Episode 38 – Exposed! A Serial Whistleblower’s Story with Bill Black

Macro N Cheese – Episode 38 
Exposed! A Serial Whistleblower’s Story with Bill Black 
October 19, 2019  

 

Bill Black [music/intro] (00:00:02): 

Wright was a particularly powerful type. So Wright demanded that Ed Grey fire Joe Selbey on the grounds that Selby was gay. 

Bill Black [music/intro] (00:00:12): 

“Gresham’s dynamic” is when you gain a competitive advantage by cheating, in those circumstances, market forces become incredibly perverse and the phraseology is, “bad ethics drive good ethics out of the market place.” 

Geoff Ginter [intro/music] (00:00:41): 

Now let’s see if we could avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine. 

Steve Grumbine (00:01:34): 

Yes. And this is Steve Grumbine with Macro N Cheese. Today. I have got none other than Professor Bill Black. Bill Black is an associate professor of economics and law at the University of Missouri, Kansas City. He’s also a white collar criminologist, a former financial regulator, former banker and serial whistle-blower.  

He is a co-founder of Bank Whistle-blowers United, BWU works to restore the rule of law to finance. Bill’s work is multidisciplinary. His principle focus is developing a real micro foundations of the macro economy, his best known book is “The Best Way to Rob a Bank is to Own One.” And without further ado, I’d like to bring on my guest Professor Bill Black. Welcome to the show, sir. 

Bill Black (00:02:28): 

Thank you. 

Steve Grumbine (00:02:30): 

I gotta tell you, it was really, really nice meeting you back in 2017 at the First Modern Monetary Theory Conference out there at UMKC, and I had been hoping for all this time that I’d be able to talk to you, and it was just nice to catch you at the Third MMT Conference [Laughter] and be able to link up again.  

This is to me, very exciting because you know, we talk oftentimes just about the economic side of this, and with all the attention Stephanie Kelton is getting in the Bernie Sanders campaign, and all the opportunities Modern Monetary Theory gets out there. We really haven’t addressed on this show in particular, the fraud that is so rampant in our financial institutions, and quite frankly, that has plagued our nation, not just our nation, probably the world since the dawn of time, but in particular in our nation right now, as we’ve experienced crash after crash after crisis after crisis.  

And it seems like all the economists sputter around completely, “I have no idea what’s going on.” They literally don’t have a clue. Can you tell me a little bit about what fraud even is in the financial sector? 

Bill Black (00:03:48): 

Sure. What it is in particular in the financial sector, that is so weird and therefore blows the mind of economists, is the fact that, the way the fraud schemes work best, is to deliberately make bad loans. And economists really can’t get their minds around that. Economists assume that people maximize their self- interest, and they assume that firms maximize profits.  

And to them that’s obvious and parallel, but actually those two assumptions are contradictory. Because, if people maximize their self-interest, why in God’s name would a CEO maximize the firm’s profits – the real profits? That’s really hard to do. You have to take all kinds of risks. You’d have to be incredibly competent, much more competent than your rivals.  

And even then life is uncertain. And you would often fail to meet your goals and such. And so George Akerlof and Paul Romer got it right. They adopted our phrase way back in 1993 and said, “Why would you think the CEOs are gambling when a fraud is a sure thing?” And they behave in a way that’s consistent with fraud and they behave in a way that is inconsistent with them simply taking risks.  

So, why don’t you actually believe that they’re frauds? And of course that was our point. As financial regulators, we observed that the way the savings and loans back in the 1980s and 1990s were behaving, made absolutely no sense under traditional economic models, but it made a lot of sense if they were in fact engaged in what we came to call control fraud.  

And then eventually we added control predation, because right near the end of the crisis, in addition to fraud, which by the way is just a conventional legal definition of it, where you take something of value through deceit, there was predation and predation started right near the windup phase of the savings and loan debacle.  

And like all good financial scams in America, it began in Orange County, California. And this particular one targeted, I know this’ll be a shock in America, Blacks and Latinos in particular African-American widows. You know, so the combination of the people who are much older and the people that they thought were less likely to be financially sophisticated.  

And there was one such place in particular, it was called Long Beach Savings, it was the only one that we hadn’t been able to put into receivership yet. All of its brethren that did this fraud and predation, we had gotten rid of and often prosecuted. And so they saw the writing on the door, and in 1994, they voluntarily gave up deposit insurance, gave up their federal charter and converted into a state regulated, which is to say in this context, almost completely unregulated mortgage lender.  

Now they did that for only one purpose, to escape our jurisdiction and avoid being sent to prison. And that savings and loan changed its name when it became a mortgage bank to AmeriQuest, and it became the biggest and the baddest, the Johnny Appleseed of fraud and predation in the United States of America.  

And was allowed to grow for 13 years, such that by 2005, it pumped out $75 billion of fraudulent and predatory loans all by itself, largely liars loans. And it’s important to know that research has demonstrated what we expected, that it was overwhelmingly the CEOs of the lenders who put the lies in liars loans.  

And all the other frauds and predators emulated. And that’s again, not something that we made up. That’s something that the state attorney generals, who were the only ones who tried to crack down on this, said was what was going on. Now, again, this was completely contrary to neoclassical economic theory because neoclassical economic theory said deposit insurance is the problem.  

Deposit Insurance removes the incentive of the primary creditors of banks. And of course were called depositors, but that’s what we are creditors, but we’re not going to undergo expensive private market discipline to determine whether a bank is safe or not because we’re protected by deposit insurance.  

