Last night, Bill Moyers Journal (PBS, Friday nights, 10:00 PM) had the most stunning revelations about the financial crisis I’ve heard yet. His guest was William Black, former Director of the Institute for Fraud Prevention and now professor of Economics and Law at the University of Missouri, Kansas City. Black was the man who, during the Savings &Loan crisis of the late 1980s, accused House Speaker Jim Wright and 5 U.S. Senators, including John McCain, of doing favors for the S&L’s to get contributions in return. Now what he’s saying is that the current financial crisis is a case of fraud, fraud that has been warned about since at least 2004, and which has been enabled and covered up by two Secretaries of the Treasury, Hank Paulson and Timothy Geithner. All should read the whole transcript (http://www.pbs.org/moyers/journal/04032009/transcript1.html) but here are some highlights.
To the question of how the CEOs and bankers committed the fraud, Black answered that they made “really bad loans, because they pay better.” In other words, they can charge higher interest. Then “you grow extremely rapidly, in other words, you’re a Ponzi-like scheme.” Finally, you employ “leverage” which means “borrowing a lot of money” to make still more loans. Thus you get record profits early on, and get rich on bonuses. Also, I assume, then you get out if you can, with your money in the Bahamas.
Bill Moyers seemed to have a hard time believing this: banks and CEOs deliberately set out to make bad loans? Black answered with an unqualified “yes.” Then came the questions about how to find evidence of the fraud. Black pointed to “specialty lenders, the ones who did most of their work in the sub-prime and what’s called Alt-A, liars’ loans.” Liars’ loans. The term was apparently deliberate, meaning the lenders knew they were fraudulent. Because not only are income and job history and assets not checked for liars’ loan, “you get a better deal if you inflate your income and your job history and your assets.” Such loans were also called “ninja” loans in the trade, meaning no income verification, no job verification, no asset verification.
The next step, as we now know, was to create complex instruments to essentially hide the “crushing risk” that was known to be lurking in all these bad loans. And then get triple-A ratings on this toxic stuff from the rating agencies, which rating signifies that there is “zero-risk.” It was only after Congress investigated these rating agencies, a year ago and after the collapse, that it found that some rating agencies had never looked at a single loan file. One statement from Fitch, the smallest of the rating agencies, said “there was the appearance of fraud in nearly every file we examined.” After the crisis, of course. So, here is a short summary from Black:
“…the investment banker that—we call it pooling—puts together these bad mortgages, these liars’ loans, creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80% losses on these things, because of course they, in reality, are toxic waste.”
This is where we had got to last Fall when Treasury Secretary Paulson made the problem public, and warned that without government bailouts, the whole financial system could collapse. And Alan Greenspan, at one point, claimed he had no idea there was so much trouble in the industry he was supposed to be monitoring. Except that William Black also pointed out this little fact: that “the FBI warned, in September 2004, that there was an epidemic of mortgage fraud” that would produce a major crisis. The only problem being that after 9/11, the Justice Dept transferred 500 white-collar fraud specialists to terrorism investigations, and the Bushies refused to replace them. The result is that even today, according to Black, with a crisis 100 times worse than the S&L crisis, there are “one-fifth as many FBI agents” to work this crisis as worked the S&L one.
As to the insiders who are now supposed to be fixing all this for the Obama administration, and us, consider these stunners from William Black. Not only did the Clinton administration collude in getting rid of the regulations in the Glass-Steagall law, they also passed a law to hamstring a heroic regulator, Brooksley Born, who was trying to regulate exotic (toxic) derivatives. And guess who did the dirty deed: Lawrence Summers (Clinton’s second Treasury Secretary, now chief financial adviser to Obama), Robert Rubin (Clinton’s first Treasury Secretary, senior adviser of Citigroup before he resigned under fire), and Phil Gramm (then head of the Senate Banking Committee):
“…Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can’t regulate.”
The law was the Commodity Futures Modernization Act of 2000, which kept derivatives transactions and credit default swaps free of government regulation. Nice.
Regarding Timothy Geithner, the head of the New York Federal Reserve when all this took place, Black says flatly that he is “covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have massive losses, and that they’re fine.”
I don’t know about you, but this is enough. Enough to make my blood boil. Enough to demand from the U.S. Congress a full-fledged investigation of this whole mess—never mind “looking forward” as Obama likes to say, never mind protecting the “confidence” of the average American. Investigate, expose, and jail, if necessary, those who profited from all this, as Bernie Madoff is being jailed. Most important--and the same is true of the war crimes of the Bushies—without an investigation and the necessary information about what went wrong and exactly how it went wrong and exactly who facilitated it, there can be only another crisis in the years to come: one we may never get out of.