(Please welcome William Black, author of 
The Best Way To Rob A Bank Is to Own One in the comments — jh)
William Black is not the guy you want to talk with for an hour and a half on a Friday night if you want to sleep well knowing all is right with the world. He’s white-collar criminologist and former financial regulator who teaches at the University of Missouri-Kansas City School of Law, and he’s written many of the canonical pieces on the role of mortgage fraud in the financial crisis. For starters, check out his Two Documents Everyone Should Read To Better Understand the Crisis.
I asked Bill here tonight for a couple of reasons. One, Rob Johnson told me to, and wise people always do what Rob says. Two, Geithner will be testifying before House Financial Services on re-regulation on Thursday. But mostly because, as we’ve been saying for a while, continuing to shovel more money into a broken financial system without regulating it first is a dangerous proposition. Other countries are extremely concerned about putting up more funds until the US fixes its banking system, and will certainly be aggressively pushing both Geithner and Obama about re-regulation at the upcoming G20.
Yesterday, I sent Bill a New York Times article on the administration’s intention to increase oversight of executive pay. I was interested to know what he thought, because perverse incentives in the compensation structure were a huge factor not only in the mortgage bubble but in the larger financial crisis we find ourselves in the midst of. This was his response:
The specifics matter enormously, so discussing this on the basis of a sketchy newspaper article has to be approached with caution.
I have intense concerns with the Fed as regulator.
*
Regulators are deeply inferior within the institution. "Real men" at the Fed are economists and they do monetary policy. They dine with top bankers on fine china. They play squash on the Fed squash courts. Fed regulators have no power within the institution and the institution is inherently hostile to vigorous regulatory action against the big banks.
*
Economists in general, and Fed economists in particular, are a major cause of the financial crisis. Their philosophies and theories shaped deregulation and desupervision. They promised that "private market discipline" and "efficient markets" would produce growth and safety. The Fed’s economists’ research during the run-up to the crisis (A) ignored everything important, e.g., it denied the existence of a bubble, (B) praised the worst possible practices, e.g., Greenspan’s praise of subprime lending and financial derivatives and his article lauding "equity stripping", (C) was full of undeserved self-praise, e.g., re "the Great moderation" that Fed policies (and neo-classical economics) had purportedly created, and (D) proved no practical assistance to Fed examiners/supervisors to deal with the crisis. Its mono-methodological reliance on econometrics produced the inevitable results — econometric studies, during the inflation phase of an epidemic of accounting control fraud must find that the worst possible practices (e.g., (A) exploding rate ARMs originated with no verification, no meaningful underwriting, no internal controls, and perverse executive compensation systems, (B) sold to others for pooling into CDOs, (C) extreme leverage, and (D) extreme growth are positively correlated with the increased "profit" and share prices. It is only after the bubble collapses that the true sign of the relationship will reverse. Economic theory teaches that regulation must fail. It creates a self-fulfilling prophecy.
*
The Fed’s regional offices (the FRBs) have strong conflicts due to the pervasive role of the industry in running the FRBs. Many of the FRB presidents were picked because of their ideological opposition to regulation.
*
The FRB has consistently failed as a regulator.
*
The FRB continues to fail to understand and respond effectively to the crisis two years after the nonprime market collapsed.
*
The FRB has been particularly weak in dealing with systemic risk. It prates endlessly about it and its economists are almost obsessed with studying esoteric potential systemic risks, but there’s a huge kicker — they were utterly clueless to the enormous systemic risk crushing the global economy. They weren’t simply useless; their policies were critical to the creation of the criminogenic environment that produced the systemic crisis.financial derivatives clearininghouses are a good idea if you’re going to allow derivatives, but they would not have prevented or significantly reduced the current crisis. They are deliberately being oversold as making financial derivatives safe. Many financial derivatives, and a large number of purposes for which derivatives are actually used (as opposed to the hypothetical usages economists employed to support the desirability of financial derivatives), should be prohibited. I see no willingness of the administration to enact such prohibitions. Everything seems to be designed to recreate the failed financial derivatives markets.
The truly obscene part of the proposal (if the article is accurate) is the desire to recreate nonprime financial derivatives (and not even to regulate them more in the near term lest we discourage such derivatives). We need to make the next point in the starkest terms: the nonprime secondary market existed for only roughly eight years. The norm is that no such market exists. The norm was the norm because nonprime loans do not even come close to meeting the minimum requisites for a prudent MBS. Among the very last things in the world we should be doing is trying to recreate the nonprime secondary market. It is inherently unsafe and wealth-destroying.
As to executive compensation:
*
The right way to do executive compensation is (as the proposal awill apparently require) to require that best practices be followed for compensation (rather than to set dollar limits). No performance compensation should be paid except that based on long-term profitable performance.
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Contrast this NYT article with the one about Geithner’s new asset disposal system. It too is obscenely bad. It suggests that the administration is eager not to apply executive compensation limits to purchasers of assets, particularly hedge funds. This seems inconsistent with this article, which implies the limits should apply to hedge funds.
*
The idea (endorsed by Geithner in prior proposals) that executive compensation should be increased if the shareholders approve it is very dangerous. It is part of the same efficient markets ideology that produced the global crisis. It is easy for the worst CEOs to get shareholder approval of the most destructive practices.
*
It is vital to deal with compensation in every publicly traded corporation. Modern executive compensation programs (along with the compensation mechanism for outside professionals: appraiser, auditors, and rating agencies) have created the perverse incentives that produced the global crisis. Even Michael Jensen, the father of performance pay, has concluded that it has become a Frankenstein monster.
As a side note, he also says that "The key, unreported, news from Geithner re: compensation is that. by joining this program, hedge funds, etc., can also secure immunity from future statutory reforms dealing with comp. and governance."
Well, that ought to give you plenty of fodder for questions.
Other articles by William Black:
Related posts:
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- FDL Book Salon Welcomes Senator Byron Dorgan, Reckless!: How Debt, Deregulation and Black Money Nearly Bankrupted America
- 238 Members of Congress Disagree with the President: The Fed Needs More Accountability
- Financial Regulation Reform: Give Us Your Talking Points
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welcome, Bill. Thanks so much for being here.
Okay, I’m getting the idea that you don’t like the idea of a systemic risk regulator answerable to the Fed as an answer to all our problems.