And therefore the economists all said, this other sector, that AmeriQuest was in, with no deposit insurance was perfect. You know, years later they would name it the shadow financial sector and blame it for the crisis. But back in the day they said this is the greatest thing ever because there’s no deposit insurance, because the entities lending are the big five investment banks, and the largest commercial banks in the world.  

And they will have money at risk. They will be the perfect source of private market discipline, and they predicted wonderful stuff for this sector. It would grow and have incredibly low losses, and all would be great. 

Steve Grumbine (00:10:33): 

So tell me, what exactly, you’re known for being one of the guys that really, really put the heat on what is known as the Keating Five. Talk to us about who the Keating Five were made up of, and what was their game? What were they actually doing? 

Bill Black (00:10:50): 

Sure. So what you have to understand is that the savings and loan debacle is a tragedy in three acts. The first one was Paul Volcker dramatically increasing interest rates. Savings and loans lent very long term, fixed rate, and they borrowed very short term. And so they were exposed to enormous interest rate risk.  

Everybody knew that was true. Volcker knew that raising interest rates dramatically in 79 to 82 would render the entire savings and loan industry insolvent on a market value basis. And it did. So that was the first phase. The second phase economists got completely wrong. They said, “Oh, this is just honest gamblers.”  

And we said well, actually we, we being the litigation group at the federal agency that I ran, we had to look at every failure. So we decided we would autopsy every failure and look for common characteristics, and the characteristics we found weren’t consistent, in fact, they were directly contrary to the gambling theory.  

It was fraud. And the head of the agency, Ed Gray, who was a Reagan appointee, appointed because he didn’t believe in regulation. Where the industry literally went to him and said, “We’re going to get you nominated by president Reagan because we think you’ll be there for us, right?” He did a road to Damascus conversion, and said, “Yeah, this is fraud.  

We have to crack down on it.” Well, the frauds, as you would expect, had determined our phrase during the crisis was the highest return on assets for a savings and loan during the debacle was always a political contribution. And so they gave very heavily, the Democrats were in charge. So they gave, you know, largely to the Democrats, but you know, they supported the president, too.  

And so Charles Keating was one of the top 100 donors to President Reagan. But he could care less about politics per se. So he also recruited five US Senators to try to protect him from our crackdown on the frauds. And four of those five senators were Democrats. Now, obviously he didn’t give the political contributions because he believed politics of any of these people.  

It was completely transactional, he needed to get us taken off the case. So Ed Gray had left by then, because President Reagan refused to reappoint him, because he was so successfully cracking down on the frauds. And instead, President Reagan appointed Danny Wall, who was called $99 Danny, by the industry…  

[Laughter] …and that’s because as a federal employee, he can’t take a gift over a hundred dollars, but if the gift’s under a hundred dollars, you can take it and you can keep it personally. So… 

Steve Grumbine (00:14:16): 

Not a bad deal. 

Bill Black (00:14:18): 

Not a bad deal. So it gives you an idea of Danny Wall, right? What his priorities and such, and he represented the savings and loan trade associations, top political fixer and political scientists rated this trade association, the third most powerful in the United States, and the chief fixer guy was – his nickname was Snake… 

Steve Grumbine (00:14:45): 

You’re kidding. 

Bill Black (00:14:45): 

Snake Freeman. So that was number one on his speed dial, was the political fixer. Needless to say, when we recommended that Lincoln Savings be put into conservatorship and taken away from Charles Keating’s leadership, they did a complete counter attack. By the way, they also had the juice to get a mole appointed by President Reagan – one of the three presidential appointees to the agency – Lee Henkel, was a tax lawyer for Lincoln Saving.  

He was a borrower from Lincoln Saving. And he was in a joint venture with Lincoln Saving. Because you know, conflicts should come in trios, and Lincoln Savings secretly paid for him to be flown to Washington and do all the vetting and such. And the short version of this incredibly wonderful saga, is that Lincoln Savings also got Lee Henkel, an ethics attorney, who, because this is really convenient, was also an attorney to Lincoln Savings. 

Steve Grumbine (00:16:02): 

Well, they had this all plotted out. It’s just like the hair club for men. I’m not just the customer. I’m also the president. 

Bill Black (00:16:09): 

Yeah, it’s actually even better. But again, in the short version, Lee Henkel, this is his claim. Remember he’s one of the three presidential appointees running our agency, right, as a mole. And he says, “I decided to propose an amendment to the direct investment rule,” which Keating had violated to the tune of over $600 million, the largest violation of a rule in our history, the kind of violation that is a hundred percent of the time fatal, to the institution, right?  

Henkel says, “I decided to make an amendment changing that rule. And I decided to take it over to my ethics attorney so it could be typed, cause you know, we don’t provide secretarial support to Presidential appointees.” 

Steve Grumbine (00:17:06): 

[Laughter] 

Bill Black (00:17:06): 

And then it just so happened while it was over at the ethics attorney, you recall, for typing, that Lincoln Savings’ lawyers called her, the ethics attorney, and said, “Hey, send us this draft.” Now being an ethics attorney, she refused to do that. She suggested they use a cutout… [Laughter] So they did. [Laughter] And the cutout then gave it to the lawyers from Lincoln Savings, who, I know this will shock you, amended the amendment. 

Steve Grumbine (00:17:46): 

No. [Disdain] 

Bill Black (00:17:47): 

And Lee Henkel didn’t say, “Hey, I just sent this over for typing. How the hell did you change my amendment?” Oh, he proposed it that night. 

