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Episode 220 – Left of Boom with Bill Black
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It’s been two years since Bill Black was last on with Steve. We’ve invited several guests to talk about the collapse of Silicon Valley Bank, so it only makes sense to ask our whistleblower friend to weigh in.
Bill and Steve discuss what it means to be too big to fail. When an institution is too big to fail, the creditors get bailed out, but then, Bill says, “really really bad things have happened.”
“…they hold the economy hostage. And nowadays they hold the global economy hostage. And if you hold the global economy hostage, you hold global politics hostage. So that needs to be fixed. And the way to fix that is not to allow such institutions, right? Duh,”
The episode looks at the capture of government by the financial industry. Bill talks about his experience during the savings and loan crisis and the transition from somewhat effective regulatory apparatus to a fully cock-blocked system. (Our words, not his.)
Bill Black is a professor of Economics and Law at the University of Missouri – Kansas City (UMKC) and the Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota Law School. He is a serial whistleblower and authored The Best Way to Rob a Bank is to Own One.
Macro N Cheese – Episode 220
Left of Boom with Bill Black
April 15, 2023
[00:00:00] Bill Black [Intro/music]: You’ve gotta understand risk to regulate effectively, and you’ve got to be disciplined about focusing on the big risk and focusing on not whether I can make the perfect case for prosecution, but how quickly can I intervene to prevent the disaster, or at least greatly minimize it.
The idea of getting left of boom is most of us read left to right, and when we do that, the thing at the end of the chart is the boom. And so you want to intervene before the boom.
[00:01:35] Geoff Ginter [Intro/music]: Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
[00:01:43] Steve Grumbine: All right. This is Steve with Macro N Cheese. We’ve talked about the Silicon Valley Bank several different times in several different ways. We recently talked with Brian Romanchuk to discuss his view of basic bankruptcies and bank failures 101. Today I’m bringing on Bill Black. Bill’s been around doing good work since the savings and loan crisis.
He’s been front and center with the great financial crisis, and we’re gonna talk about what a real regulatory body might look like that was effective, that had the primary purpose of stopping banks from doing things that they shouldn’t do, and maybe looking at what banks should do. It’s been a while since I talked to him so if you haven’t checked it out, we have an entire series called The New Untouchables.
He’s been part of The Con. He has done so many things with Paul Jay over at The Real News and The Analysis, and every time he speaks, it’s worth listening. Bill, thank you so much for joining me today, sir.
[00:02:48] Bill Black: Thank you. It’s good to be back!
[00:02:51] Grumbine: Absolutely. I keep hearing people talking about bonds and the different yields. Everybody’s focused on the technocratic details of what occurred. I want our conversation today to focus on what. A meaningful regulatory body would look like, and that includes staffing, funding, primary purpose. I want to know what it would look like to reign this Leviathan in to actually have it under the oversight of people that understand not only what the bankers are doing, but the sneaky things they do and how we can prosecute white collar crime. Why don’t you set the stage? Tell me how it went wrong. Why is this banking system so unbelievably in disarray.
[00:03:40] Black: So there’s two basic reasons, and you need different approaches to deal with both. One is that they have actually made that phrase real, too big to fail. That doesn’t quite mean what people think it means. Now there, the institution may still fail, but the creditors will overwhelmingly get bailed out. And if the creditors are overwhelmingly getting bailed out by us, the insurance fund or express bailout from treasury, then really, really bad things have happened.
So when you allow these institutions that you simply can’t basically shoot, then they hold the economy hostage. And nowadays they hold the global economy hostage. And if you hold the global economy hostage, you hold global politics hostage. So that needs to be fixed. And the way to fix that is not to allow such institutions, right? Duh. And the good news is those institutions are phenomenally inefficient.
So the economic world would be better if we didn’t have them as well, and politics would be better, et cetera. The second problem is not so much deregulation, that’s the words you always hear. But if you’ve listened to me, I always emphasize the three Ds: deregulation, desupervision, and de facto decriminalization. And it’s the second two that are the biggest problem, as opposed to deregulation.
So for example, in the case of Silicon Valley Bank, it’s absolutely true, as the Democrats have been talking about that, the change in the law under the Trump administration that deregulated this cutoff point for these too-big-to-fail institutions and said, uh, no. We’re gonna let it go up to 250 billion dollars. And on the theory that we were doing this to protect tiny community banks, you gotta love it. Right?
It’s so transparently stupid. Okay, so a couple of things. First, let’s recognize that this was substantially bipartisan. The only way Trump could do that was with substantial Democratic support, which he got. Second, it wasn’t really the issue because that was just where you automatically had to apply certain tests, particularly the stress test. And without getting in the weeds, here’s what all these institutions have in common.
Fannie, Freddie, Lehman Brothers, Bear Stearns, AIG, the big three Iceland Banks and a host of others, they all passed stress tests with flying colors just before they crashed and burned. Stress tests don’t check whether you can survive a run, which is the thing that typically kills you quickest, at least. Right? So that’s kind of a big gap. And maybe it was intentional because the stress tests were designed as propaganda to say, look, we’ve made the bank so much safer.
They could survive all this stuff. And just to go back, because Fannie and Freddie were great at one thing. Well, two things. Lobbying and propaganda. And propaganda for lobbying. Fannie and Freddie convinced most of the world that their stress tests were so severe that they were analogous to a nuclear winter scenario. And in fact, of course, they were dead long before the great financial crisis occurred.
They were deeply, deeply insolvent. Okay, so first it wasn’t important that they were removed from the stress test because the stress tests are worthless, and in particular, they’re worthless about the thing that killed them, which is a liquidity crisis. Which is when everybody goes, “Hey, maybe I’m not gonna get paid. This place is insolvent. Duh. Maybe I should take my money out, especially if my money’s uninsured”.
Which Silicon Valley Bank over two thirds of its depositors were uninsured. So it was like, duh, we could lose 200 billion dollars. Oh, we could take the money out. I wonder what we’ll do. And remember the guys, and they’re almost all guys taking the money out, not only are taking it out electronically, they’re not waiting line or outside the branch. But they’re also treasurers, they’re corporate treasurers. They’ve got codes, three keystrokes, and the 200 million is gone from the bank. Oops.
So people haven’t focused on that. And that’s crazy because put this under the general theme, when you fail to learn lessons from catastrophes, you get bigger and longer and repeated catastrophes. So the greatest run in world history, and it wasn’t close, occurred in the great financial crisis. Before the great financial crisis, the biggest run had been ballpark ish, 6 billion dollars. And in the great financial crisis, the biggest run was 400 billion. Know what it was? And you follow finance.
[00:09:57] Grumbine: Housing.
[00:09:58] Black: Nope. It was money market mutual funds.
[00:10:04] Grumbine: No kidding.
[00:10:05] Black: And I won’t explain it, but I’ll just tell you that among professional economists, the FDIC is the great Satan because it allegedly gets rid of private market discipline, which would otherwise keep us safe in a wonderful laissez faire world. And the ideal place, therefore, would be one that had no deposit insurance. Oh, I know. Money market mutual funds.
[00:10:33] Grumbine: Interesting.
[00:10:33] Black: In fact, it had the world’s largest run by incredible margins, and it was saved only by us providing them federal deposit insurance.
[00:10:47] Grumbine: It’s interesting you’re saying that because a great many people, in fact, many people, even within the MMT world, pushing for all deposits to be insured 100%. That there should be no limit on FDIC. What are your thoughts on that?
[00:11:05] Black: That’s not a very good idea at all, and it massively compounds the too big to fail problem and creates a raft of bad incentives. But the worse idea is getting rid of deposit insurance, you know, so, It’s one of these things where the answer is more like Goldilocks, not the biggest, not the smallest, somewhere in between. And there’s no perfect answer and we shouldn’t worry too much about whether it’s 250 or 230 or 260, $250,000 is current limit per institution and sometimes per type of account.