Or am I out on a limb here?
When I was at the AIG hearing on the Hill last week, the woman from the GAO said that it was somewhat unusual that they could not audit the Fed. Is that something that you think would help?
Dugg right here — please join me!
Yes, welcome(hard to believe I’m so early on a thread). I concur copletely with Mr.Balck re the Fed as a ‘regulator’. Two questions:
What is your perspective regarding ‘nationalizing’ the Fed as per Ellen Hodgson Brown’s suggestion?
Why in the world would Barney Frank be pushing for the Fed to become a ‘regulator’?
And wouldn’t a simpler solution to taxing executive compensation be to have the tax code deny any business related expense to any company who paid any member of it’s staff or a consultant any amount of compensation that exceeded the President of the United States salary?
Sounds like the Regulator in the Fed is as popular and listened to about as much as the Auditor is on DoD contracts.
That is, not at all.
So — today’s PPIP program is a compensation protection racket.
Who could have seen that coming?
How out of touch are these people, really?
Bill is here, he’s just reading through the questions.
I don’t think the Fed is capable of being a sound systemic regulator and unless we fundamentally rethink the way that conventional economists approach systemic risk I don’t believe systemic risk regulation will work regardless of what agency is charged with the task.
Best,
Bill
Welcome, Bill! Glad to see a fellow Kansas City person at the Lake!
I’m a Lutheran pastor, but your writing has brought back all kinds of memories of my undergrad work as a math/economics major (especially the game theory stuff!) in the early 80s.
Your comments about the reputation of regulators inside the Fed is stunning in its depiction of an “inside the bubble” mentality. Without regulation, firms have an incentive to cheat because they fear others will gain an advantage over those who play it straight — and where everyone has an incentive to cheat, more and more folks eventually will.
This basic observation, though, runs counter to the anti-regulatory orthodoxy that’s held sway in many quarters since Ronald Reagan — despite the S&L debacle, WorldCom and Enron, and countless other scandals. Phil Gramm did more than anyone I can think of to strip the ability of regulators to help insure a fair market, in his zeal to kill off any regulation, any rule, or any law that would get in the way of private market actors.
How do we get past the argument that “these were just bad actors, but the system is basically fine?”
Yes, the opaqueness of the Fed is a major problem. Check out the recent book by Robert Auerbach about the many scandals the House Banking Committee investigators found at the Fed.
Best,
Bill
Preaching to the converted here.
I’ve been thinking that a very simple financial system might be perfectly fine. There is no evidence that the fancy dancy “engineering” helped any other part of the economy except for those who directly benefitted. The economy grew just fine in the 1950s and 60s with a simple, and very rigid financial system.
Would you care to critique that thought?
Welcome, Mr. Black. If not the Fed as regulator – then who or what should be doing the regulating?
thanks for being here, sir.
“Many of the FRB presidents were picked because of their ideological opposition to regulation.”
Potentially stupid question: How is this different from the Bush administration’s politicizing of the DOJ? And are the picks subject to any kind of review or term limits on their presidencies?
Central bank independence makes some sense with regard to monetary policy. It makes no sense when we’re talking about swap lines, etc. in which the FRB is in essence becoming a massive lender. That should be subject to vigorous congressional oversight and restrictions.
Best,
Bill Black
Yes, your simile is apt. One of the big problems with internal audit and risk management is that they lack power within the organization.
Best,
Bill Black
Bill, what’s the relationship between other regulators (SEC, FDIC, etc.) and the FRB folks?
I agree. See my Senate Agriculture Committee testimony about financial derivatives. Very great segments of financial derivatives were justified through “just so” stories about hypothetical appropriate uses (e.g., credit default swaps (CDS)). In the real world, CDS were overwhelmingly used inappropriately.
Best,
Bill Black
thank you jane and thank you bill for being here.
completely agree with everything you said about the fed – i have been very concerned to see that idea floated and am so glad to see you knock it down. would just add that congress, as lame as their “oversight” is, seems to have even less when it comes to the fed.
I don’t think we’ve talked much about the problem with Moodys/S&P and the ratings agencies. Evidently those at the G20 are very concerned, and there have been some proposals floated by about pooling fees so that no individual agency is directly paid by the company whose bonds they’re rating. But is that going to be effective?
It’s true that regulation is fragmented in the U.S., and I would merge the OTS into the OCC and the CFTC into the SEC), but that fragmentation has almost nothing to do with the ongoing crisis. I’d concentrate on appointing the best officials (e.g., Mike Patriarca — a wunderkind at the OCC and a huge success with S&L reregulation) rather than rearranging the agencies.
Best,
Bill Black
A simple financial system would solve tons of regulation problems. If they are not allowed to do complicated stuff, it’s much easier to tell if they’re in compliance.
Of course, that is a non-starter under current circumstances. How do we get the idea to be more popular?
(Disclosure: I worked for over 25 years as a Wall St. economist, and it doesn’t look any better close-up than it looks from afar.)
Well the Risk Management people and the auditors and anyone else put into these types of positions are, almost by definition, forced into the Cassandra role.
And because they are supposed to be looking out for the pitfalls that no one wants to know about, they are considered “non-team players” and urged to “get with the program”
How do we re-establish the independence and authority for these positions? Is there any way to force the folks in power to understand AND respect the role? Or will it inevitably devolve to the position Bush took on the PDB in August ‘01: “OK, you’ve covered your a** now.”?
There isn’t much interaction. There’s a joint examination council and of course the Basel process creates some uniform rules, but the agencies are relatively separate. It’s good that you asked about the SEC. The Bush administration generally neutered it. Restoring it to competency and vigor should be a major priority. They can be very helpful to effective bank regulation because accounting fraud is the “weapon of choice” for financial frauds.
Best,
Bill Black
You’re quite right re the generally limited Congressional oversight of the Fed. We need a new Chairman Gonzalez (the terror of the Fed in the late 1980s and early 1990s.
Best,
Bill Black
It’s different than DOJ (fyi, both my wife and I were “honor’s programs” lawyers at DOJ under both Carter and Reagan — neither of whom politicized the process) because so many conventional economists (regardless of party affiliation) bring the same destructive ideology to the markets and regulation. Even though the crisis has falisified all of their theories they refuse to admit it.