Steve Grumbine (00:17:59): 

Oh my goodness. 

Bill Black (00:18:00): 

And of course it will further shock you that the amendment, just happened to be crafted in such a way that it immunized Lincoln Savings and its officers from this massive violation of the rule. 

Steve Grumbine (00:18:15): 

Wow. Wow. 

Bill Black (00:18:17): 

So, in my own quiet way, as soon as they proposed this thing, even though it, of course, carefully never mentioned Lincoln Savings. That’s my god, I have to do this, almost plain sight. Right. And I go up after the meeting to the two other presidential appointees and say, “Do you understand what this guy has just done?”  

And so, they sent it to the head of the agency, does a referral to a Senate banking committee, to the FBI, and to the government ethics office, which in that era never did anything, but it developed a spine, God forbid, and made a referral to the FBI. And they did an investigation and Henkel resigned in disgrace, and they agreed to give up the prosecution.  

Oh. And have I told you the last element? So I told you that Henkel was in both the loan and the direct investment, and our rule was on direct investments. So Lee Henkel had given a personal guarantee of this investment, which he was also a borrower on. And this investment had suffered huge losses, which is, of course, why we passed the rule to prevent these kind of investments.  

The losses were so large that Lee Henkel was going to be, bankrupt. But he was, he had an ethics attorney. So the ethics attorney put this in a blind trust, this crappy investment that was going to bankrupt him, and I know it will shock you, but someone came along after he had tried to deliver the goods, in the way I’ve just described, and purchased his interest in the direct investment.  

Right? So this interest in the direct investment, of course, was really a liability, but this guy, this purchaser, paid so much that Lee Henkel’s losses were eliminated and he was left with a substantial profit measuring in the millions of dollars. I’m going to give you a thousand guesses. I bet you can’t guess who the purchaser was. 

Steve Grumbine (00:20:41): 

Ahhh, John McCain. 

Bill Black (00:20:44): 

So yes, it was Lincoln Savings. So this is the corruption again on Trumpian type levels of the gang that can’t shoot straight. You’re going, seriously guys, you are this blatant? And the further short version of this is that Keating actually tried to get two presidential members appointed. And President Reagan tried to do that, which would have given Charles Keating majority control over the federal agency.  

Just imagine what the savings and loan debacle would have become, when the agency was run by the leading fraud. And fortunately Bob Dole had some weird political objection to this. It had nothing to do with fraud and, knocked off this other scam artist that was going to be head of the agency and deliver it to Charles Keating.  

So the nation narrowly escaped absolute catastrophe in the savings and loan debacle through that method. In any event, you were asking about the Keating Five . . . well, this fits directly in because we actually have a memo from one of the Keating Five saying, “Hey, Lee Henkel just tried to do what Keating wants us to do.”  

And so, they decided to do it. They held meetings with Ed Gray. First, we were all five of the senators would supposed to appear, but one of them sort of chickened out at the last moment. And then they put pressure on him. So April 9th, 1987, five US senators met with us. So I was, you know, the detailed, to Washington, but I was the general counsel of the Federal Home Loan Bank of San Francisco, which was the entity that was doing the investigation, the examination and recommending, as I said, conservatorship for Lincoln Savings.  

And once more, as they had with Ed Gray the week before the senators urged us to take zero enforcement action against the largest enforcement violation in our history, one that was always fatal. And that didn’t work. We refused. And Ed Gray refused . . . 

Steve Grumbine (00:23:16): 

What was the rationale, for asking you to take no action. I mean, obviously we know why, but what was the, at least the veneer, what was the rationale for not taking action in this case? 

Bill Black (00:23:27): 

Okay. You asked. It was multiple. So the first thing going on, of course, is that Keating had given very large donations to all five of the senators. The second, and really fun thing, is, on top of that, he recruited the five senators; and the way he recruited them was to hire an unusual lobbyist to go personally to the Senate and walk the halls, recruiting the folks who would become the Keating Five. And that guy’s name was Alan Greenspan. 

Steve Grumbine (00:24:06): 

Oh my goodness. 

Bill Black (00:24:08): 

And Alan Greenspan gave a letter of support to Keating that said his institution posed no foreseeable risk of loss to the insurance fund. 

Steve Grumbine (00:24:22): 

Wow. 

Bill Black (00:24:22): 

It eventually of course would be $3.4 billion, the largest, most expensive failure in US banking history until the great financial crisis. So that was part of it. The second part is that Keating recruited two, of what were then the big eight audit firms, to write the most unbelievable letters for auditors.  

So auditors, particularly in that era were, you know, white shirts, stuffy, careful types, even if they were sleazy. These letters were the most incredible things – we have never had to deal with regulators who were so vicious, rapacious, personally biased against Charles Keating. It was just deplorable, etc. etc. So, how did that occur? So one of them, Arthur Anderson. 

Steve Grumbine (00:25:21): 

Wow. 

Bill Black (00:25:21): 

Yes. If they had acted on our criminal referral out of the matter I’m about to describe, the whole Enron WorldCom thing might never have happened, but justice department blinked. And I will say they did over a thousand felony prosecutions, overwhelmingly the elite fraudsters, but the then big eight audit firms was a bridge too far for the justice department this year.  

Anyway, Arthur Anderson again, eventually with receivership we get the underlying documentation and we can waive attorney client privilege because we become the client. So we in our investigations have unusually great detail. And this was one of the things by the way, that was wrong with the great financial crisis, because they refused to put any of the banks into receivership, large banks into receivership.  