It’s actually kind of complicated. We’ll avoid those weeds. Okay. So back to the second big thing that can take down institutions is a bunch of different risks. And here’s the key. If you are creating a regulatory agency that was designed to, hey, I’m gonna use a national security term, get left of boom. Maybe in Hebrew would be right of boom. Right? But the idea of getting left of boom, of course, is most of us read left to right. And when we do that, the thing at the end of the chart is the boom. And so you want to intervene before the boom. That’s what we learned.
[00:12:43] Grumbine: I got it now.
[00:12:45] Black: And by the way, this is a serious thing because one of the views in 9/11 report was that the FBI was too concerned with whether it could make a perfect case to prosecute. And to folks said, yeah, that’s important, but it’s actually kind of more important to stop them from flying planes into huge buildings and killing thousands of people. And the FBI went, uh, yeah, that makes sense.
So that’s our job as regulators. We would like to get left of boom. We’d want to prevent the failure and failing that we want to minimize the cost and harm of the failure. And if the failure occurs, we also then want to prosecute the people if it’s appropriate because they’ve committed crimes. Because that’s the only way you can even possibly deter this stuff in the past.
So you’ve gotta understand risk to regulate effectively, and you’ve got to be disciplined about focusing on the big risk and focusing on not whether I can make the perfect case for prosecution, but how quickly can I intervene to prevent the disaster, or at least greatly minimize it. So here’s the short version with the technocratic thing and how it fits into regulation.
[00:14:20] Grumbine: Okay.
[00:14:20] Black: Risk is not risk is not risk. Risks vary. For example, if you prudently as a bank take credit risk by underwriting, by having systems, by monitoring your loans, the expected value, that means the weighted probability is you make money as a bank. That’s what we like. We don’t want the bank to fail. The bank has to make money. It’s in it for a profit and such.
So credit risk is what banks ought to be taking, and they should be doing it prudently in the great financial crisis and in the savings and loan debacle, of course, they did no such thing because when you loot an institution, you deliberately take…
[00:15:13] Grumbine: That’s not a risk
[00:15:15] Black: Enormous risk. Yeah, that’s pointy actually. It’s kind of a different risk. We call it operational risk, and the expected value of operational risk is therefore not positive, but
[00:15:28] Grumbine: Very negative.
[00:15:30] Black: vVery negative. So do we want banks to be taking any significant operational risk? No. If banks are taking very large amounts of operational risk, should we go “well, we’re not sure whether you have adequate capital to taking…”. No! No! No! You say no, you can’t do that. We will stop you. We will put you out of business. We will bring enforcement actions against you.
If the operational risk is you looting the place, we’ll put you in prison. That’s what you do in a system. You differentiate between the risks. So what blew up Silicon Valley Bank? Well, that was the first act of the savings and loan debacle. It’s called interest rate risk. An interest rate risk. Again, I have to take a little bit into the weeds because this one’s counterintuitive. Most people think, oh, interest rates went up. Bonds must be worth more.
You know, they’re higher interest rates, except not your bond. No, you bought a 30 year bond. It’s fixed rate. It doesn’t go up in interest rate. So the guys that bought the next day after interest rates say doubled, they’re getting twice the yield you are. So can you sell your bond to somebody else for the face value of that bond, which by the way is 10,000 bucks?
No, because you ain’t earning even close to a market value return. So you lose a ton of money on your bond. So that’s market value as opposed to book accounting value, which is whatever you bought it at. It’s also called original cost. That’s an example of the difference between market value, which might be $5,000 on your bond versus your book value of $10,000.
Therefore, is taking interest rate risk a good thing the way credit risk prudently taken is a good thing? Well, here’s a thought experiment. What would happen if taking interest rate risk had a positive expected value? You’re betting on which way interest rates were gonna go, and your expected outcome was you’d make a profit from doing that. Hmm. If somebody could do that, what would we call that person?
[00:18:04] Grumbine: A genius.
[00:18:05] Black: Oh no. We call them the ruler of the world. That’s true. Okay. Because they’d have all the wealth of the world, or if they were willing to sell it, all of us would buy his or her magic, whatever it was that told them interest rates, and we’d all be rich. The entire world would be rich and it would happen within weeks. It’d be great. So we don’t live in that world, right? And we will never live in that world.
No, because that’s not how things work. So we don’t want banks to take significant interest rate risk. Why? Now, here’s a fancy word. Because the risk and return are asymmetrical from the standpoint of the government. What happens if you do what Silicon Valley Bank officers, notice I’m emphasizing officers. I’m not gonna talk about the bank having incentives because banks don’t have incentives. Only people do, or animals do too.
But let’s assume that the bankers are people, not animals. All right? So if you win your bet at Silicon Valley Bank, well, the bet they made, they took a lot of interest rate risk by buying bonds that had a stated yield of about 1.8%. That means if they win their bet, Silicon Valley Bank gets a hundred million dollars more, maybe. And if they lose their bet, well they bet the bank and the whole.
200 plus billion dollar bank goes insolvent. And do they have 200 billion shareholders? Are they protected by something called limited liability? Yep. They’re not responsible for the losses of the corporation by law. So this is deeply asymmetrical. If they win, they keep the money and it’s not very much. And if they lose, we lose the money. So should we allow this bit? No.
[00:20:31] Grumbine: No, hell ,no!
[00:20:32] Black: No. And do we heaven and haw and say, oh, it’s just a paper loss. Oh, these are good assets. What do you mean it’s a good asset? It’s gotta market value of half of what you paid for it. That sounds like a really crappy asset. And you know what? You’d have to report if we had really real accounting that you were massively insolvent, which is what Silicon Valley Bank was. So we have rules, generally accepted accounting principles. And the general accepted accounting principle in general says, eh, you don’t have to recognize the loss.
[00:21:11] Grumbine: Wow.
Now, that’s a stupid rule from the standpoint of a regulator and an FDIC insurer, right?
[00:21:19] Black: And guess what? The banking regulatory agencies don’t have to follow GAP. They can create and have always done so, regulatory accounting principles that could be protective against this bs. So you could stop the incentive to play these games. Now, I said this bet was really weirdly asymmetrical and no bank, if the bank actually were animate, would ever take a risk the way Silicon Valley Bank did.
But the officers, they have the immensely perverse incentives because if they take interest rate risk by buying higher yield paper, higher interest rate treasuries or mortgage backed securities, which is what they did at Silicon Valley Bank, then the bank reports more income under GAP, even though it’s actually lost money because of the loss of market value. Baseball been very, very good to me.
[00:22:27] Grumbine: Wow.
[00:22:28] Black: And therefore there’s an incredibly perverse incentive if you’re the officers to pile on interest rate risk. And it’s a sure thing on an accounting basis. You will, at least in the early months and sometimes early years, report higher income, even though you actually bankrupted the bank.
[00:22:50] Grumbine: Wow.
[00:22:51] Black: And guess who gets a lot of money when you do that?
[00:22:54] Grumbine: The guys that own it.
[00:22:55] Black: No, no, no. The officers bonuses. Oh, no, no, no, no. This can be very bad for the owners, but for the officers, it’s another example of a sure thing. But these clowns, because Silicon Valley Bank was an absolute clown car, clearly complete with bozo noses and such, right? If you can’t get this one right, this is the test of how far regulation has fallen, and they didn’t even come close to getting it right. Okay.
So Silicon Valley Bank did an interesting twist on all of this. We have special accounting rules if you hedge. We want to encourage you to hedge because hedging is one way of dramatically reducing interest rate risk. And Silicon Valley Bank actually did some hedging, not remotely enough, right? But it actually did some hedging, and I won’t take you in the weeds, but I’ll give you the conclusion.