Best,
Bill Black
I understand about ‘independence’ re ‘monetary policy’ but since bank reserves are set by Basel (not that the bankers didn’t figure a way around such) it would seem advantageous to not have to pay interest to the Fed for Government borrowing; this is to what I am referring:
http://www.webofdebt.com/articles/monetizethis.php
bill – my first exposure to your work was at naked capitalism when yves asked you about the stress testing and lack of experienced examiners. that was a very helpful post that i continue to think about and refer to.
some questions:
1. do you know if there is any effort to correct that situation (hire, train, etc examiners)? what would it take to get the needed staff and experience?
2. does the lack of experienced examiners in any way affect our ability to put the big banks into receivership (or whatever we’re supposed to call nationalization today)?
You are quite right to focus on the rating agencies. See my Huff Post column on “The two documents everyone should read….”, which shows just how much in the tank they were. There are at least two major problems. First, the SEC has proven unwilling to regulate the rating agencies. Second, the way the rating agencies are compensated (and the same is true for outside auditors) converts what is supposed to be a “control” into an “enabler.”
Best,
Bill Black
There are legions of economists who have not drunk the kool aid, but they are not allowed to sit at the adults’ table.
Welcome to the Lake, Bill Black. I’ve been reading some of your essays today.
I had a conversation with some friends recently about business schools and what on earth they must be teaching these days. What underlying assumptions would you change if you could develop a universal curriculum? If everything they know is wrong, who does know?
If you could pick, who would your Treasury Dream Team be?
Yes, the Bush administration gutted the FDIC and its sister agencies’ staffs. The FDIC is trying to staff up but it has put some absurd limits on hiring back the best examiners.
No, the FDIC shortages are critical in examination, not in the use of receivership. The Obama administration and Treasury are misleading people. We didn’t resolve the S&L crisis by appointing “political commisars” to govern failed S&Ls. We hired competent bankers with records of integrity to run the receiverships. The academic literature concludes that they did an excellent job. It is bizarre that Obama and Geithner are channeling Reagan and claiming the government can’t do anything and the market is all knowing.
Best,
Bill Black
Well, Summers is at the adults table and if you’ve been following the senior financial regulatory appointments you’ll see the common denominator is that they not only drank the kool aid, they served it to the world and helped produce the crisis.
Best,
Bill Black
thank you. i will have to tell my friend hugh he was right and i was wrong.
From the “UBS = Chutzpah” piece that Jane linked to above:
I hope you are right about it being hard to imagine anything worse. Given the way this whole mess is unraveling, however, I fear you are wrong.
When did you write this piece? Have you seen anything since it came out to suggest you spoke too soon in saying you can’t imagine anything worse?
Exactly my point.
Obama’s campaign contributions depended on his doing that.
Summers on CNN right now. Didn’t even answer the question about oversight/accountability. Blitzer quoting Krugman to Summers: ”Wish he’d waited until the plan was announced before writing his column.” Ouch.
Summers: Everyone will make TONS of money. Taxpayer will only lose money once/if all other players have been wiped out.
WTF?
Hello, Bill Black!
First, efficient markets can be a very fine thing, but markets are frequently inefficient. In particular, when there are epidemics of accounting “control fraud” (criminology jargon for situations in which a seemingly legitimate firm is used by the person that controls it, typically the CEO, as a “weapon” to defraud others) markets become profoundly inefficient. These epidemics are not random or “black swanish”, they occur when dergulation and perverse executive compensation systems create a “criminogenic environment.” The epidemics extend and hyper-inflate financial bubbles and produce financial crises.
My ideal team includes Stiglitz, Galbraith, Randy Wray, and Mike Patriarca.
Best,
Bill Black
BTW, my rejoinder that the govt can’t run the banks is: well, one thing a govt run bank wouldn’t do is financially engineer itself into bankruptcy.
“It is bizarre that Obama and Geithner are channeling Reagan and claiming the government can’t do anything and the market is all knowing.”; not bizarre to me given all the Clintonista’s appointed; I’m still of the opinion that a deal was struck between Obama and Hillary for her acceeding to fully supporting Obama.
bill – i should also ask: can you refer me to any reading on how a large multinational investment type bank would be taken over (especially one where massive fraud is suspected)? i’ve read a very little about bcci, but i’m wondering if there are better examples. thank you.
I wrote the piece an hour ago. I accept your caution — these folks are possible of worse abuses and if left in power they will plumb new depths. But I think forcing U.S. taxpayers to secretly bail out a foreign bank that is busily defrauding U.S. taxpayers is such a low that it should lead to a political firestorm.
Best,
Bill Black
eCAHN, in case you hadn’t read this re ‘government bank’.
You’re right. Does anyone have any clue why Obama and Geithner are such fans of failed bankers and regulators and so willing to dismiss the abilities of government workers (other than troops)? Maybe we need to start wearing uniforms in the civil service to get any respect.
Best,
Bill Black
Bill,
What is the outcome of the Obama economic policy?
Many thanks.
What’s your take on Sheila Bair at the FDIC, or KC Fed President Thomas Hoenig and his recent remarks about “Too Big Has Failed”?
I posted about the two of them here at FDL a couple of weeks ago, right after Hoenig’s speech:
Any sense — either knowledge or a reasonable guess — as to how Hoenig’s remarks are playing inside the Fed and at Treasury?
Thanks for the link. I scanned the beginning and it looks like just the thing, but will read the rest later.
The plan is so incoherent and such an obvious, massive transfer of taxpayer money to failed banks and vultures that the mind boggles. I’ll be writing about how bad the plan is and why the arguments for it are internally inconsistent. But the bottom line is clear: their vaunted markets and private parties are what caused the global crisis. There is a market price for toxic MBS (TMBS) — it’s just that the banks won’t recognize the price because it would require them to admit they were insolvent.
Note something else that is more subtle — immunity from reregulation. If you participate in this plan (which provides enormous taxpayer subdidies to participants) you are going to be exempt from any future congressional reforms about compensation and governance. It is the patent dishonesty of the plan and how it is being sold that is the final straw.
Best,
Bill Black
Wouldn’t a good start be to separate investment banking from just plain old deposit/savings/home and car loan/small business loan type banking? It seems like when the walls between those disappeared is when the real looting began.