They were never able to waive the privileges and actually do a full investigation. So, back to Arthur Anderson, we know from this investigation we were able to do, because, Lincoln was eventually put in receivership, that Arthur Anderson did notify Lincoln Savings – “Hey, we’re going to withdraw as an auditor,” and that’s a big deal and really negative, of course, when one of the top tier audit firms says, we don’t want to deal with you anymore.  

Right? And so Keating, whenever he was dealt lemons, he tried to make, not lemonade, but Dom Perignon. And this is how he did it in this case. And we, again, we had the back and forth memos on this. Arthur Anderson submitted a draft of the letter you have to make public when you withdraw as an auditor of a publicly traded corporation, like Lincoln’s parent.  

And it’s, you know, gave the usual things we’re worried about, you’re doing the following things and they’ve often led to failure, and to lawsuits, and we want nothing to do with it, right? That’s the first draft from Arthur Anderson. Keating’s folks write back, the lawyers and say, “You publish that, we will sue your asses off.”  

And then it goes back and forth about seven times. And eventually what emerges is, Oh, poor Mr. Keating, we can’t stand it anymore. We’re dealing with these reprehensible regulators who are personally biased to get you, yada yada yada type of thing. So, Arthur Anderson pure and simple, gave into extortion and absolutely lied to the investors about what was going on.  

Right? And they did a whole bunch of other things we probably don’t have time to go through, as well, that were all part of our criminal referral. The other audit firm, that letter came from the audit partner. That’s the key person on the audit. And it’s like law, you know, the way you really get promoted through the ranks and get power and prestige and money in a top tier audit firm is to bring in a giant client, a whale.  

And so this guy brought in Lincoln Savings, which was a hell of a whale. And the frauds spend a lot more [Laughter]. They’re quite willing to pay the auditors as consultants and such, because what they want is the imprimatur – the good housekeeping seal from this top tier audit firm, and they’re happy to buy it. So this particular audit partner, while he was completing the audit, got an offer from Lincoln Savings to triple his salary. 

Steve Grumbine (00:29:06): 

Wow. 

Bill Black (00:29:07): 

And he didn’t think that was a conflict of interest, so went ahead and gave them a clean opinion. Whereupon, a few months later, they hired him and quadrupled his salary. 

Steve Grumbine (00:29:19): 

Wow. 

Bill Black (00:29:21): 

So again, he wrote this utterly flame gram type thing, that you, you know, you see on blogosphere today, but you never saw from a then big eight audit firm back in the era. “We were awful, terrible. He had never seen anything like it. He can’t believe that anyone had to deal with basically the punish invasion.  

We were Genghis Kahn or something, terrorizing the field.” So the senators said, “Well, look, you know, you’ve got these two of the big eight firms telling us that you folks are involved in an incredible scandal.” And then they say, “Why is this happening?” And we had never seen these letters and the senators respond. And this is recorded in my notes, which led to the whistle-blowing in the Senate ethics investigation of the Keating Five.  

Senators say, “Hey, these have been all over the Hill.” So Keating had been spreading these lies, you know, Greenspan’s letters and the top audit firms letters that we were, again, these out of control, crazy types, to not just the five Senators, but the entire Reagan administration and both the Democrats and the Republicans in the House and the Senate.  

So anyway, the senators ask us, and the head of our top professional regulator, as a guy everyone should know, Mike Patriarca, real hero of all of this. And remember, this is five US Senators, one 20th of the Senate. And we just lost in the House on an absolutely critical bill. And our absolute only hope is on the Senate.  

And it isn’t just five US senators, one of them was about to become the chairman of Senate banking committee. That’s Don Regal. And the other one was the ranking minority at that point on Senate banking, Alan Cranston. So these are folks we couldn’t say no to, but had to say no to, if you get my drift in all of this.  

And again, they asked Mike Patriarca why these two audit firms would be willing to say this. And Mike Patriarca says because they have a client. And then Senator DeConcini, who was a former prosecutor, and had been acting like an aggressive prosecutor in this entire meeting and running the meeting.  

And speaking on behalf of the Keating Five, said, “Are you saying two of the big eight audit firms would prostitute themselves for a client?” Okay. Now phrased that way, what’s the only possible answer? 

Steve Grumbine (00:32:23): 

I would (say) no. 

Bill Black (00:32:24): 

No, no, no. We weren’t saying that. Right? 

Steve Grumbine (00:32:28): 

Right? 

Bill Black (00:32:28): 

Mike Patriarca’s answer was, “Yes, absolutely. It happens all the time.” 

Steve Grumbine (00:32:36): 

Great. About time, right? 

Bill Black (00:32:40): 

Yes. And again, I mean, you know, substantively, by the way, this was different, but absolutely easy. Ed Gray knew that there were two regions of the country that were completely out of control and causing massive losses because of the endemic fraud – one was centered in Texas and the other was centered in California.  

And so Ed Gray asked everybody in the regulatory ranks, in Washington, DC, who are the two best financial supervisors in America. And the answers were, Mike Patriarca and Joe Selby. Joe Selby was actually the more senior of the folks. So Gray personally recruited Selby and Patriarca to the agency. And he put Selby in the worst disaster, Texas and Mike Patriarca in the second largest.  

I’ve told you about Patriarca and that incredible answer. What you need to know again, in this era, Selby does exactly the right thing and is destroyed – his career. Selby is the most prestigious financial regulator in America. He twice rose through the ranks to become the acting comptroller of the currency of the United States, right.  