The principle way you hedge in the modern era is something called an interest rate swap. And I will tell you the proverbial bottom line on this. As your fixed rate treasury or mortgage-backed security loses market value because the interest rates are going up, your hedge goes up in value. And that could, if you bought a big enough hedge, counteract the interest rate risk. Neutralize it is the jargon.
And you could be safe and prudent, but what would the fun of that be? Because then all your profits would go away from this accounting game I talked about. So first they bought a hedge that was not remotely big enough. But here comes the really fun stuff. Remember I said the hedge will go up in value and you’re not recognizing the loss on the other side, the market value loss of having this fixed rate treasury, that’s losing value as interest rates increase.
So here’s what you do and Silicon Valley Bank did it. You sell the hedge, you sell the interest rate swap, and you take the gain on the interest rate swap, which has gone up in value. But of course the gain is only 1/10 of what you would need. But all of that, flows into income and bing bing bing bing bing… Triple double on your bonus,
[00:25:55] Grumbine: Yes.
[00:25:55] Black: You make a better quarter. So they also being a clown car decided, you know what we really, really don’t need and we could save so much money. We don’t need no stinkin chief risk officer.
[00:26:11] Grumbine: Oh my goodness.
[00:26:13] Black: So for nine months, nine months, a 200 plus billion dollar institution taking fatal levels of interest rate and liquidity risk said, we don’t need no stinkin chief risk officer and the regulators went: mumble, mumble, mumble, mumble, mumble. So what do you need as a regulator? First, you need to understand these things. So you gotta actually be technically competent, but that’s not remotely sufficient. You have to then actually believe in regulation.
[00:26:47] Grumbine: Yeah, that’s a big one.
[00:26:49] Black: So we believed in regulation. We regulated the savings and loan industry under Ronald Reagan, who was super pissed. So one of the first things they did when they got the major legislation was not fix the savings loan crisis, but fix the problem of regulatory independence. They got rid of our agency as an independent regulatory agency and put us within treasury
[00:27:26] Grumbine: Wow.
[00:27:27] Black: because we had been effective, not because we had been ineffective in dealing with the crisis that we inherited when people like me came to the agency in 1984. So what would you do? Well, we do what we did in 1984, right? Okay. We’re not geniuses. In 1984, and we didn’t invent it in 1984, we inherited it. Right? I’m not claiming credit for this.
We would have regular reports, and in particular, we would have two reports with regard to interest rate risk. One, how insolvent was the place on a market value basis? Two, if interest rates increased by 1%, 2%, 4%, 6%, how much more insolvent would the savings and loan in that case be? Right? Guess what? Have you seen those two charts?
[00:28:31] Grumbine: No, I have not.
[00:28:31] Black: No. And they’re not secret because they’re collated, they’re combined. You don’t find the individual institution, you could have that for the entire industry. Those would be the two charts you would absolutely need. Now, the next thing is the old joke about never missing a chance to miss a chance after the great financial crisis. And they said, you know what really needs to happen in supervision?
We need to give the economists more power. Now, the economists had been the problem at all top ends in central financial regulation. And so the answer was to give more power to the people who are the problem. And as I say, get rid of any independence and put you inside treasury. Okay, so they created FSOC, Financial Stability Oversight Council, which is the economists’ dream. They’re supposed to be this cloister of monks.
That do deep thoughts and deep research and are always looking for the next problem before it occurs. So you aren’t being generals fighting the last war. And then they’re supposed to come out with real answers to how to intervene to get left of boom so that there isn’t a problem. Except that economists are the last people in the world to think that way.
So I will now paraphrase, but it’s almost a direct quote, what FSOC did when it did circa 2014, a special report to Congress on interest rate risk, forward thinking. And it said, as I say, this is almost a direct quotation and the entire substance of the recommendation. One: banks should continue to monitor interest rate risk. Two: regulators should continue to monitor interest rate risk. Whoa. Thank you.
[00:30:48] Grumbine: Blinding flash of the obvious.
[00:30:50] Black: Whoa, what a PhD in economics will do for you. Okay, so that’s useless, right? And it’s deliberately useless. So you’re not even trying. And then they did, because they’re economists, 75 PowerPoint slides of which exactly zero included the two slides you needed. Which is how big are the market value losses due to interest rate risk, and how much will they increase?
And if you wanna get wonky, because banks can play yet another accounting game I haven’t described, they can move these assets from different accounts. Some of which they can vary the loss for nearly forever and others where they can recognize a gain due to interest rate changes that are in their favor. Right? So you might also want a chart on how many people were gaming the system.
And if you had extra time, you’d do a chart on how many people were gaming it by inadequately doing hedges like interest rate swaps that I just described, and then selling the swap prematurely to book a gain when there was actually a loss, net net due to interest rate risk. I have not heard a single treasury or regulator talk about any of those charts, or frankly, those issues.
[00:32:41] Intermission: You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon. Like and follow our pages on Facebook and YouTube and follow us on Periscope, Twitter, Twitch, Rokfin, and Instagram.
[00:33:32] Grumbine: If I am a person that’s planning to create a regulatory environment for this space, we need people, we need money, we need tools, we need laws and access that support our mission, and then we need the green light from whoever we report to, whether it be the president, the treasury secretary. We need to have the buy-in that our mission matters and that we’re free to conduct our operations as we require.
How would you structure a regulatory environment in terms of staffing and ratios between institutions? It seems like we underfund these kind of efforts. We understaff them and then don’t allow them to do their jobs. What would an effective regulatory agency look like?
[00:34:31] Black: Okay, so part of that was like consultants speak and that’s the worst thing in the world that you would wanna do. And it’s therefore, of course, their absolute default. That’s exactly how they would phrase it, except for the people part. Okay, so let me tell you what worked. First, it was 95% people, maybe 98% people, in terms of changing things in the savings and loan debacle.
It’s easy to see because when you change from Dick Pratt, the libertarian economist and creature of the industry, to Ed Gray, it takes about six months. But that’s when you get the complete change. And Ed Gray was a personal friend. Not just a politico, a personal friend, not only of Ronald Reagan, but Nancy Reagan, which in this world was actually very important.
And despite that, and despite the fact that he knew that Ronald Reagan would hate what he was doing, he reregulated and resupervised the industry, because he felt that’s what Ronald Reagan would have done if Ronald Reagan was willing to be open to the facts. Interesting way of phrasing it. Right.
[00:36:04] Grumbine: Uh huh.
[00:36:04] Black: Second thing, which we could do now and which any president could do, Ed Gray proceeded to ask everybody he ran into who was in a position to give substantive guidance. Who are the two best financial supervisors in America? Then he personally recruited them and hired them and put them in the two epicenters of the savings and loan debacle. So they’re almost always epicenters.
It’s almost always not just randomly split in geographic terms in the United States. So you look for where the problem is worst, you get the best people, you put them there and you tell them, change it. Fix it. I don’t want process. I don’t want tons of reports. I want you to fix it. You do what you need to do to do that. So they proceeded to recruit people as well.
And because they had stellar reputations, guess what? People wanna work for people with stellar reputations who are actually gonna do something. So that gets you through much of the stuff now. There were innumerable things that Gray had to deal with, that even with the craziness of the modern era, you wouldn’t have to deal with because the Reagan administration was insane. Right.
And it wasn’t just the Reagan administration, it was a Democrat leadership as well. So when Gray started to reregulate and close the worst thrifts, because when you’re being looted by the CEO, every day you stay open, can be tens of millions of dollars in additional losses. So you really, really wanna prioritize those and you wanna take chances, you wanna put them in receivership before you have the perfect case made.
