remoralize our capitalist economy through better regulation from the public sector doomed to failure because most regulators and politicians in the public sector are as corrupt as most major bankers in the private sector.

    If this is the case you are attempting to treat a moral crisis with a kind of technical fix that has no chance of working.

    Is it still your assumption that there is a moral framework at work and operable in our public sector which encourages key individual decision-makers to do their duty for the long-run public good?

    It may have still been possible in the 1920s and 1930s when Keynes was formulating his perspective(he seemed to see the state then as an unexploited resource) to believe in the possibility of “wise” management under a moderate type of collectivism.

    But to me, in 2011, it seem highly questionable to put one’s faith in an “enlightened” public sector regulatory response to, what at its core, appears to be breakdown in values across the board.

    1. DownSouth

      So Jim, do you believe the following assessment, from someone who was born in Poland in 1921, lived under a totalitarian Nazi regime from 1939 to 1945 and a totalitarian Communist regime from 1945 to 1977, was arrested and jailed many times by the Communists, to be too optimistic?

      The great majority [about 80%] of the population forms the society of normal people. It behooves us to wonder why these people reject the advantages conformity affords, consciously preferring the opposing role; poverty, harassment, and curtailment of human freedoms. What ideals motivate them?…

      For the moment, let us limit ourselves to stating that a person with a normal human instinctive substratum, good basic intelligence, and full faculties of critical thought would have a difficult time accepting such a compromise; it would devastate his personality and engender neurosis.


      The pathological authorities are convinced that the appropriate pedagogical, indoctrinational, propaganda, and terrorist means can teach a person with a normal instinctive substratum, range of feelings, and basic intelligence to think and feel according to their own different fashion. This conviction is only slightly less realistic, psychologically speaking, than the belief that people able to see colors normally can be broken of this habit.

      Actually, normal people cannot get rid of the characteristics with which the Homo sapiens species was endowed by its phylogenetic past. Such people will thus never stop feeling and perceiving psychological and socio-moral phenomena in much the same way their ancestors had been doing for hundreds of generations. Any attempt to make a society subjugated to the above phenomenon “learn” this different experiential manner imposed by pathological egoism is, in principle, fated for failure regardless of how many generations it might last…

      Pathocratic leadership believes that it can achieve a state wherein those “other” people’s minds become dependent by means of the effects of their personality, perfidious pedagogical means, the means of mass-disinformation, and psychological terror; such faith has a basic meaning for them. In their conceptual world, pathocrats consider it virtually self-evident that the “others” should accept their obvious, realistic, and simple way of apprehending reality. For some mysterious reason, though, the “others” wriggle out, slither away, and tell each other jokes about pathocrats.


      One of the first discoveries made by a society of normal people is that it is superior to the new rulers in intelligence and practical skills, no matter what geniuses they seek to appear to be. The knots stultifying reason are gradually loosened, and fascination with the new rulership’s non-existent secret knowledge and plan of action begins to diminish, followed by familiarization with the accurate knowledge about this new deviant reality.

      The world of normal people is always superior to the deviant one whenever constructive activity is needed….
      ▬Andrew M. Lobaczewski, Political Ponerology

    2. aet

      Just staff the positions with people who care more the welfare of their fellow citizens, rather than their own emolument.

      Hire people to regulate the money who do not care about the money themselves. I know that there are such.

  18. DavidE

    I have to agree with his criticism of both Mr. Romney and President Obama. Let’s put it this way. The banks do what they want. Like the public utilities used to, they employ friends of politicians to make sure the politicians are kept in their pockets.

    If there is a weakness in Professor Black’s theory, it is that Lehman management would have deliberately destroyed their entire enterprise, which actually had value, in order to get bonuses. I think you have to look at recklessness rather than a desire to commit fraud as a possibility at least at the beginning.

    Computers make people dumber. I think the banks got sucked in by models and charts that showed that these loans were not that risky because they were backed by the underlying real estate. And the loans weren’t have been that risky if real estate prices had behaved as they did during the 1990s with relatively small annual increases in price.

    When Aurora was formed and decided to offer these loans, there may have been minimal risk. The problem is what occurred when prices skyrocketed and Aurora became even more aggressive in offerring the loans. When real estate became very volatile, all mortgage loans are risky. Even 20% down is too little if prices are very volatile.

    Now what I think happenned in 2006 and 2007 is that Fuld knew that Lehman had hit the iceberg. They couldn’t sell the loans to third parties. It is at that point that I believe that Lehman management deliberately looted the firm because they were going to be gone and the stock was totally worthless once the truth got out.

    1. Just Tired

      What makes you conclude that Lehman was “their enterprise”. I suggest that “their enterprise” was actually themselves. It’s a rough world in those circles. Ya get it while ya can. I guess you missed the excellent post from NC on 7/10/07, entitled: “Musical Chairs Theory of Markets (Chuck Prince Edition)”. I highly recommend it!

  19. Francois T

    Come on Professor Black,

    This stuff is ultra simple to dig: Upton Sinclair get it figured out for us more than a century ago.

    Mitt Romney is paid not to understand the true origins and causes of the crisis. He’s a Republican for Pete’s sake!!


  20. F. Beard

    Breaking the death grip of this criminogenic dogma on theory and policy is the economic profession’s most pressing need. Economists, and the politicians who find parroting their anti-regulatory policies so useful in raising campaign contributions, are the greatest threat to the economy. Bill Black

    Modern banking cannot exist without government privilege such as a lender of last resort, legal tender laws for private debt, government deposit insurance etc.

    So long as bankers enjoy government privileges then they have no legitimate cause to complain about government regulations.

    Significantly threaten their government privileges and the bankers would beg to be regulated instead, I would bet.

    The government does not need the banking system so why does it grant privileges to it?

  21. Random Blowhard

    None of this matters, the United States NO LONGER has the capacity to bail out Wall Street from it’s mistakes and the next financial collapse due in 2012-2014 will end the United States as a first world country.

    The United States of Argentina – It’s change alright.

  22. Herman Sniffles

    “Almost everything the president did had the opposite effect of what was intended,” Romney said. “He said, okay, we’re not going to re-regulate the banking sector. Well, what he caused was the banking sector to pull back, and that’s the very sector that’s got to step forward to help get the economy on its feet again.”

    Am I missing something here, or is this some kind of Orwellian double talk? Obama said “we’re not (NOT!)going to re-regulate the banking sector” and that “caused…the banking sector to pull back”? What the hell is this imbecile trying to say? So it looks like anyone who votes Dem or Repub is just helping fill the slot with another banking industry shill. Bloody sickening. Elizabeth Warren for President!

  23. Teejay

    Kudos to Black! Great post says this choir
    member. How do Shelby, McConnell, Ryan et al
    admit a policy/strategy that has won many an
    election for them is decimating our country?

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