He would never be appointed to that position, of course, because he’s not a political hack. It’s just, you know, substantively the right guy. He starts cracking down in Texas. The frauds run to speaker Wright. First, he’s majority leader, and then speaker of the house, Jim Wright, who’s answer to the trick question, what is the second most powerful elected official in America?  

Ain’t the vice president. It’s the speaker of the house if they use their power; and Wright was a particularly powerful type. So, Wright demanded that Ed Gray fire Joe Selby on the grounds that Selby was gay. 

Steve Grumbine (00:34:49): 

Oh my goodness. 

Bill Black (00:34:49): 

Gray refused. But $99 Danny didn’t simply force out Selby. Danny Wall took public credit for forcing him out. Again, this is the most distinguished supervisor in America who has just prevented literally hundreds of billions of dollars of losses, probably trillions. And the head of the agency, not only forces him out, you see such a raving blankety blank, that he thinks he can take credit for this.  

For of course, everyone is going, you are pond scum. You’re just absolute pond scum. 

Steve Grumbine (00:35:38): 

Wow. Oh my goodness. 

Bill Black (00:35:40): 

So that was the Keating Five. And they were also recruited by letters from the top law and economics scholar on corporate law in America, Daniel Fischel, who wrote that Lincoln Savings was the best savings and loan in America. There were roughly 3000 at the time. Lincoln Savings, of course, was the worst savings and loan in America.  

So making a 3000 position error in a 3000 position industry, you can’t do worse than that. Right? And two things about Fischel. And as I said, he’s the leading author of the neoclassical law and economics text on corporations. One, he published that book, that treatise, after Lincoln Savings had collapsed, after he knew, he Fischel, had tried in the real world, his neoclassical nostrums and they weren’t simply wrong, they were catastrophicly wrong.  

And of course the treatise never mentions that small little fact. And second, because of this error, his reputation was destroyed and we never heard of him again. Oh no, sorry. We’ve made him Dean of the U Chicago Law School. 

Steve Grumbine (00:37:04): 

Oh my god 

Bill Black (00:37:04): 

And he has buildings named after him because he made so much money, selling his soul to these kinds of scum, that that’s where U Chicago law students get taught at the Fischel building. The third guy was also a neoclassical economist, and he studied 34 institutions that, like Lincoln Savings, did large amounts of direct investments.  

And he wrote, “You’re basically morons at the federal agency. These 34 institutions that do lots of direct investments, are unusually profitable and have unusually low losses, instead of banning it, they should be the model for the industry.” Well, 18 months later all 34 were dead. 

Steve Grumbine (00:37:58): 

Oh! 

Bill Black (00:37:58): 

And so his reputation was destroyed and he was never heard of again, Oh no, he actually got an endowed chair at Emory for that screw up. So this is a world where there’s a really nice prof and her phrase is “failing up.” 

Steve Grumbine (00:38:19): 

No kidding? 

Bill Black (00:38:20): 

In neoclassical economics, you fail up. And another person, this is also in the new book on whistle-blowers has a earthier phrase. It’s “fuck up, cover up, move up.” 

Steve Grumbine (00:38:34): 

Bam. There it is. Well, I got to ask you, so there’s a memo, apparently that circulated where Keating actually called saying, get Black, kill him dead. Metaphorically, of course. 

Bill Black (00:38:47): 

Well, they didn’t say that metaphorically, thats a, you’re quoting an interviewer about the last part, but yes. It didn’t circulate very much, of course, he said it to his chief political fixer. And yes, it says, “Highest priority, get Black, kill’em dead.” 

Steve Grumbine (00:39:07): 

Wow. What was that like? I mean, when did you find out about this? 

Bill Black (00:39:11): 

I didn’t discover that for years later, again, as I told you eventually with receiverships, we get the documents and Keating withheld this as attorney, client privilege. [Laughter] And what your listeners need to know, is that Keating was a lawyer, and he put this in writing and of course being Keating, he didn’t just put it in writing, he put it in all caps. 

Steve Grumbine (00:39:38): 

Oh my God. Oh my goodness. 

Intermission (00:39:54): 

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Steve Grumbine (00:40:43): 

So let’s flash forward just a little bit. So, you know, obviously we had the Bill Clinton era, where he and the Republicans were able to get rid of the last vestiges of Glass-Steagall. We go and we have the early recession in 2000. Carries on and then all of a sudden, we now have Lehman Brothers, and we now have modern era that many people are still smarting from.  

Can you talk a little bit about what happened in the global financial crisis? What was that all about? 

Bill Black (00:41:17): 

Yeah, so first the great financial crisis, it wasn’t truly global, so most of us call it the Great Financial Crisis. What is actually the third act of the savings and loan debacle, it’s AmeriQuest, allowed to grow for 13 years and create of what economists call a Gresham’s dynamic, and criminologists call a Gresham’s dynamic is when you gain a competitive advantage by cheating.  

In those circumstances, market forces become incredibly perverse and the phraseology is “bad ethics drive good ethics out of the marketplace.” So to very briefly go back to the Clinton folks. Yes. Clinton came in, of course, with the idea of reinventing government, and making it much more effective, allegedly. Well, there was one great model of that. The savings and loan debacle, right, where the regulators had stopped this epidemic of fraud of 300 institutions that we inherited, each growing more than 50% in a year.  

Each of them a fraud. Each of them with its immense political power. And it isn’t just that we get felony convictions on over a thousand of those most elite folks, we actually stop that fraud epidemic before it can become a catastrophe. We actually deliberately burst a real estate bubble in commercial real estate in Dallas/Fort Worth, as a deliberate policy to ensure that there wouldn’t be a catastrophe.  