Because the perfect case might be three years from now and at 10 million dollars a day in additional losses, that would be insane. So you have to get people who are not only good, but are willing to take chances, prudent chances that make sense. Who are willing to lose sometimes, to fail sometimes to do these things. Okay. Gray does that, and the OMB, Office of Management and Budget, threatens to make a criminal referral against Gray personally on the grounds that he was putting too many insolvent thrifts into receivership.
The next time someone tells you that the regulators were always pushing for forbearance, that was the predecessor, that was the economist, Dick Pratt. The opposite under Ed Gray. And the second is when we went forward with regulations. Charles Keating that you mentioned had so much political juice that within three weeks of beginning the effort, he got a majority of the House of Representatives to hear that statement, a majority of the members of the House of Representatives to not just vote in favor of, to co-sponsor a resolution calling on us to back off of reregulation.
And that wasn’t just a majority, it was the entire leadership of both parties. And Ed Gray therefore said no to a president that he loved, no to threats that they would criminally prosecute him for doing his job and no to a majority of The House, including the bipartisan unanimity of the leadership of The House telling him not to go forward. So, one Ed Gray is worth 2000 of these useless people that want careers.
Now, this ended Ed Gray’s career. The two people that were the best supervisors in America. One was Joe Selby. He, in fact, was the most distinguished, and gray put him in the absolute worst place, which in the savings loan debacle was Texas. And with the substantial aid of Jim Wright, a Democrat Speaker of the House, Selby was forced out on the grounds that he was a homosexual. Beginning to sound like familiar times.
[00:41:16] Grumbine: Yeah, wash rinse repeat.
[00:41:18] Black: And Mike Patriarca had his jurisdiction removed over Lincoln Savings when the five US Senators, the Keating five and Jim Wright came together to extort Gray’s predecessor, who of course caved to that kind of pressure. So you should not assume that you can create something that works for all time as a regulatory apparatus. Eventually, there will be times when there will be people in who give in to political pressure, who have career aspirations.
We, at the big law firm I started at, always referred to the thing that was my greatest skill as a CLG, a career-limiting gesture. And, and we were all very good at CLGs, and that’s what you need. People quite willing to have their career in that field end, but they’re dedicated to the public and they won’t give in to the intimidation. Now, the other thing that you’ve talked about is true and is particularly important on a long run basis, and that is budget.
And there’s actually a term in criminology for this, and it’s the deliberate creation of systems incapacity, and it is political. For 30 years, the House of Representative Republicans have had an unholy war against the Securities and Exchange Commission and the Commodities Futures Trading Commission at the behest of very rich investors who do not want honest markets.
And so even today, when overwhelmingly trading is done by these ultra fast methods, they have denied the SEC and the CFTC sufficient budget to even get computers that could possibly monitor the trades. They want to make it impossible for the SEC to get left of boom. So sometimes it is political and that is why Senator Warren put the Consumer Financial Protection Bureau, CFPB, in the Fed because the Fed of course, makes profit, huge profit.
And so Congress couldn’t deny the Fed the budget because the Fed doesn’t have a budget from Congress. And the Republicans have always hated that and are continuing to make efforts. And let me now bring up the third huge new problem that’s gonna get vastly bigger. And that is the federal judiciary.
[00:44:26] Grumbine: Oh.
[00:44:26] Black: Particularly under this new Supreme Court, they are determined to make effective regulation illegal. Not impossible, unlawful. So they are bringing back their own version of substantive due process in which they say, no, you shouldn’t be able to constrain that because you have a market right to do these things. And no, you can’t use regulators to do regulations.
It’s an important issue. They’re creating a new doctrine and on important issues only Congress can proceed and it can only proceed by statute. Now, Congress has no ability to do the regulations necessary, and that was when Congress was semi-functional. And now in the House it’s a clown car show again. Right? Again, a literal clown show with public urination discussions that go on for 20 minutes.
So we are not gonna be able, as regulators, we’re going to have to either win the judiciary, we have to save the judiciary. If you wanna save American democracy. Democrats have been way too quick to say, oh yeah, no, we’ve won a number of these things. Yes, but that tells you how ultra extreme Trump’s positions were, that there was no conceivable way.
And even then you saw that one judge that was dealing with the warrant, the seizure of the information who created new procedures and tried to win for Trump. Anyway, what we’re seeing is fantastically anti-regulatory, but also extreme hostility against convicting elite white collar criminals among the Trump appointees and indeed the Bush appointees before them. So we’re going to have to have ferocious rear guard strategies unless and until we can save the judiciary and save democracy in America.
[00:46:51] Grumbine: You’re talking about it, but Congress doesn’t understand money and they have Article 1, section 8 driving their purpose as they are the ones in control of the purse strings. They clearly do not really understand banking. They’re reliant on people in industry to advise them about this stuff. We have to have representatives to debate or go through whatever process, but are these people really the people we need doing this? They don’t have any pre-knowledge to even judge whether they’re being hoodwinked.
[00:47:24] Black: True, but to be serious, it was easy to find Mike Patriarca
[00:47:29] Grumbine: Okay. Fair enough.
[00:47:30] Black: after the great financial crisis, and you knew when President Obama didn’t seek out any of us, that they didn’t want to succeed, and they had no clue how you would succeed. You have to remember that the Democrats went all in on reinventing government. And that the purpose of reinventing government was to make sure we would not get left of boom.
So I left the government when it became clear they had made it impossible for me to succeed going forward. When they told us, and this wasn’t some general advisory, this was official training on how under reinventing government we were to be regulators, which became an oxymoron. And the phrase, which I heard personally in not some casual conversation, but in their official training was we were to “treat the bankers as our customers”.
[00:48:41] Grumbine: Ugh god,
[00:48:42] Black: That is virtually word for word, quotation.
[00:48:46] Grumbine: Isn’t the customer always right?
[00:48:48] Black: Well, you don’t mess with customers, and it was expressly phrased that if we had to prosecute and convict someone, that was a regulatory failure. As you recall, we got over 1500 elite convictions.
[00:49:09] Grumbine: We haven’t seen too many since then, though, have we?
[00:49:12] Black: No, but again, that’s the point. So yes, they don’t know what they don’t know, but it’s not hard to do what Ed Gray did. Start there. Who are the people with courage and competence who are willing to have a very limited career in public service if that’s necessary to do the right thing.
[00:49:38] Grumbine: I like that part. I look at regular politicians and I say, wouldn’t it be better if you were willing to be a one termer and to say the things that no one else has said than to try and be a lifer and do absolutely nothing remarkable?
[00:49:53] Black: And feel good about yourself? Y
[00:49:55] Grumbine: Yeah. To me it doesn’t make any sense. I would rather do my four years or two and a half. If I got kicked out, I’d do it with honor and bust some chops and fix things than to just coast along and keep going on with it. I would definitely be in the group that said, yeah, sign me up for one term or less.
[00:50:15] Black: Well, you have to be willing to do the things that will make you unelectable. I’m not positive that if someone actually did that, they would be defeated for reelection necessarily. They certainly wouldn’t get donors. Big donors,
[00:50:32] Grumbine: They wouldn’t get donors. They wouldn’t get party support.
[00:50:34] Black: Right. So we had a bunch of people who had exactly that, who were willing to lose their jobs, and we did. But you keep your sanity and your conscience and you don’t have to avoid looking in mirrors.
[00:50:53] Grumbine: One of the things that is really painful, having not really had a great deal of experience with whistleblowers, then. Having met your band of friends who are all serial whistleblowers, such as yourself, and to realize that once you cross into the whistleblower territory, you’re perpetually having to try to explain to people that you did the right thing and having to tell the story. Because ultimately they’ll do everything they can to silence you and to make you ineffective.
[00:51:24] Black: Yeah.
[00:51:24] Grumbine: Just thinking about Michael Winston’s story, there’s so many people that you hear the things they did when they raised their hand and said something ain’t right, and their lives become scary.