Welcome Mr. Black Thanks for your insight into the current crisis.
The latest version of Greenspan’s put was announced today. Beyond driving up the DJIA nearly 500 points, what positive results and unintended consequences for Main Street will result from the Geithner plan?
You’re implicit question is correct. Multinational investment banks haven’t been taken over (they’ve been exempted from regulation and they’ve always been bailed out). The directly available answer is bankruptcy. That is what should have been done for AIG’s trading arm.
Best,
Bill Black
Hello and welcome to the Lake!
Is the plan deliberately incoherent? It seems the whole idea is to obfuscate any understanding of anything and the biggest con line is “it’s too sophisticated for the unwashed to understand”.
Good afternoon, Mr. Black! I’ve been a fan of your book for a few years, and am glad to see it’s ideas making some headway against a certain segment of macro-orthodoxy, as I have the impression is finally starting to happen.
Thanks for the linked remark in particular, as it opens up to attack the excuse that the problem is with managing a post-takeover situation.
Would you say that there is a logistical problem with actually taking possession of any of the largest banks, however? For me, that possibility is roughly the last defense.
Repealing Gramm-Bliley-Leach and many of the regulatory measures that eroded GS would be a very good reaction. We need a Pecora investigation.
Best,
Bill Black
Here’s a quote about Obama by Naomi Klein, days after he won the nomination:
This isn’t some deal he struck with Hillary. It’s what he believes. If he’d struck a deal, he’d still have countervailing advice he could listen to, and he’d be having Geithner at least say things that make more sense, I think. There certainly would be more balance on his economics team than there is. Looking at Klein’s article, the actions of the last couple of months make more sense to me.
Belief dies hard, because belief requires a whole lot more proof to dispel than a considered opinion does.
Barney Frank has promised new regs and it seems he’s the only one talking about new regulation (maybe I missed a few). It seems like the ridiculous “let’s tax the bonuses” (to appease the masses) might be all we get out of DC. Any thoughts about any future regulation? I’m already tired of talking about more wealth transfer to the robbers.
WOW, I missed this “Note something else that is more subtle — immunity from reregulation. If you participate in this plan (which provides enormous taxpayer subdidies to participants) you are going to be exempt from any future congressional reforms about compensation and governance.” in the plan; do you remember which section?
what (and where) do you think produced the current crisis?
I take your point. But the plan is not “sophisticated” and there is no reason to search for sophisticated magic bullets. Geithner is continuing Paulson’s policy of violating the law: the “Prompt Corrective Action” provisions of 1991 (see my Huff. Post column explaining this). What people need to know is that we have successful procedures for resolving failed banks at a much cheaper cost than under the Geithner plan. Those means do not produce these unconscionable subsidies to the wealthy and do not create the perverse incentives that will make future crises more likely and harmful.
Best,
Bill Black
Welcome to the Lake William Black.
firedogs,
per last week’s advice from Galbraith – ‘open the books’ – “examine the tapes!”
look what Mr Black included in the aforementioned HuffPo article:
professional credit rater has told his superiors that he needs to examine
the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages “underlying” the derivative. A senior manager sends a blistering reply with this forceful punctuation:
wow, just effing wow
William Black @ 48: It’s stuff like this … immunity from regulation … that makes me really upset. And these vile revelations come daily. Tying our hands for the future WHILE telling us that a new regulatory era is coming. Removing compensation caps as a come on. Unbelieveable.
When I hear this it’s no longer hyperbole that these guys are working for the enemy.
I don’t believe there will be any new regulations. I’m almost out of hope that we can even get out of this mess.
Wow. At least the Republicans are against it!!!!!!! Perhaps there’s that hope.
Summers was lying I so wish someone in the media would call him on it: but if they are quoting Krugman (and earlier at Gibbs’ presser too) we are making *some* headway.
Maybe we need to start wearing uniforms in the civil service to get any respect.
I think this is a big part of the problem with regulation and auditing in the government – civil service just isn’t respected as much as it needs to be for the civil service to be effective. Part of the reason that revolving door exists is because it’s getting harder to do interesting work on the GS side of things, and there is little prestige there even if the work is good.
Accountants wouldn’t do anything so nefarious. So are you suggesting that is why PricewaterhouseCoopers (the largest accounting firm) was one of the biggest contributors to Bush/Cheney? And why Dick Cheney made an ad praising Aurther Andersen’s professionalism? And why all of the accounting firms absorbed all the Andersen partners after the bankruptcy?
This would sound like a conspiracy. I am sure
wethey were not involed in fraud. I do remember several partners bitching about being forced to contribute even though they though a democratic president would regulate more and be better for business. It also seemed oddly strange how much of the PwC power shifted from NY to Texas in 1999/2000. Go figure. Couldn’t be collusion or fraud.I keep trying to think of a way that this does not constitute a direct transfer of all the toxic mortgages for at least double their worth onto the Fed’s balance sheet. Now Carlyle loves the plan
http://www.bloomberg.com/apps/…..refer=news
Well that inspires confidence.
I’m wondering about what kind of investigation … forget oversight, that’s for ninnies … investigation we need right now while this money is being transferred.
I expect you have the same feeling: we are going to find out in about a year or two that there was massive criminality and fraud pepetrated by the very people who recieved these funds. I’m more and more sure of this.
((reader)) I feel the same way. And then there’s the added perversion of the press waxing so sympathetically about banksters being sooo afraid of the people they are ripping off. Well, if that’s what gets you to stop abusing us, be afraid!
I agree that beliefs die hard. Think of the theoclassical econ. profs that have been arguing for decades that markets are self-regulating and efficient. To do a mea culpa they would have to say: I’m sorry, the policies I recommended produced a disaster, the theories I propounded were false, the methodology I praised (econometrics) produces the worst possible policy advice during the expanasion phase of an epidemic of accounting control fraud — or any financial bubble. Then, after that apology, they’d realize that they had no useful expertise. It is the rare human that can admit to such worse than futile condition.
Best,
Bill Black
The folks at the banks, the Fed, Treasury, and Wall Street all poo-poohed the idea of directly helping out borrowers by allowing bankruptcy judges to alter the terms of mortgages, because of the “moral hazard” problem. That is, it will reward bad behavior and so encourage more of it in the future.