So we’re the poster children, right, of what you should be reinventing government. There’s absolutely no mention of that in any reinventing government literature. It was all absolutely to destroy effective regulation. So starting under Clinton continuing under Bush, but most of this under Clinton, the FDIC staff was cut by more than three quarters.  

The office of thrift supervision staff was cut by more than half. I left the agency when they came, the Washington folks, and told us, instructed us, that we were to refer to the industry as, and I quote “our client,” “our customer.” I got up and said, “Surely you mean the people, the United States of America?” And they said, “No, we considered that, but we rejected it.” 

Steve Grumbine (00:44:01): 

Oh my goodness. 

Bill Black (00:44:03): 

So if you want a single phrase, treat the industry as your customer, that will destroy regulation, that would be the most succinct statement of how you would do this. And remember that the first warning of the great financial crisis comes from our examiners in 1990, eighteen years before where they say, “Hey, these institutions are doing things.”  

They weren’t called liars loans, the that era, but that’s what they were describing – AmeriQuest or which again was Long Beach Savings in that era. They’re deliberately not verifying borrowers income. They’re deliberately predating on Blacks and Latinos. This is the entire model that became the great financial crisis, right?  

And we crack down. So we know precisely these fraud and predation mechanisms since literally 1990. We acted on them, and then we couldn’t act anymore because when they gave up deposit insurance, we ceased to have any jurisdiction over them. Although the Fed was given jurisdiction in exactly that year of 1994, and could have prevented the entire crisis, but, of course, Alan Greenspan was head of the Fed and refused to use that statutory authority.  

But then the great warning that people don’t know about actually begins in 1998. So appraisal fraud is one of the great markers of the kinds of fraud and predation that produce the savings and loan debacle, the second phase, and the third phase which becomes the great financial crisis. And it makes the point of Akerlof and Romer’s title “Looting the Economic Underworld, a Bankruptcy for Profit”.  

So the lender is driven bankrupt and will fail unless it’s bailed out. But the owners, the CEO types, they make a fortune by deliberately making vast amounts of bad loans; and this is the famous recipe for where accounting control fraud with the four ingredients, right? So to do that recipe, you have to gut your underwriting system.  

Underwriting is the things you do before you make a loan that create a positive expected value from lending for the lender. So no honest lender would ever gut their underwriting system, and an obvious example of that is the appraisal, right? What the appraisers found during the savings and loan debacle, and then in the lead up to the great financial crisis, which again begins in 1990, right, was that the lenders were extorting the appraisers to inflate the value of the home that was being pledged as security for the loan.  

Now think of that, no honest lender would ever do that because the collateral is your great protection against loss. But it makes a lot of sense, in fact, it optimizes the counting control fraud recipe that I talked about. So this is one of the superb markers of when you definitely know it’s fraud, there’s no ifs, ands or buts about it, right?  

So the appraisers see this again. And again, what you’re trying to do as the lender, the sleazy lender, is generate a Gresham’s dynamic among the appraisers, where bad ethics will drive good ethics out of the marketplace. And so what you do is blacklist any appraiser who is honest and refuses to inflate the appraised value.  

And the appraiser’s had enough. They have rival professional associations, so they began in 1998 to come together, find a uniform way of fighting this and implement it. And by the year 2000, they had come up with that mechanism, which was an online petition that also was sent directly to the relevant federal agencies.  

And the petition said in plain English, this is what’s happened. “We’re being extorted to inflate the appraisal. This is going to end catastrophically. We need action to block.” They didn’t use the word Gresham’s dynamic, but that’s what they meant. Okay. So all the major banking regulatory agencies have chief appraisers and that means that no later than 1998, they knew about this.  

And again, by 2000, they had actually agreed on a uniform strategy, implemented it, and the petition was out. Notice that is under bill Clinton. 

Steve Grumbine (00:49:26): 

Absolutely. 

Bill Black (00:49:29): 

So that warning is before the Enron era frauds. In fact, the warning to the chief appraisers came three years before Enron goes down, which is, you know, right at the end of the year 2001. So yes, Clinton has enormous responsibilities. And this is the legacy of the so-called new Democrats, who were, of course the Wall Street wing of the Democratic Party.  

So they are every bit as bad as the Republicans on this particular issue. Again, Bush probably tried to outcompete Bill Clinton and just absolutely killing the last remnants of regulatory independence that might’ve done anything. But Bill Clinton, for example, of course, reappointed Alan Greenspan twice to the Fed. Now, Alan Greenspan is literally an Ayn Rand groupie. He was the executor on Ayn Rand’s estate. 

Steve Grumbine (00:50:43): 

Unbelievable. 

Bill Black (00:50:45): 

That’s how wacky the new Democrats were. 

Steve Grumbine (00:50:49): 

It’s just shocking. You know, you go back, there’s some stories I’m not gifted enough in this area to be able to speak, you know, confidently, but a gentleman named Sydney Wheel. And I used the term gentlemen very loosely, there, was very, very ecstatic over Bill Clinton, signing away Glass-Steagall, and I think Bill Clinton even kindly gave him the pen that he signed it away on.  

This whole thing gets swept under the rug in modern history. And it needs to really be brought out because the forces that we’re battling, as a movement, as people, it’s not a partisan issue only, there’s a lot of bad actors here. These neoliberal actors, that have put us all in great, great danger.  