[00:51:40] Black: Yeah. Let me give you two specific examples of your point from the savings and loan debacle from high level officials who would’ve been considered the adults in the room unlike us. So one was the chief of staff to the new chairman that removed our jurisdiction over Lincoln Savings, the name of Jim Boland. And he knew Mike Patriarca from the old days and said to him, we did you guys a favor when we removed your jurisdiction over Lincoln Savings because Keating is so powerful, they’ll get you in ways you’ll never know you’ve been gotten.
That is word for word. So obviously that’s what they felt, you know, that they had to give into him, give him this incredible sweetheart deal. That led to incredible tragedy because otherwise he would get them. And the other one was Jordan Luke. Jordan Luke was the chief counsel top lawyer in the agency talking to me. And this is not a friendly talk. He’s trying to put a shot across my bow in Naval terms.
And he goes: do you know why Danny Wall, the new chairman of the agency after Ed Gray doesn’t trust you, Bill? No. Well, because you took on Jim Wright. Jim Wright was this incredibly powerful Speaker of the House. And I go, what? He said, well, first he thought substantively Jim Wright is so powerful and so vindictive that you put the entire agency at risk by not giving into his demands to do sleazy things for the frauds. Including by the way, fire Joe Selby on the quote, unquote grounds that he was homosexual.
The second thing is it meant that Danny didn’t trust your judgment because it meant you would do something so insane in terms of your own risk and therefore you couldn’t be trusted. So I think your point, those two illustrations you were dead on in terms of your analytics, that’s exactly what it is. And those guys both thought that they were morally superior because of the positions they took.
[00:54:15] Grumbine: I remember when Richard Bowen was talking about what he experienced as he tried to get his story out to Congress about the fraud he had seen and him trembling at home, fearing getting in his car that it would blow up. It is not a safe environment to be somebody who’s a man or woman of integrity within the system.
[00:54:38] Black: You’re telling this to the guy that Keating put in writing: “Highest priority. Get Black. Kill him dead”.
[00:54:47] Grumbine: I was trying to lead to that, but you got there. Yes, that’s exactly my point though, Bill. We are in a country that the Libertarians won going back to the sixties. They have done everything they could to rip this joint down to the bones and the power elite, the powers that be, that live a different life than we do have empowered that mindset of free markets.
All the things you’ve already stated, we didn’t get here overnight and we certainly didn’t get to this point by only a couple of bad eggs we got here by an extreme level of disregard for mankind and the global citizen and the power elite are winning every day. There’s capture of our government by industry and the revolving door from industry to government and back to industry again. How do we put an end to that when we have the proverbial wolf guarding the henhouse here? How could we do this when the people that would pass the laws are in on it?
[00:55:54] Black: Quis custodiet. So you can’t end it. There’s no such thing in this context as a decisive battle that you win it and it’s over. Every generation has to fight for a rule of law and democracy and some basic humanity towards each other and doing your duty. So I’d make a friendly amendment. They’re not libertarians, they’re faux libertarians.
[00:56:26] Grumbine: Okay. Fair enough.
[00:56:27] Black: They make their money off of the government typically. They constantly manipulate the government. I like markets. I like effective markets. You know, I got no problem with effective markets. I saw my job as helping to create those. So part of the answer, and it comes back to your broader question about how do you work as an effective regulator. We had two slogans and one is immediately to the statement you just made.
It’s a variation of the House of Orange, by the way, in the Netherlands that eventually won a hundred year civil war against the most powerful army in the world, which was then Spain. The short version of it is, it is not necessary to hope in order to persevere. So we persevered. The second slogan was: Never chase mice while lions roam the council. And currently regulatory leaders, and currently meaning the last 20 plus years, exclusively chase mice. And actually they don’t chase mice. They have minions who they direct to chase mice and they rarely catch even the mice.
[00:57:54] Grumbine: Is this just a distraction technique to give the appearance that they’re doing something while doing nothing.
[00:58:00] Black: It isn’t just that you feel you’re supposed to be doing something, but yes, it’s resumes as well. So remember in the great financial crisis response, they didn’t prosecute any of the elite criminals, but they brought civil cases, not against the individuals, but against the corporation. Where effectively the CEO was getting immunity for himself by giving a bunch of shareholder money to the government, it’s a win-win.
And so I guarantee you every one of those Justice Department lawyers has on his resume “negotiated 12 billion settlement with X, Y, Z bank” as a key thing. And of course, what happened to the stock price in almost every case when they announced those settlements? It went up.
[00:59:03] Grumbine: And that’s something. Bill, I really appreciate you taking us through this. It’s easy to see the problem. Well, it’s not always even easy. It is if you can have clear eyes and have somebody eliminate the noise so you can just hear the facts. But having a real effective approach to attacking it is usually the thing that we don’t have. We hear the problem, we don’t hear the solution.
And to me, what I heard was we need people with moral conviction that are willing to be a short timer in their career to make a difference and make an impact. And each generation is gonna have to fight this fight. There’s no one silver bullet. It’s gonna come up again. We have to find a way to put it down.
[00:59:48] Black: Yeah, and here’s the good news about that. The constant thing from Richard Bowen, from Michael Winston, from Joe Selby, even when he was driven out of government. From Mike Patriarca for me is all of us would do it again in a heartbeat, knowing what the outcome would be. We’d do it again.
[01:00:14] Grumbine: You’re a hero.
[01:00:15] Black: No, we’re not. We’re normal people and we had the great privilege to work with other people like us, and there were lots of them. There are a whole bunch of really, really good people. And again, it’s easy to recruit. If you hire the Mike Patriarcas of the world, the right people reflect to work with him or her.
[01:00:45] Grumbine: Well, I’m gonna let that be the final word, sir, you are a brilliant man. I appreciate you taking the time, and it’s been too long. It’s so nice to have been able to say hello to your lovely wife, June, and just to hear your voice again, Bill, it means a lot to me. I’m really glad to have had you on, and I hope you won’t be a stranger.
[01:01:05] Black: Not at all. It’s good to be back. Thank you.
[01:01:07] Grumbine: Absolutely. All right, friends. My name’s Steve Grumbine. I’m the host of Macro N Cheese. My guest Bill Black. Please check out our other podcasts. They’re evergreen. They’re intended to be there for you to learn. We’re a nonprofit. We’re all volunteers. We don’t make a lot of money here as an organization, but it does take money to keep these lights on. So by all means, please consider becoming a donor. Bill, thank you so much once more for joining me. We are out of here.
[01:01:43] End credits: Macro N Cheese is produced by Andy Kennedy. Descriptive Writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.
“It is not necessary to hope in order to act, nor to succeed in order to persevere.” William of Orange
Bio
William K. Black is Associate Professor of Economics and Law at the University of Missouri, Kansas City, where he teaches White-Collar Crime, Public Finance, Antitrust, Law & Economics. He covers markets and regulation with his speech “Unsound Theories and Policies Produce Epidemics of Fraud and Regulatory and Market Failures.”
https://billmoyers.com/content/william-k-black-on-u-s-financial-fraud/
https://www.pbs.org/moyers/journal/04032009/profile.html
PEOPLE
Brian Romanchuk
Dr. Brian Romanchuk is a consultant and author with 15 years of experience as a senior quantitative analyst in fixed income.
https://talkmarkets.com/contributor/brian-romanchuk/
Charles Keating
Charles Humphrey Keating Jr. (December 4, 1923 – March 31, 2014) was an American sportsman, lawyer, real estate developer, banker, financier, conservative activist, and convicted felon best known for his role in the savings and loan scandal of the late 1980s.