Do they not see the irony of that criticism, given the new Geithner plan — or are they simply counting on no one noticing the double standard?
It’s pretty weird that a lot of this is just ether. There are no tapes, there are no books.
Non-regulation (mortgage bankers were never effectively regulated), deregulation, desupervision (e.g., the OTS director that came to the press conference with the chainsaw and the rules to demonstrate his intention to destroy the rules — he did, which helped the industry destroy the industry, and the perverse incentives created by executive compensation and compensation for “independent” professionals (appraisers, auditors, and rating agencies) that perverted “private market discipline” into “vectors” (think anopheles mosquitoes and malaria) that spread the epidemic of accounting fraud and hyperinflated the bubble.
Best,
Bill Black
wow is right.
Actually, the problem is even worse than you suggest. By putting mortgages under the control of the most rapacious vultures it is very possible that the latest Geithner plan will eviscerate other Geithner programs designed to reduce foreclosures.
Best,
Bill Black
Do you think this system, mortgage debt and CDOs, can be unwound? Or are we just trying to manage a
softbumpy landing?That WH organic garden (WH OG)is looking more and more like a Victory Garden.
and yet it’s all “too complex” for we the unwashed to comprehend
if the paradox wont getcha, the irony will :D
I see it more as a way station before the assets become the FDIC’s. In the normal takeover, the FDIC would take control of the assets and hold them until a favorable opportunity, if ever. In the Geithner plan, the FDIC puts up most of the money to purchase these assets, bu PPIP gets to hold them, and if they do well, the PPIP makes money (including Treasury) and if they don’t do well, FDIC is stuck with them as the private guys bail out. Whether one or the other is more likely depends on how you think the conflicting incentives work to raise bids (because of the subsidy) or lower them (because of desire not to lose money). If they offset, you’ve accomplished little except expose the banks’ insolvency.
Jane @ 64 — When Blackrock & Carlyle love the plan, it’s a dead giveaway that it’s a dead giveaway.
DeutscheBank has also shown up on the list of large bailed-out AIG counterparties. Based only on their role in the hollowing out of the residential base of the city of Cleveland I’d like to see them investigated —along with lots of U.S. cohorts naturally— rather than paid.
Yes, the press is so easy a target. What drives me crackers currently is their willingness to report Geithner’s assertions as objective fact without even the most basic questioning of his often internally inconsistent statments.
We need a Pecora investigation. Please demand one from your representatives.
Best,
Bill Black
Wonderful.
I see Jane wasn’t kidding in her intro: “William Black is not the guy you want to talk with for an hour and a half on a Friday night if you want to sleep well knowing all is right with the world.”
question – isn’t Carlyle festooned with the same folks who have propped Citi up in the past ??
and didn’t some European arm of Carlyle get in the CDO game late and lose $300MM just last summer ?
I think a Pecora investigation is an excellent idea. Though our representatives have not been too responsive to requests for any investigations.
There is no silver bullet solution. The Geithner’s of the world that peddle recurrent silver bullet solutions are the problem. We know from a number of failures such as IndyMac and UBS roughly what the true losses are on nonprime assets. The losses are so large that they render any bank with a large nonprime position insolvent. That will be expensive to fix and the taxpayers will have to bear the cost. But the Geithner plan will be far more expensive and it will create such intense pervers incentives that it will produce a new crisis.
Best,
Bill Black
Hey, experts never measure …
bill – i wanted to thank you, in addition to your very informative posts, for the piece your wrote with tom ferguson, robert johnson and walker todd. it is especially helpful in these times to see recommendations made by a group like that – they give activists and concerned citizens something to organize in support of. i hope you will be doing lots more of them and expanding the group of co-authors.
Funny, our kids didn’t always share that belief. They were wont to suggest that I could be a sleep aid!
Best,
Bill Black
For those unfamiliar with Pecora and his investigation, here’s a snip from wiki (internal links omitted):
Any candidates you’d suggest to head up a sequel?
Unfortunately I’m happy to hear that Geithner’s plan could lead to more foreclosures. I’ll take ANYTHING at this point that reflects badly on the program, it’s startup, and the outcome. It may be the only way we get to a better plan. And the quicker the better.
I said earlier to Dean Baker that I didn’t think this plan will lead to any restoration of credit to Main Street. If not, then it’s not a plan we need. It’s the plan the banksters want.
Former Prime Minister John Major was/is a Carlyle member. One never knows who is on board with Carlyle Group, but it ain’t us chickens.
the lack of any effective investigation makes me think that congress doesn’t really want to know. maybe we can help a little bit with that.
Thanks, it was a very strong group and we were trying to give practical answers. Yes, we are trying to expand the group.
One of the errors of the Obama administration is to treat executive compensation as a distraction. It isn’t. Indeed, if you had to pick a single factor to explain to crisis it would be the perverse incentives created by modern executive compensation. The problem is so great that the academic “father” of performance pay now denounces it as a Frankenstein creation.
Best,
Bill Black
I believe they count none too few Saudi princes among their members
Welcome, Bill. wrt to the “Pecora Commission,” who is our Pecora? I fear we don’t have anyone of sufficient stature and integrity. Any recommendations for who should chair (and also for chief counsel)?
There seems to be an ideological or almost literal barrier between the chosen ones (reportedly Obama’s picks) and the folks you name as dream team choices.
Two questions.
Is the divide as wide as it seems?
How can it be bridged?
I remain convinced that this situation calls for checking egos and portfolios and political aspirations at the door in favor of mining the finest economic minds in the country.
I’m interested to note that Krugman did not make your cut. Is he/should he be a major influence? (Okay, three querstions.)
Thanks, Peterr. Have to admit that I didn’t know what that was.
It’s gonna take too long to blow up. Its the next bubble in the works. Investors are always keen to learn where the next asset bubble will be. This is it, I guess.
Jack Blum and Saul Wisenberg (Dem., Rep) as counsel. Hire Dick Newsom and Chris Seefer as your key investigators.
Best,
Bill Black
see my comment @86
btw, i called both the house financial services committee and the senate banking committee today and was informed, among other things, that there are no rules or other impediments for having committee counsel (or other committee staff) do the questioning during the hearings.
personally i’m really really sick of watching hearings filled with ignorant congress members at best read questions that an aide wrote for them (which means they don’t know enough to do effective follow up) and at worse grandstand for the youtube clip.