This is horrible. I mean, I personally was devastated by the great financial crisis. And so as I look at this and I think to myself, how did we not see this then? You’re telling me over and over again, these big, huge beacons of light came out and said, “Hey, big problems, big, huge problems. It’s happening right here, big, huge problem.”  

And going all the way back to the Keating Five, you were showing where these frauds were occurring. You were showing, how these things came to be. It was not an unknown thing. And the robber, the chief robber, Greenspan kept getting put in positions of power, no matter who was present. It’s amazing. 

Bill Black (00:52:17): 

So, people also drew the worst lessons. So Ed Gray had this promising career. He was absolutely destroyed, smeared, you know, by all of this, so that he could never get a job in government again, where he was the hero of this. Joe Selby, I’ve told you how he was, you know, destroyed in despicable fashion.  

But, Brooksley Born, again, she was a Clinton appointee, tried to protect us from what was coming in financial derivatives, particularly credit default swaps, and the bipartisan effort of Republicans and Democrats, just did a complete tap dance in destroying her. And again, that legislation was passed under Bill Clinton.  

So yes, this community of interests around Wall Street that is directly hostile to the American people is there. But also there are these folks all along the way who fought, and Ed Gray told me, frequently, at the time, this is going to destroy my career and continued to do it. I’ll give you another example, Tim Ryan.  

So when the first President Bush became president, unlike President Obama, he was smart enough to say, I’m going to say I inherited this crisis, right? It’s not my crisis. And that was bizarre because he, after all, had been President Reagan’s vice president and chair of the financial deregulatory task force. 

Steve Grumbine (00:53:58): 

Uh, yes. 

Bill Black (00:54:00): 

Right? So he, Bush, decided that he was going to demonstrate how different he was, and bring in Tim Ryan, who was a up and comer, in the Republican ranks, a lawyer, first cousin of Meg, by the way, and such and Tim Ryan unleashed us. Enforcement actions quintupled. Civil suits went up by 300% compared to Danny Wall.  

We had this huge success and Tim Ryan, therefore, when a relatively minor matter came to him, said, “Yep, sign off, bring, you know, again, not a very significant enforcement action against this guy, but yeah, bring it.” Now that guy, of course, was Neil Bush. 

Steve Grumbine (00:54:58): 

Oh wow. 

Bill Black (00:54:59): 

And that was the end of Tim Ryan’s career in government. The Bush administration went nuts. Now Neil eventually had to find this consent decree, but that was the end for Tim. And that was the end for our crackdown as well. So we have good folks, and I would really emphasize in the great financial crisis, the enormous number of whistle-blowers and such, again, who suffered enormous retaliation.  

Indeed, I just take a second, let me introduce my co-founders of Bank Whistle-blowers United, Richard Bowen was the most senior whistle-blower at Citi Group. And Michael Winston was the most senior whistle-blower at Countrywide. And they presented cases on a platinum platter to the department of justice and to the Securities and Exchange Commission to prosecute and bring enforcement actions.  

And in both cases, they absolutely refused. Now here’s the key. These two guys are like everybody’s hero, right? They’re good people. They got it right. They weren’t trying to blow the whistle. They were just doing their job. If they had been listened to, they would have saved hundreds of millions or billions in losses.  

I’m sorry. Tens of billions in losses, and such. And what do we know from the whistleblowing? We know that they’re courageous and we know that they have integrity. So, you know, Wells Fargo, what every 18 months, tells us it’s turning over a new leaf, and it’s now going to be a company of integrity.  

Well, I wrote to them, okay, I’ll believe it when you hire Michael Winston or Richard Bowen. Because today, as we speak, 11 years, almost exactly 11 years, from the start of the great financial crisis, most acute phase, Richard Bowen and Michael Winston are unemployed and unemployable in finance. 

Steve Grumbine (00:57:11): 

Wow. 

Bill Black (00:57:11): 

Think of that, that not a single financial firm in America is willing to hire them. And what do you infer about the culture of corruption through finance even today? 

Steve Grumbine (00:57:24): 

Pervasive, completely built into the DNA of the entire specimen. 

Bill Black (00:57:29): 

Right? So even the folks that aren’t active frauds now, CEOs are going, you know, if things went really bad, maybe I’d go that way. Do I want a Richard Bowen sitting next to me when I do that? I don’t think so. 

Steve Grumbine (00:57:48): 

Wow. 

Bill Black (00:57:48): 

So I’ll believe that there’s a real change when the Richard Bowen’s and the Michael Winston’s become the people who are promoted instead of what I told you about fuck up, cover up, move up. 

Steve Grumbine (00:58:03): 

It’s funny because, you see that under Obama, that no one was prosecuted whatsoever. I mean, no one. And you know, for all the puff and bluster, literally, no one was prosecuted. What is the state of affairs today in terms of any kind of regulatory teeth. Is Dodd-Frank or is there anything out there at all protecting us from the next great financial crisis? 

Bill Black (00:58:35): 

Oh, finally. An easy question. No. 

Steve Grumbine (00:58:40): 

[Laughter] I mean, I laugh. It’s not one of those laughs that, you know, is really very funny. It’s actually incredibly sad. I mean, just living the experience of the great financial crisis as a victim, if you will, of all the financial malaise that occurred. I live in somewhat of a feral state wondering when the next shoe is going to drop, and to know that no one takes this seriously, or if they do take it seriously, they take it serious enough to cover it up.  

What would you say is the single most important thing that activists and people that are trying to bring about change in regulatory bodies in the financial system could focus on? 