https://en.wikipedia.org/wiki/Charles_Keating
Michael Winston
https://americanswhotellthetruth.org/portraits/michael-winston/
James Boland
Jordan Luke
https://www.c-span.org/person/?4213/JordanLuke
M. Danny Wall
https://apnews.com/article/22cf149735ef608f838c720053d3b90b
Richard Bowen
https://americanswhotellthetruth.org/portraits/richard-bowen/
Paul Jay
Paul Jay is a journalist and filmmaker. He’s the editor-in-chief and host of theAnalysis.news, a video and audio current affairs interview and commentary show and website.
https://theanalysis.news/about/
https://www.huffpost.com/author/paul-jay
Richard Pratt
https://www.latimes.com/archives/la-xpm-1989-03-05-fi-95-story.html
https://www.upi.com/Archives/1983/03/14/Savings-and-loan-business-survives-crisis/3439416466000/
Edwin Gray
Edwin J. Gray is an American politician and businessman who served as the chair of the Federal Home Loan Bank Board in the 1980s.
https://en.wikipedia.org/wiki/Edwin_J._Gray
Joe Selby
Jim Wright
James Claude Wright Jr. (December 22, 1922 – May 6, 2015) was an American politician who served as the 48th speaker of the United States House of Representatives from 1987 to 1989. He represented Texas’s 12th congressional district as a Democrat from 1955 to 1989. -From Wikipedia
https://history.house.gov/People/Detail/24127
Michael Patriarca
https://www.c-span.org/video/?15176-1/savings-loan-senate-ethics-investigation
Elizabeth Warren
https://www.warren.senate.gov/imo/media/doc/Official%20Bio%20with%20photo.pdf
Keating Five
The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger savings and loan crisis of the late 1980s and early 1990s. The five senators; Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle, Jr. (D-MI)—were accused of improperly intervening in 1987 on behalf of Charles H. Keating, Jr., chairman of the Lincoln Savings and Loan Association, which was the target of a regulatory investigation by the Federal Home Loan Bank Board (FHLBB). The FHLBB subsequently backed off taking action against Lincoln.
https://en.m.wikipedia.org/wiki/Keating_Five
Ronald Reagan
https://www.reaganlibrary.gov/reagans/ronald-reagan
INSTITUTIONS
Federal Home Loan Bank Board (FHLBB)
https://en.wikipedia.org/wiki/Federal_Home_Loan_Bank_Board
Fannie Mae
Lehman Bros
https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
Bear Stearns
https://www.history.com/this-day-in-history/bear-stearns-sold-to-j-p-morgan-chase
American International Group (AIG)
Freddie Mac
https://www.freddiemac.com/?gclid=EAIaIQobChMI56H54c6n_gIVO9_jBx0luQOuEAAYASAAEgIyPvD_BwE
Office of Management and Budget (OMB)
https://www.whitehouse.gov/omb/
Federal Deposit Insurance Corporation (FDIC)
Financial Stability Oversight Council (FSOC)
Lincoln Savings and Loan Association
https://en.wikipedia.org/wiki/Lincoln_Savings_and_Loan_Association
Securities and Exchange Commission (SEC)
Commodities Future Trading Commission (CFTC)
Consumer Financial Protection Bureau (CFPB)
https://www.consumerfinance.gov
EVENTS
Savings and Loan Scandal
https://en.wikipedia.org/wiki/Savings_and_loan_crisis
https://www.ojp.gov/pdffiles1/Digitization/176104NCJRS.pdf
Silicon Valley Bank (SVB) Collapse
https://www.theguardian.com/business/2023/mar/17/why-silicon-valley-bank-collapsed-svb-fail
Great Recession
https://en.wikipedia.org/wiki/2007–2008_financial_crisis
https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath
House of Orange
https://www.britannica.com/topic/House-of-Orange
CONCEPTS
Swap
In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount. -From Wikipedia
https://www.investopedia.com/terms/s/swap.asp
Bank Run
https://www.investopedia.com/terms/b/bankrun.asp
Hedge
To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged.
https://www.investopedia.com/terms/h/hedge.asp
https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
Liquidity
https://www.investopedia.com/terms/l/liquidity.asp
Bank Stress Test
A bank stress test is an analysis conducted under hypothetical scenarios designed to determine whether a bank has enough capital to withstand a negative economic shock.
https://www.investopedia.com/terms/b/bank-stress-test.asp
Money Market Mutual Funds
https://www.investopedia.com/investing/introduction-to-money-market-mutual-funds/
Article one, section 8 of The United States Constitution
The constitutionally enumerated powers of Congress
https://constitutioncenter.org/the-constitution/articles/article-i#article-section-8
Libertarian
Libertarianism is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state’s encroachment on and violations of individual liberties.
https://en.wikipedia.org/wiki/Libertarianism
https://www.theamericanconservative.com/marxism-of-the-right/
Quis custodiet ipsos custodes
Latin for “who will guard the guards themselves?”
https://www.iclr.co.uk/knowledge/glossary/quis-custodiet-ipsos-custodes/
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Show Notes
Transcript
Extras
Download
**Every episode of Macro N Cheese is accompanied by a full transcript and an “Extras” section with links to further resources. Check them out at realprogressives.org/macro-n-cheese-podcast
It’s been two years since Bill Black was last on with Steve. We’ve invited several guests to talk about the collapse of Silicon Valley Bank, so it only makes sense to ask our whistleblower friend to weigh in.
Bill and Steve discuss what it means to be too big to fail. When an institution is too big to fail, the creditors get bailed out, but then, Bill says, “really really bad things have happened.”
“…they hold the economy hostage. And nowadays they hold the global economy hostage. And if you hold the global economy hostage, you hold global politics hostage. So that needs to be fixed. And the way to fix that is not to allow such institutions, right? Duh,”
The episode looks at the capture of government by the financial industry. Bill talks about his experience during the savings and loan crisis and the transition from somewhat effective regulatory apparatus to a fully cock-blocked system. (Our words, not his.)
Bill Black is a professor of Economics and Law at the University of Missouri – Kansas City (UMKC) and the Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota Law School. He is a serial whistleblower and authored The Best Way to Rob a Bank is to Own One.
Macro N Cheese – Episode 220
Left of Boom with Bill Black
April 15, 2023
[00:00:00] Bill Black [Intro/music]: You’ve gotta understand risk to regulate effectively, and you’ve got to be disciplined about focusing on the big risk and focusing on not whether I can make the perfect case for prosecution, but how quickly can I intervene to prevent the disaster, or at least greatly minimize it.
The idea of getting left of boom is most of us read left to right, and when we do that, the thing at the end of the chart is the boom. And so you want to intervene before the boom.
[00:01:35] Geoff Ginter [Intro/music]: Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.
[00:01:43] Steve Grumbine: All right. This is Steve with Macro N Cheese. We’ve talked about the Silicon Valley Bank several different times in several different ways. We recently talked with Brian Romanchuk to discuss his view of basic bankruptcies and bank failures 101. Today I’m bringing on Bill Black. Bill’s been around doing good work since the savings and loan crisis.
He’s been front and center with the great financial crisis, and we’re gonna talk about what a real regulatory body might look like that was effective, that had the primary purpose of stopping banks from doing things that they shouldn’t do, and maybe looking at what banks should do. It’s been a while since I talked to him so if you haven’t checked it out, we have an entire series called The New Untouchables.
He’s been part of The Con. He has done so many things with Paul Jay over at The Real News and The Analysis, and every time he speaks, it’s worth listening. Bill, thank you so much for joining me today, sir.
[00:02:48] Bill Black: Thank you. It’s good to be back!
[00:02:51] Grumbine: Absolutely. I keep hearing people talking about bonds and the different yields. Everybody’s focused on the technocratic details of what occurred. I want our conversation today to focus on what. A meaningful regulatory body would look like, and that includes staffing, funding, primary purpose. I want to know what it would look like to reign this Leviathan in to actually have it under the oversight of people that understand not only what the bankers are doing, but the sneaky things they do and how we can prosecute white collar crime. Why don’t you set the stage? Tell me how it went wrong. Why is this banking system so unbelievably in disarray.