I can’t remember when the prima donnas in Congress allowed an independent chief counsel to run an investigation — Sam Dash in Watergate? Any recent examples?
Excellent analysis — where will a reformed system of incentives come from when congress won’t investigate this fraud, and corporate management holds stockholders and taxpayers in such contempt?
How can you forget Kenneth Starr? does he count?
I’m still searching and can’t find exmption from regulation; can you?
As an aside I came across this -titled ‘Let it Die’- you may find interesting.
I think Paul is extremely good and is most valuable where he is because it is such a unique position. I also think he’d quit within two weeks if he did join the administration.
I don’t see the issue as particularly a matter of ideology or ambition. I was one of four regulators that met with the five U.S. Senators that became known as the “Keating Five.” They attempted to intimidate us, on behalf of Charles Keating (of Lincoln Savings — the worst of the S&L control frauds) into not taking enforcment action against the largest violation in the agency’s history. They failed with us (but succeeded with our successors). I took the notes of the meeting. The key point is this: I have no idea what the party affiliation is/was of my three regulatory colleagues. We were wholly apolitical as regulators. That’s why I recommend Mike Patriarca (one of my colleagues at the meeting) as the nation’s top regulator. His competence and integrity have faced the stiffest test — and he passed that test. Geithner as we all know failed both the tests of competence and integrity.
Best,
Bill Black
Bill Gross of PIMCO was on npr/atc a while ago practically trilling with delight, outlining scenarios in which he and his firm come out winners, then remembering himself, tossing in “and the taxpayers win too” with no regard for the zero sum nature of what he’d just outlined.
He was a special prosecutor, wasn’t he?
No. Starr was an “independent prosecutor” under the law passed after Watergate.
Sam Dash was the Majority Counsel on the Senate Select Watergate Committee (Chairman Sam Ervin of NC). The Minority Counsel on that committee was Fred Thompson.
Yes THAT Fred Thompson. It’s how he got his start in film, because someone in Hollywood thought he was “photogenic”
The construction of another sub-prime lending scheme, seems like a nefarious enterprise, but many people have such poor credit scores now that there should be many customers waiting to sign up (again or for the first time), as soon as they find employment.
Amen. There are known ways to make the questioning far more effective. It is overwhelmingly ego and reelction that produce the weak committee questioning. We need a Pecora investigation.
Best,
Bill Black
Yes, I know him. He’s very smart. The market surged because Geithner wants the taxpayers to produce a bonanza for the elites at the taxpayers’ expense. I repeat, he is violating the law — the Prompt Corrective Action law. Remember when Democrats were upset that Bush repeatedly violated the law?
Best,
Bill Black
Ugh. Note to self: finish Bill Gross post.
Not part of Congress. And no, I don’t believe he could count.
Thank you. I am blown away by the concept of being genuinely apolitical, at least situationally. Booyah!
I didn’t know who Mike Patriarca is, but I do now. Thanks for that as well.
I had been thinking of Krugman bringing his journalist/economist/outspoken thinker persona to the solution table. But you’re probably right about his serving most effectively where he is.
I’m tired of seeing those gasbags
ownedp0wned by witnesses like Ollie North, too.Selise, I’ve gone through all the pdf’s on the http://www.financialstability.gov/ related to PPIP and can’t find what Mr. Black is referencing re ‘re-regualtion’; any ideas of where else to search?
Arthur Limon filled that role in the Iran-Contra hearings, IIRC, but Ollie North’s lawyer Brenden Sullivan played him like a fiddle. My guess is that this example wouldn’t help anyone trying to persuade Congress to have committee counsel do the questioning. I can’t think of another situation more recent than that.
The last thing we want to do is bring back nonprime lending of the 2003 and beyond vintage.
When I give a talk I often start by asking how many people remember the subprime mortgage crisis of 1991-92. It’s a trick question. There was no crisis because we saw that subprime underwriting was becoming an oxymoron and we killed the abuses. Regulation can be highly effective if you have regulators that don’t accept the self-fulfilling prophecy that regulation cannot succeed.
Best,
Bill Balck
have not looked. was planning to after the chat with bill. but if it’s difficult to find we should ask now.
bill – could give us a pointer on where to look?
Ed Schultz sitting in for David today on 1600 – about to cover Geitner’s/Treasury’s vacancy issues . . .
will he mention Geitner’s Chief of Staff – Mark Patterson ?? as reported last week in Mother Jones, he didn’t just come from Goldman (bad enough) but he’s the very guy who torpedoed then Senator Obama’s proposed reform legist. on Exec Pay in 07
They were never upset enough to impeach the violators. I suspect they’ll be even less likely to now.
From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 4% of the purchase price – the remainder being “non-recourse” financing from the Fed, Treasury and FDIC. This essentially implies that the government would grant bidders a put option against 96% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
Roughly 10 days from now the world will meet in London for a “post April fools” meeting. In the past, the U.S. swung the big stick, set the agenda and made the rules. Not this time, this time the world knows that we are sick and dying. They know that the U.S. has spread its “disease” far and wide to the four corners of the earth. The world is calling for a move to stability and transparency, this is intolerable to the U.S.. Stability would mean “settlement”, this can never happen using Dollars. Transparency can never happen because if we actually got to see what has really happened behind the scenes, panic would be far too passive a word for what would occur.
We wait and watch as this rally flames out like all the rest. BUT, this time it’s different. This time the Fed has already admitted bankruptcy and implicated the U.S. Treasury in said bankruptcy. Last fall I wrote that the “end game” would include the rating and viability of the Treasury, we are there now. Once this rally rolls over, the BIG ONE is next. The “big one” will change life on the entire planet, FOREVER! The current rally is leading up to the G-20 summit where I believe the world will tell us NO MAS. No more will the world fund U.S. spending (overspending). We have purchased real goods from the rest of the world for nearly forty years and “paid” with Dollars, but what did we really “pay”? Nothing, we didn’t pay, we can’t pay, and we won’t pay. This is no “April fools” joke that the world will accept, they will impose their collective wills and the world will begin using a new reserve currency.
what can we do about this? no one pays attention to a solitary voice saying one of the masters of the universe is breaking the law.
how can we force them to follow the law?