Bill Black (00:59:23): 

Well, the first thing they have to get over is this idea that the government is the problem and can’t succeed. And so I tell these narratives to show folks that are actually in incredibly impossible circumstances, where our model literally was, it is not necessary to hope in order to persevere. That enormous success is possible if you put the right folks in charge.  

I don’t know if you’ve ever talked to Tom Frank, you know, “What’s the Matter With Kansas” author, he has a doctorate in history and such. He was told in the great financial crisis that I was one of the people he should talk to, to learn what was going on. And, you know, he found me knowledgeable and he asked me, because where I’m sitting right now is six feet from where, one of the, I’ll call it a commercial, was filmed for then candidate Obama, in his first presidential run, the successful one, obviously as well.  

Right? They had me featured because John McCain was one of the Keating Five. And so Tom Frank asked what positions are you in line for. And six minutes later when I could stop laughing, I explained to him that 300 at that time, 310 million American people would have to die, before they would ever give me any power again as a regulator. They’re not going to repeat that mistake. 

Steve Grumbine (01:01:10): 

The gift that keeps on taking right, integrity really, really has cost whistle-blowers tremendously. 

Bill Black (01:01:17): 

I would say, now, and our experiences are almost all bad in any objective sense, overwhelmingly, and it’s certainly true of the three of us as the co-founders of Bank Whistle-blowers United, we’d do it again. We don’t feel we really had a choice. The other choice is everything your parents told you never to do.  

You know that you would be a disgrace if you did those things. And one aside on the laughter, I’m largely Irish and the Irish decided centuries ago, it is slightly less painful to laugh than to cry. 

Steve Grumbine (01:01:58): 

Fair enough. You know, and it is interesting because as you laugh through this, and you gotta laugh, because you’re right, it is demoralizing and it is terrifying that so much corruption is going on right in front of us. And we’re largely powerless because we’ve got it in institutions that could do the protecting for us, because we have thought that somehow or another, we needed to make government more lean, eliminate regulation.  

You know. Strip away any protections we ever had. And now what do we got? We’ve got the wild, wild West and we’ve got no safety net. And it’s absolutely terrifying. 

Bill Black (01:02:38): 

Yeah, precisely that word you used is the one that we think of, it is the demoralization that saps us and they want us to be demoralized. They want us to believe that we cannot succeed, and they want us to also believe on the other side that they’re all the same, all the time. But this is the most corrupt administration in American history.  

And there’s nothing close. I mean, Harding and Grant’s relatives, you know, must be in a constant party that they’re out of the debate as to what was the most corrupt administration in America. 

Steve Grumbine (01:03:23): 

It is bad. So let me ask you, going forward. What does a proper regulatory framework look like? And I know that’s a very, very loaded long question, so… 

Bill Black (01:03:37): 

Gosh, I kind of think in banking, I can give you a fairly direct answer. 

Steve Grumbine (01:03:41): 

1.  

Bill Black (01:03:41): 

And it’s what neoclassical economists get wrong. In banking, the key is underwriting. It is the tell, in the poker sense, or in economic jargon, it’s the leading indicator. Our whole system is predicated on an incredible lagging indicator, reported capital. And of course, what you do in a fraud scheme is inflate assets and understate liabilities.  

Guess what that does to reported capital? So our whole system is predicated on capital requirements and prompt corrective action off of those; but by the time an entity reports that it’s insolvent, on average, the bank is insolvent by over 20%, in reality. So banking should concentrate overwhelmingly on leading indicators, underwriting that not only weeds out the incompetence, it weeds out the fraudsters.  

So what it shouldn’t be relying on is all these clots doing the stupid manipulation of numbers, which have already been falsified by the institution. 

Steve Grumbine (01:05:01): 

Right. Wow. 

Bill Black (01:05:02): 

Let me give you one other answer to that. 

Steve Grumbine (01:05:04): 

Sure. 

Bill Black (01:05:05): 

And the answer is, pick your leaders. Just like Ed Gray did. It’s not that hard. When people have 20 years of track record, you know the people who are competent, you know the people who have integrity, you know the people who have courage and will stand up. You know, regulation is a full contact sport and it’s rugby, not football. We got no pads. 

Steve Grumbine (01:05:36): 

Alright, great way to lead up to the final point here. And that is, as you go forward Bill, what do you think is the most important financial issue facing the United States today? 

Bill Black (01:05:52): 

It’s the domination of this neoclassical mantra about finance and almost everything important in the neoclassical canon is wrong. About money, about regulation, about banking of the subjects we’ve been dealing with, but in particular, it’s wrong in saying, (A), we don’t have to do anything, and (B) if we do anything, we’ll make it worse.  

No, we can make it vastly better. We have a track record that proves that. We know how to succeed. We have to believe, and we have to insist on leaders who will try to succeed. We must get rid of people who fuck up, cover up and move up. 

Steve Grumbine (01:06:41): 

Excellent. Alright, well with that, I want to thank you so much for spending this time with us. I hope that I can have you back on because I really want to get into the great financial crisis at a deeper level. So appreciate you taking this time with me today. And I just want to thank you from all of our listeners and from all the people that support us at Macro N Cheese and Real Progressives, you’ve just been the best. Thank you so much, sir. 

Bill Black (01:07:05): 

Thank you. And if I can leave one suggestion, read Dr. Herndon’s “Study of Liars” book. 

Steve Grumbine (01:07:14): 

You got it, man. All right, we’ll talk soon. Thank you so much. 

Bill Black (01:07:18): 

Thank you. 

End credits [music] (01:07:24): 

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