William K. Black, author of The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry, is a lawyer, academic, and a former bank regulator. He was formerly the litigation director of the Federal Home Loan Bank Board, deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC), senior vice president and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel of the Office of Thrift Supervision. Black was also deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Black was a central figure in exposing Congressional corruption during the Savings and Loan Crisis. He took the notes during the Keating Five meeting that were later published in the press, and brought the event to national attention and a congressional investigation. Looks as if he had a hit put out on him for his pains!
According to Bill Moyers, “The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate’s so-called “Keating Five” were named — he sent a memo that read, in part, ‘get Black — kill him dead.’ Metaphorically, of course. Of course.”
Black developed the concept of “control fraud” — frauds in which the CEO or head of state uses the entity as a “weapon,” and which cause greater financial losses than all other forms of property crime combined.
After my recent Bloomberg interview, Black wrote a series of four commentaries on what had occurred at Citigroup that are some of the best I have read. I’m excerpting a couple of his comments, and providing links to the articles. It’s worth pouring yourself a double of your favorite adult beverage and reading on. I’ll also be featuring several more of his comments from all the articles in other posts.
Black’s first column, “The Lessons Richard Bowen’s FCIC Testimony Should Have Taught the Nation,” focuses on a complete summarization of the financial debacle. He says, “One cannot understand, effectively investigate, or prosecute the senior financial officers who led these fraud epidemics without a detailed technical understanding of the fraud schemes and the financial markets. This first column is intended as a resource for those willing and able to make the investment towards achieving that understanding.”
His second column, “The DOJ and the SEC Spurn their Ace in the Hole: Richard Bowen,” explains why what occurred and my role in it when I was at Citi. According to Black, this “makes the FBI, the SEC, and the Department of Justice’s (DOJ) failure to draw on Bowen’s expertise all the more harmful and indefensible.”
His third column, “How FCIC Spurned Its One Chance at Greatness,” discusses how my testimony before the Financial Crisis Inquiry Commission (FCIC) was stripped of some of the most damning evidence.
The fourth, “Meet Citi’s Ethical Underwriters That Tried to Save It and America: Sherry Hunt,” focuses on my and former colleague Sherry Hunt’s in depth description of Citi’s exploits and the outcomes.
Black points out that Citi sold a massive amount of fraudulently originated mortgages, primarily to Fannie and Freddie. “Even Attorney General Eric Holder now repeatedly labels these mortgages “toxic.” Had Citi’s leadership been honest, Bowen’s warnings could have substantially reduced the three fraud epidemics driving the financial crisis and Bowen would be one of Citi’s most senior leaders. Citi’s senior managers did not ignore Bowen’s warnings – they actively made the frauds he documented worse and they destroyed Bowen’s distinguished career in banking. Citi, Fannie and Freddie, and Treasury lost billions of dollars and Citi’s senior officers were made wealthy by the “sure thing” of the accounting control fraud “recipe.”
The fraud recipe for a lender, or loan purchaser, allows us to explain what the senior bank officers who controlled Citi and its equally fraudulent peers’ strategy was. The “recipe” has four ingredients.
- Grow extremely rapidly by
- Making (purchasing) terrible quality loans with a premium nominal yield, while
- Employing extreme leverage, and
- Providing only grossly inadequate allowances for loan and lease losses (ALLL) and loan repurchase obligations
The first two “ingredients” in the fraud recipe require the lenders and loan purchasers to gut their underwriting standards and their “controls” that are supposed to ensure compliance with those standards. In a fraud strategy that depended on the financial version of “don’t ask; don’t tell” about the toxic nature of the mortgages being originated and sold Bowen was Citi’s top management’s worst nightmare. He asked, he told, he documented, he warned Citi’s senior managers (accurately, urgently, and bluntly), he demanded integrity, and he put Citi’s senior managers on written notice of the frauds they were leading and the consequences of those frauds. Citi’s leaders had only two choices, stop their massive fraudulent sales of toxic mortgages to Fannie and Freddie or crush Bowen. The fraud recipe’s tie to their compensation made that choice an easy call.
Understanding the fraud recipe also makes clear how comically bad the alternative explanations for the banksters’ conduct are. Honest senior bankers at Citi would have seen immediately that Bowen was doing Citi (and the financial system) a great benefit at enormous personal risk. It is the very real bonuses that arise from the faux profits that are the “sure thing” from the fraud recipe that are so seductive and perverse.
If a bank does not make liar’s loans it is more profitable and it stays in business. If your competitor makes bad loans, suffers critical losses, and fails you not only “stay in business” – you dominate the business.
The DOJ, FBI, and the SEC almost certainly do not understand the significance of Bowen’s testimony (and many other matters). They do not understand that Bowen gave them not only Citi’s top managers on a platinum plate for a criminal prosecution, but also the roadmap for how to investigate and prosecute the CEOs of Citi’s controlling officers’ fraudulent peers and the (typically) smaller fraudsters that dominated the shadow financial mortgage sector.
Instead of the hypothetical scenario of Citi serving as a superb loan underwriter rooting out endemically fraudulent loan originations by bad banks and providing Fannie and Freddie, Citi’s senior managers settled on the opposite strategy. They sought out fraudulent lenders in order to purchase large amounts of fraudulent liar’s loans that Citi then resold to Fannie and Freddie through fraudulent reps and warranties. Bowen had to be butchered by Citi’s top officers because he posed a fatal threat to Citi’s fraud strategy. Citi’s senior officers crafted a fraud strategy that traded on Citi’s former reputation – as exemplified by Bowen – for strong underwriting ability of home loans.”
I keep expounding on the significance of what happened during the financial debacle for a very explicit reason. This time around, some of our best known and supposedly most respected banks committed fraud against the American consumer and got away scott free – except for a knuckle rapping and small fines. We, the American public bailed them out and the same situation is starting once again- a perfect storm that – this time around – the economy may not survive. During the S&L crisis, on William Black’s watch, over 800 of the perpetrators went to jail!
Black’s columns are detailed cliff hangers. This really happened. The scenarios he describes make for an HBO movie. Unfortunately, not a fictional one.