[00:03:40] Black: So there’s two basic reasons, and you need different approaches to deal with both. One is that they have actually made that phrase real, too big to fail. That doesn’t quite mean what people think it means. Now there, the institution may still fail, but the creditors will overwhelmingly get bailed out. And if the creditors are overwhelmingly getting bailed out by us, the insurance fund or express bailout from treasury, then really, really bad things have happened.
So when you allow these institutions that you simply can’t basically shoot, then they hold the economy hostage. And nowadays they hold the global economy hostage. And if you hold the global economy hostage, you hold global politics hostage. So that needs to be fixed. And the way to fix that is not to allow such institutions, right? Duh. And the good news is those institutions are phenomenally inefficient.
So the economic world would be better if we didn’t have them as well, and politics would be better, et cetera. The second problem is not so much deregulation, that’s the words you always hear. But if you’ve listened to me, I always emphasize the three Ds: deregulation, desupervision, and de facto decriminalization. And it’s the second two that are the biggest problem, as opposed to deregulation.
So for example, in the case of Silicon Valley Bank, it’s absolutely true, as the Democrats have been talking about that, the change in the law under the Trump administration that deregulated this cutoff point for these too-big-to-fail institutions and said, uh, no. We’re gonna let it go up to 250 billion dollars. And on the theory that we were doing this to protect tiny community banks, you gotta love it. Right?
It’s so transparently stupid. Okay, so a couple of things. First, let’s recognize that this was substantially bipartisan. The only way Trump could do that was with substantial Democratic support, which he got. Second, it wasn’t really the issue because that was just where you automatically had to apply certain tests, particularly the stress test. And without getting in the weeds, here’s what all these institutions have in common.
Fannie, Freddie, Lehman Brothers, Bear Stearns, AIG, the big three Iceland Banks and a host of others, they all passed stress tests with flying colors just before they crashed and burned. Stress tests don’t check whether you can survive a run, which is the thing that typically kills you quickest, at least. Right? So that’s kind of a big gap. And maybe it was intentional because the stress tests were designed as propaganda to say, look, we’ve made the bank so much safer.
They could survive all this stuff. And just to go back, because Fannie and Freddie were great at one thing. Well, two things. Lobbying and propaganda. And propaganda for lobbying. Fannie and Freddie convinced most of the world that their stress tests were so severe that they were analogous to a nuclear winter scenario. And in fact, of course, they were dead long before the great financial crisis occurred.
They were deeply, deeply insolvent. Okay, so first it wasn’t important that they were removed from the stress test because the stress tests are worthless, and in particular, they’re worthless about the thing that killed them, which is a liquidity crisis. Which is when everybody goes, “Hey, maybe I’m not gonna get paid. This place is insolvent. Duh. Maybe I should take my money out, especially if my money’s uninsured”.
Which Silicon Valley Bank over two thirds of its depositors were uninsured. So it was like, duh, we could lose 200 billion dollars. Oh, we could take the money out. I wonder what we’ll do. And remember the guys, and they’re almost all guys taking the money out, not only are taking it out electronically, they’re not waiting line or outside the branch. But they’re also treasurers, they’re corporate treasurers. They’ve got codes, three keystrokes, and the 200 million is gone from the bank. Oops.
So people haven’t focused on that. And that’s crazy because put this under the general theme, when you fail to learn lessons from catastrophes, you get bigger and longer and repeated catastrophes. So the greatest run in world history, and it wasn’t close, occurred in the great financial crisis. Before the great financial crisis, the biggest run had been ballpark ish, 6 billion dollars. And in the great financial crisis, the biggest run was 400 billion. Know what it was? And you follow finance.
[00:09:57] Grumbine: Housing.
[00:09:58] Black: Nope. It was money market mutual funds.
[00:10:04] Grumbine: No kidding.
[00:10:05] Black: And I won’t explain it, but I’ll just tell you that among professional economists, the FDIC is the great Satan because it allegedly gets rid of private market discipline, which would otherwise keep us safe in a wonderful laissez faire world. And the ideal place, therefore, would be one that had no deposit insurance. Oh, I know. Money market mutual funds.
[00:10:33] Grumbine: Interesting.
[00:10:33] Black: In fact, it had the world’s largest run by incredible margins, and it was saved only by us providing them federal deposit insurance.
[00:10:47] Grumbine: It’s interesting you’re saying that because a great many people, in fact, many people, even within the MMT world, pushing for all deposits to be insured 100%. That there should be no limit on FDIC. What are your thoughts on that?
[00:11:05] Black: That’s not a very good idea at all, and it massively compounds the too big to fail problem and creates a raft of bad incentives. But the worse idea is getting rid of deposit insurance, you know, so, It’s one of these things where the answer is more like Goldilocks, not the biggest, not the smallest, somewhere in between. And there’s no perfect answer and we shouldn’t worry too much about whether it’s 250 or 230 or 260, $250,000 is current limit per institution and sometimes per type of account.
It’s actually kind of complicated. We’ll avoid those weeds. Okay. So back to the second big thing that can take down institutions is a bunch of different risks. And here’s the key. If you are creating a regulatory agency that was designed to, hey, I’m gonna use a national security term, get left of boom. Maybe in Hebrew would be right of boom. Right? But the idea of getting left of boom, of course, is most of us read left to right. And when we do that, the thing at the end of the chart is the boom. And so you want to intervene before the boom. That’s what we learned.
[00:12:43] Grumbine: I got it now.
[00:12:45] Black: And by the way, this is a serious thing because one of the views in 9/11 report was that the FBI was too concerned with whether it could make a perfect case to prosecute. And to folks said, yeah, that’s important, but it’s actually kind of more important to stop them from flying planes into huge buildings and killing thousands of people. And the FBI went, uh, yeah, that makes sense.
So that’s our job as regulators. We would like to get left of boom. We’d want to prevent the failure and failing that we want to minimize the cost and harm of the failure. And if the failure occurs, we also then want to prosecute the people if it’s appropriate because they’ve committed crimes. Because that’s the only way you can even possibly deter this stuff in the past.
So you’ve gotta understand risk to regulate effectively, and you’ve got to be disciplined about focusing on the big risk and focusing on not whether I can make the perfect case for prosecution, but how quickly can I intervene to prevent the disaster, or at least greatly minimize it. So here’s the short version with the technocratic thing and how it fits into regulation.
[00:14:20] Grumbine: Okay.
[00:14:20] Black: Risk is not risk is not risk. Risks vary. For example, if you prudently as a bank take credit risk by underwriting, by having systems, by monitoring your loans, the expected value, that means the weighted probability is you make money as a bank. That’s what we like. We don’t want the bank to fail. The bank has to make money. It’s in it for a profit and such.
So credit risk is what banks ought to be taking, and they should be doing it prudently in the great financial crisis and in the savings and loan debacle, of course, they did no such thing because when you loot an institution, you deliberately take…
[00:15:13] Grumbine: That’s not a risk
[00:15:15] Black: Enormous risk. Yeah, that’s pointy actually. It’s kind of a different risk. We call it operational risk, and the expected value of operational risk is therefore not positive, but
[00:15:28] Grumbine: Very negative.
[00:15:30] Black: vVery negative. So do we want banks to be taking any significant operational risk? No. If banks are taking very large amounts of operational risk, should we go “well, we’re not sure whether you have adequate capital to taking…”. No! No! No! You say no, you can’t do that. We will stop you. We will put you out of business. We will bring enforcement actions against you.
If the operational risk is you looting the place, we’ll put you in prison. That’s what you do in a system. You differentiate between the risks. So what blew up Silicon Valley Bank? Well, that was the first act of the savings and loan debacle. It’s called interest rate risk. An interest rate risk. Again, I have to take a little bit into the weeds because this one’s counterintuitive. Most people think, oh, interest rates went up. Bonds must be worth more.
