The Banksters ride again

The Banksters ride again.

During the heyday of the market run-up that led to the Great Depression, the last time tycoons hollowed out the economy, a new term was born: Banksters. The veiled reference to the mob aptly described the manner in which the barons of the day used deceit and fraud to accomplish what Capone did with a machine gun. William K. Black conjures up the reference to describe todays "banksters" fleecing the public. Black knows fraud, perhaps better than anyone. He wrote a book with the title “The Best Way to Rob a Bank is to Own One.” Black is the former director of the Institute for Fraud Prevention, and has caught some pretty big fish, including the “Keating five” which touched off the Savings and Loan scandal.

According to Black, the essence of fraud is creating a foundation of trust, then betraying that trust to get something of value. In an interview with Bill Moyers, Black makes it clear that most corporate failures result from calculated dishonesty by those the highest levels. The current meltdown is no different. CEO’s deliberately jacked up bad deals to create record profits and huge bonuses. In fact the bonus system is the mechanism by which companies’ internal checks and balances are defeated. Money buys out the morality.

Black goes on to talk about how the entire system, stripped of regulation, drifted to the dark side. There was no one looking in from outside, and from inside, well, it all just felt so good. Corporate culture being what it is, who is going to kill the golden goose? Case in point - one of the truly slimy aspects of the mortgage crisis: so called “liar” loans. No income verification, no job verification and no asset verification. The more you lie, the better deal you get. One bank, Indy Mac, specialized in these loans, and in 2006 resold 80 billion dollars worth of them into the securities markets. This company eventually recorded loses greater than the entire S&L debacle.

As Ronald Reagan said, trust, but verify. It was the lack of verification that allowed the fraudulent loan securities to be cleansed and passed along to innocent pension plans and the 401K’s of widows. That part of the laundering was done by the rating agencies, who have yet to adequately answer for consistently giving these toxic securities triple A ratings, when these investments went on to lose 60-80% of their value. Of course, by the time that scenario played out, the fraudsters have cashed their bonuses and are driving the getaway car over the proverbial state line. It was a classic Ponzi scheme in all respects but one: everyone knows who did it; no one is being prosecuted. In fact William K Black calls Bernie Madoff a “piker, he doesn’t even get into the front ranks of Ponzi schemes.”

The FBI warned the Bush administration way back in 2004 that there was an epidemic of mortgage fraud going on that would result in a debacle at least as large as the S&L. At the time Bush had re-allocated most of the white collar crime unit to counter-terrorism, and they were never replaced. Now, with a fraud a hundred times worse that the S&L, there are one fifth the number of available white collar crime specialists that worked the S&L.

After the S&L, congress passed a law called the Prompt Corrective Action Law. This law requires the government to put failed banks into receivership immediately, not to keep them alive on corporate welfare. What was called “Receivership” then, is now being called “nationalization” by the hotheads hoping to hang the socialist mantle around Obama’s neck. That mantle rightfully is shared by both parties, who both have ignored and are still ignoring what this law mandates them to do. That would be to make these banks rightfully eat their own losses, not hang them on the broke, beleaguered, and unemployed taxpayers for the purposes of recapitalizing millionaires.

Politicians of both parties have acted in consort with the Treasury and Fed to hide the true extent of the losses and to prop up the existing power structures. All done, I’m sure they would claim, to protect the system from panic and total collapse. But the net result is to protect criminals with taxpayer money.

There is another reason no one being prosecuted, or even being asked to account for their mistakes. It is because this Ponzi scheme is systemic. It’s not where do you start prosecuting, it’s where do you stop? When half of Wall Street is behind bars? That’s the dilemma. A proper accounting of what went wrong would require stomping on the patient (the economy) right when we are desperately trying to revive him. We won’t swallow that medicine either, because we all got mighty used to the prosperity and we want it back as soon as possible. In that way, we too, are playing our part in the world’s largest Ponzi scheme.

Doug Friesen
5/04/09