Remember when Democrats were upset that Bush repeatedly violated the law?
Anyone around here want the starter’s signal?
when paul krugman was here, he found it very difficult to be even a little bit critical of summers and geithner. i do not see him being the kind of person we need to stand up to summers and the banksters. maybe stiglitz if the stories i’ve heard about him are true.
I’m not sure I’m interpreting your question correctly, but….
In several press conferences administration spokespersons have emphasized that the industry demands that TARP participants not be subject to any congressional reforms that may subsequently be enacted (and the two categories mentioned were limits on compensation and new governance reforms). So, you can (1) get a series of taxpayer subsidies for participating in TARP and (2) get immunity from subsequent reregulation as a lagniape.
Best,
Bill Black
Bill, when it comes to accountability, we’ve been talking mostly about federal agencies. What about the various licenses that the different players in this mess have to hold, in order to play in the financial markets they way they have?
Lawyers have to have a law license, granted by a state board. Accountants have to have their CPA certification, and brokers need licenses to buy and sell stock.
Are there avenues of meaningful accountability available through the license-granting agencies (state boards, etc.), that would take some of these folks out of the financial services industry for good?
In case y’all haven’t heard, AIG has become AIU Holdings. I believe it stands for “Ahem, I’m Undercompensated.”
Thanks for mentioning it. I’m particularly disturbed by his lack of integrity. I’m happy to assume that he failed to pay his taxes through a mistake. But when he was caught he knew that he had failed to pay his taxes. He deliberately refused to pay his taxes for years beyond the statute of limitations — because he could get away with it. He did so at a time when he held one of the most senior governmental positions in the world and was probably within the top 5% of the income distribution. Can you imagine what a field day every lawyer representing someone sued for tax fraud will have? (The IRS is part of Treasury.)
Best,
Bill Black
I’ve been wondering what, if anything, will shake Obama’s belief in the Chicago School way of doing economics. Maybe the shock of experience such resistance at the G-20 would be a start down that road. I don’t know what form it would take, but I suspect that in one way or another, they will be less apt to follow the U.S.’s lead, and more likely to express displeasure in the way rude uncles talk to their errant nephews.
I don’t remember that, but I trust your recollection. And now I can’t sort out whether Krugman’s critiques are aimed only at Obama or at the whole economy posse.
lol…AIU=”Also, I’m Unprincipled.”
This is the question Judge Sporkin asked of all the professionals that Keating suborned and turned into the most valuable allies for his accounting control fraud. I believe there is a book about to come out by an attorney that used to represent the California board of accountancy and tried to pursue ethics actions. I dealt directly with the bar (lawyers) and their response to the too often disgraceful role of attorneys in aiding the S&L control frauds. The bar was overwhelmingly hostile to the folks trying to prevent and punish the fraud. They closed ranks to protect the worst elements of the bar.
Best,
Bill Black
My first home loan (still paying it) is a 30 year adjustable rate. Was an assumable builder’s loan originated in 1983. It’s been quite good overall. My other mortgage was a 1989 non-qualifying loan, which I refinanced a couple of times now.
There were/are some useful nonprime loans that work well for some people.
I understand there were some nasty tricky ones recently that contributed to our “economic downturn”. Thanks for your excellent reply.
Most of the critiques of his I’ve read have been of the “this won’t work” variety, rather than being critical of individuals. He was critical of Bush and his cronies because they were such rampant jerks, of course, but more recent criticisms of presidential policy have mostly been more technical.
At least, that’s how I remember things…
You have to remember that Obama taught at the U. Chicago Law School (which is the worst exemplar of modern “law and economics”). I’m sure he was influenced by their beliefs. I don’t think that means he can’t change in light of the failure of the Chicago School’s policies.
Best,
Bill Black
Why does John Yoo come to mind?
Perhaps the angry Pakistani lawyers could teach their American colleagues something about standing up for the rule of law.
Of course there were some nonprime loans that didn’t default. The same is true of junk bonds, credit default swaps, CDOs, etc. You can’t regulate on the basis that you can’t stop a category of activity that, overall, will cause severe losses, because there are some exceptions.
Best,
Bill Black
Yes, he does come to mind. What comes to mind with regard to him and Paulson and Gramm are why we’ve lost the societal capacity to shun people that are so lacking in integrity.
Best,
Bill Black
I think you’re right. I just re-read his NYT piece from this morning. And “this won’t work” is the leitmotif.
I don’t think anyone that read’s Paul Krugman’s columns regularly has any doubt that he believes that Geithner, Summers and Rubin are part of the problem rather than part of the solution.
Best,
Bill Black
Avarice Incarnate Undercover
sorry, can’t help myself with the easy ones :D
big front page on this over at HuffPo, 15 of 20 Execs have ret’d bonuses, Cuomo threatening to ‘out’ the remaining 5. Less than half of bonuses went to Americans -
Thank you for the clarification and a new word(though I’ll probaly never use it except perhjaps in Scrabble) “lagniappe”
BUT, if it’s not ’statute’d’, then the possibility exists for such not to happen; having ’said’ that, the way things happen in ‘conference’ and the lackof reading of a complete bill before voting, you’re probably right. We -the people- need to be speaking out about that and a Pecoria investigation.
Depends how deep the belief is, I suppose. As both the Muslim world and Republican conservatives have demonstrated, often when confronted with failure the first reaction is “We just weren’t being good enough (fill in the blank)s. We have to try harder.” Once you get through that, you can start to hope for the light to go on.
I suppose the good news is that Obama’s not an economist, so he clearly won’t have as much professional pride in his beliefs. It will really come down to how attached he is to his Chicago School buddies, and the money they represent.
Interesting. Paul was a strong supporter of HC and (I think correctly) often wrote about why her health care plan was superior to Obama’s. The administration plainly does not see him as part of their team.
Best,
Bill Black
I came late but just wanted to say I have a lot of respect for your work. Do you know of any financial sectors are not essentially bankrupt: banks, private equity, hedge funds, pension funds, etc.? because all of them look like they have existential size problems.
Contrast the AIG bonuses with the bonuses at Microsoft if you really want to see how insane AIG was. Then think of the far larger bonuses that the leaders of the AIG trading group received in earlier years by enormously inflating accounting income. We need to establish that fraud and “claw back” those far larger bonuses.
