February 7th, 2015
As a U.S. Federal litigator, Bill Black had a pivotal role in ensuring that hundreds of the bankers behind the U.S. savings and loan crisis of the late 1980s were put behind bars. Since then, he’s become increasingly exasperated by his country’s failure to prosecute any senior bankers for the much more serious and more damaging epidemic of financial fraud that culminated in the global crisis of 2007-09.
An associate professor of accountancy and law at the University of Missouri-Kansas City, Black has featured several times in this blog. In May 2010 he explained how, through control fraud, senior bankers had “suborned internal checks and balances“; in October 2010, he described government dishonesty about the banking sector as “a form of tyranny“, and in July 2012,he said Libor rigging was “the biggest anti-trust felony in the history of the world”
Interviewed by INET’s Marshall Auerback, Black describes how ‘crony capitalism’ now rules in America, with politicians, regulators and prosecutors cosying up to bankers and vice versa, a situation which makes criminal prosecutions virtually impossible and a continued culture of fraud and wrongdoing inside the banking sector inevitable, while the safeguards intended to prevent and punish such abuse are allowed to wither on the vine.
Things were different when Black was a regulator. In the USA, the regulations covering savings and loan (S&L) associations, also known as ‘thrifts’, were relaxed under President Ronald Reagan in the 1980s. This triggered a crime wave across the sector, replete with theft, fraudulent lending and corruption. After the Federal Reserve under chairman Paul Volcker raised U.S. interest rates, many S&Ls collapsed and 747 failed or needed bail outs.
But the government of the day and the lead regulator the U.S. Office of Thrift Supervision, where Bill Black was deputy counsel, were determined to ensure that those responsible for the disaster should be brought to book. In the end the OTS, founded as a semi-autonomous division of the U.S. Treasury Department in 1989, brought 3,000 lawsuits against identified perpetrators, many of whom were jailed. In a number of cases, the OTS was able to claw back the funds and profits which convicted parties had fraudulently obtained.
Fast forward to the 2008 financial collapse, in which the losses related to the household sector were over 70 times greater than during the S&L crisis. Fraud, for example in the area of subprime mortgage lending and securitization, was rampant and blatant. Yet how many criminal referrals did the OTS, which was supposed to be regulating the likes of Countrywide, Washington Mutual, Indymac and AIG make?
None. No, not one.
So why did the OTS and other regulators that are supposed to supervise and regulate Wall Street and the financial markets ignore the fraud that ought to have been so discernible, and let ‘white collar’ criminals to roam free, to continue looting the system? Why has the U.S. Attorney General not launched a single investigation of criminal behaviour by the top management of a major bank?
In this interview, Black explains why, and highlights the U.S. government’s complicity.
He refers to the March 2013 admission of the US Attorney General Eric Holder that he considered some banks “too big to prosecute” (an admission Holder made at the height of the furore over the Justice Department’s failure to throw the book at London-headquartered HSBC or its top management for industrial-scale money-laundering for drug cartels, organised criminals and proscribed regimes).
Black also refers to an admission made two months earlier by Lanny Breuer, the assistant Attorney General for the criminal division of the Department of Justice, that he had been “losing sleep at night over worrying about what a lawsuit might result in at a large financial institution.” If that isn’t a sign of regulatory capture, I don’t know what is!!
Black also points out that the terror attacks on New York and Washington of 9/11 caused the FBI to shift its focus away from white collar crime and onto “national security”. The numbers of FBI agents assigned to America’s financial sector fell from 2,500 in the 1990s to just one hundred by 2007, he says. Matters were, of course, not helped by U.S. financial regulators’ post-2008 failure to make any criminal referrals.
Black now seems resigned to the fact it’s almost too late for those behind the frauds that caused the crisis to be prosecuted. “We’re getting very near the effective end of the statute limitations.” He adds that “pick a number” fines and financial settlements, the costs of which are borne not by guilty bankers but by shareholders in their employers, are always counter-productive. “The process is an immense conflict of interest… it ensures the elite officers are able to defraud with impunity.”