Best,
Bill Black
Because they’re powerful and that is who we worship now. There is no longer any societal approval whatsoever for being poor but honest.
That’s one of the reasons I like his columns. They’re usually about the technical rather than the personal. Although I’d have to agree with William Black @ 139 that one does get the sense that he thinks those guys are part of the problem.
“the societal capacity to shun people that are so lacking in integrity.” and that is directly tied to the mass media and the lack of regulation/enforcement regarding it.
Krugman has a background I believe as a free trader. He praised the TARP initially. I think he was willing to give Geithner a chance. His criticism of Bernanke remains muted because as he said here one time Bernanke got him his job at Princeton. But the sheer wrongheadedness of the Obama program has pushed him further away from Obama and more toward us.
What would it take to establish that fraud?
The short answer is that we don’t know about a number of places. Many of the smaller regional banks seem fine. The opaqueness is causing investors/creditors to be worried about all financial institutions. We think that subprime assets and exotic derivatives are held in a very “lumpy” fashion, i.e., many of the big financial firms have lots of them, many of the smaller firms have little or no direct exposure.
Best,
Bill Black
Believe it or not the ‘King of the Hill’ animated comedy DID have to do (in favor of) being poor but honest.
We all wanted these folks to succeed. We’re simply amazed at how persistent and strong is the attraction to error. The fact that the errors are bad finance, bad public policy, and bad politics makes us shake our heads all the more.
Best,
Bill Black
But the big houses also have most of the deposits. I think that when we hear the issue of systemic risk (which for me translates into acknowledgement of systemic bankruptcy) we should also raise the issue of systemic fraud.
“, i.e., many of the big financial firms have lots of them,” ; and those are the ones spending money on lobbying and campaign contributions.
But it’s not just ‘wall street’ unless you apply such to ‘master banks’; the NCUA was forced to takeover a couple of ‘master Credit unions’ becuase they did the same crap of over leveraging/investing is speculative vehicles.
American International Undone
that was back in december. i had already formed an opinion about larry summers from his days in the clinton administration but i think krugman was trying to give obama’s economic team the benefit of the doubt or something. my impression was that he was just too nice a guy for the fight. but what do i know?
Bill you are an iron man!
Thanks so much for being here today.
We’ve got Jim Himes who is on the House Financial Services Committee, and co-chair of the group within the New Dems that is re-writing financial regulation language here on Wednesday.
I hope everyone will take this bounty of information and ask him how he plans to address these things.
bill, thank you so much for your time today. this has been a fantastic thread and you’ve been a great help. i hope this will not be your only visit here. many, many thanks!
here is my take home message:
A real investigation by a task force that includes examiners, FBI agents, and accounting specialists. We were able to get felony convictions of over 1000 senior insiders in the S&L debacle. Unfortunately, the FBI, despite correctly identifying that lenders initiate 80% of mortgage fraud was extremely late in investigating the major nonprime lenders. There are no major convictions of mortgage control frauds (i.e., CEOs of the large, speciality lenders). The Bush administration greatly reduced white-collar crime prosecutions, as did the SEC re its enforcement actions (though their numbers were more mixed).
Best,
Bill Black
I don’t see the Obama-Summers-Geithner policies working. I believe they will have an effect with some bottoming out next year but I don’t see a recovery. At the beginning of 2011 I think we will be back where we are now with fewer options and greater debt (unless there is a radical rethink).
I wondered how you saw this playing out in the next couple of years.
That’s not unheard of in popular entertainment. Most of the comics-based movies I’ve seen lately have a similar ethical stance, as does Battlestar Galactica. When one ventures away from artistic expression, though, there does seem to be more worship or toleration for avarice. All the praise for Enron and their ilk comes to mind. Very few people seemed to want to believe that those emperors were naked, either.
Excellent takeawys. Thank you.
Best,
Bill Black
Thanks Jane, and thank you Bill
this has been a fascinating discussion. Sure hope we get our Pecora investigation, it’s essential.
Unless they change fundamentally these policies will destroy his presidency and his reputation in history.
Best,
Bill Black
New post–>>
I wanted to add my thanks for your visit today and hope it will be one of many. I agree about the need to investigate. Investigation is the real transparency.
de nada.
Thanks for having me.
Best,
Bill
Thank You William Black !
and thank you Jane Hamsher – my, my, my
thank you for visiting the lake today Mr. Black. hope you visit regularly and continue to share your insights with us.
Thank you for staying so long and chatting.
What Hugh said! Amen to that.
BTW Larry Summers is now on the NewsHour selling
snakeoilthe Geithner program.It was our treat, Bill. Thanks for coming.
Concur and much appreciation for your time and contributions.
Thank you Mr Black and to Jane Hamsher for providing this extraordinary forum for us to learn and understand this debacle.
Oh, lord, Teddy, if you understand, will you be my mentor??? *g*
Barbara -
if you haven’t already, do read the Taibbi piece in Rolling Stone – not sure what impressed me more, his facts or his ability to lay them out so clearly for folks like us
and here (courtesy Ian) is SEIU Treasurer’s 1 page take on Geitner’s, um, proposal – fabulous
http://www.seiu.org/2009/03/fi…..eryone.php
i sure wouldn’t mind having william black lead the questioning of committee witnesses. now those would be hearings worth watching!
amen sister
I would lose my job for excessive absences – tivo be damned! :D
cbl2, Matt will be here tomorrow at 5 pm ET for a chat.
Looks like I missed a great discussion. Mr. Black was amazing. Good work in getting him, Jane! You continue to amaze me with how much more your bring to FDL each year.
Ignore the stupid people and get on with fixing the system.
My view is that the system evolves somewhat like a person or society and that it could be dangerous to try and impose an ancient system (like an ideology) on people who are used to something more recent.
That’s one reason I say that even to roll back regs to 1989 could erase some good things that occurred after that. It’s going to require a lot of care to fix this.
The International Economic Forum of the Americas
CEO of General Electric (GE), Robert B. Zoellick, President of the World Bank Group, and Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), will meet with policymakers and other stakeholders in the international financial sector in Montreal this June[2009] to find the best methods for “Adapting to the New World Order” at the 15th edition of the International Economic Forum of the Americas.”