You know, they’re higher interest rates, except not your bond. No, you bought a 30 year bond. It’s fixed rate. It doesn’t go up in interest rate. So the guys that bought the next day after interest rates say doubled, they’re getting twice the yield you are. So can you sell your bond to somebody else for the face value of that bond, which by the way is 10,000 bucks?
No, because you ain’t earning even close to a market value return. So you lose a ton of money on your bond. So that’s market value as opposed to book accounting value, which is whatever you bought it at. It’s also called original cost. That’s an example of the difference between market value, which might be $5,000 on your bond versus your book value of $10,000.
Therefore, is taking interest rate risk a good thing the way credit risk prudently taken is a good thing? Well, here’s a thought experiment. What would happen if taking interest rate risk had a positive expected value? You’re betting on which way interest rates were gonna go, and your expected outcome was you’d make a profit from doing that. Hmm. If somebody could do that, what would we call that person?
[00:18:04] Grumbine: A genius.
[00:18:05] Black: Oh no. We call them the ruler of the world. That’s true. Okay. Because they’d have all the wealth of the world, or if they were willing to sell it, all of us would buy his or her magic, whatever it was that told them interest rates, and we’d all be rich. The entire world would be rich and it would happen within weeks. It’d be great. So we don’t live in that world, right? And we will never live in that world.
No, because that’s not how things work. So we don’t want banks to take significant interest rate risk. Why? Now, here’s a fancy word. Because the risk and return are asymmetrical from the standpoint of the government. What happens if you do what Silicon Valley Bank officers, notice I’m emphasizing officers. I’m not gonna talk about the bank having incentives because banks don’t have incentives. Only people do, or animals do too.
But let’s assume that the bankers are people, not animals. All right? So if you win your bet at Silicon Valley Bank, well, the bet they made, they took a lot of interest rate risk by buying bonds that had a stated yield of about 1.8%. That means if they win their bet, Silicon Valley Bank gets a hundred million dollars more, maybe. And if they lose their bet, well they bet the bank and the whole.
200 plus billion dollar bank goes insolvent. And do they have 200 billion shareholders? Are they protected by something called limited liability? Yep. They’re not responsible for the losses of the corporation by law. So this is deeply asymmetrical. If they win, they keep the money and it’s not very much. And if they lose, we lose the money. So should we allow this bit? No.
[00:20:31] Grumbine: No, hell ,no!
[00:20:32] Black: No. And do we heaven and haw and say, oh, it’s just a paper loss. Oh, these are good assets. What do you mean it’s a good asset? It’s gotta market value of half of what you paid for it. That sounds like a really crappy asset. And you know what? You’d have to report if we had really real accounting that you were massively insolvent, which is what Silicon Valley Bank was. So we have rules, generally accepted accounting principles. And the general accepted accounting principle in general says, eh, you don’t have to recognize the loss.
[00:21:11] Grumbine: Wow.
Now, that’s a stupid rule from the standpoint of a regulator and an FDIC insurer, right?
[00:21:19] Black: And guess what? The banking regulatory agencies don’t have to follow GAP. They can create and have always done so, regulatory accounting principles that could be protective against this bs. So you could stop the incentive to play these games. Now, I said this bet was really weirdly asymmetrical and no bank, if the bank actually were animate, would ever take a risk the way Silicon Valley Bank did.
But the officers, they have the immensely perverse incentives because if they take interest rate risk by buying higher yield paper, higher interest rate treasuries or mortgage backed securities, which is what they did at Silicon Valley Bank, then the bank reports more income under GAP, even though it’s actually lost money because of the loss of market value. Baseball been very, very good to me.
[00:22:27] Grumbine: Wow.
[00:22:28] Black: And therefore there’s an incredibly perverse incentive if you’re the officers to pile on interest rate risk. And it’s a sure thing on an accounting basis. You will, at least in the early months and sometimes early years, report higher income, even though you actually bankrupted the bank.
[00:22:50] Grumbine: Wow.
[00:22:51] Black: And guess who gets a lot of money when you do that?
[00:22:54] Grumbine: The guys that own it.
[00:22:55] Black: No, no, no. The officers bonuses. Oh, no, no, no, no. This can be very bad for the owners, but for the officers, it’s another example of a sure thing. But these clowns, because Silicon Valley Bank was an absolute clown car, clearly complete with bozo noses and such, right? If you can’t get this one right, this is the test of how far regulation has fallen, and they didn’t even come close to getting it right. Okay.
So Silicon Valley Bank did an interesting twist on all of this. We have special accounting rules if you hedge. We want to encourage you to hedge because hedging is one way of dramatically reducing interest rate risk. And Silicon Valley Bank actually did some hedging, not remotely enough, right? But it actually did some hedging, and I won’t take you in the weeds, but I’ll give you the conclusion.
The principle way you hedge in the modern era is something called an interest rate swap. And I will tell you the proverbial bottom line on this. As your fixed rate treasury or mortgage-backed security loses market value because the interest rates are going up, your hedge goes up in value. And that could, if you bought a big enough hedge, counteract the interest rate risk. Neutralize it is the jargon.
And you could be safe and prudent, but what would the fun of that be? Because then all your profits would go away from this accounting game I talked about. So first they bought a hedge that was not remotely big enough. But here comes the really fun stuff. Remember I said the hedge will go up in value and you’re not recognizing the loss on the other side, the market value loss of having this fixed rate treasury, that’s losing value as interest rates increase.
So here’s what you do and Silicon Valley Bank did it. You sell the hedge, you sell the interest rate swap, and you take the gain on the interest rate swap, which has gone up in value. But of course the gain is only 1/10 of what you would need. But all of that, flows into income and bing bing bing bing bing… Triple double on your bonus,
[00:25:55] Grumbine: Yes.
[00:25:55] Black: You make a better quarter. So they also being a clown car decided, you know what we really, really don’t need and we could save so much money. We don’t need no stinkin chief risk officer.
[00:26:11] Grumbine: Oh my goodness.
[00:26:13] Black: So for nine months, nine months, a 200 plus billion dollar institution taking fatal levels of interest rate and liquidity risk said, we don’t need no stinkin chief risk officer and the regulators went: mumble, mumble, mumble, mumble, mumble. So what do you need as a regulator? First, you need to understand these things. So you gotta actually be technically competent, but that’s not remotely sufficient. You have to then actually believe in regulation.
[00:26:47] Grumbine: Yeah, that’s a big one.
[00:26:49] Black: So we believed in regulation. We regulated the savings and loan industry under Ronald Reagan, who was super pissed. So one of the first things they did when they got the major legislation was not fix the savings loan crisis, but fix the problem of regulatory independence. They got rid of our agency as an independent regulatory agency and put us within treasury
[00:27:26] Grumbine: Wow.
[00:27:27] Black: because we had been effective, not because we had been ineffective in dealing with the crisis that we inherited when people like me came to the agency in 1984. So what would you do? Well, we do what we did in 1984, right? Okay. We’re not geniuses. In 1984, and we didn’t invent it in 1984, we inherited it. Right? I’m not claiming credit for this.
We would have regular reports, and in particular, we would have two reports with regard to interest rate risk. One, how insolvent was the place on a market value basis? Two, if interest rates increased by 1%, 2%, 4%, 6%, how much more insolvent would the savings and loan in that case be? Right? Guess what? Have you seen those two charts?
[00:28:31] Grumbine: No, I have not.
[00:28:31] Black: No. And they’re not secret because they’re collated, they’re combined. You don’t find the individual institution, you could have that for the entire industry. Those would be the two charts you would absolutely need. Now, the next thing is the old joke about never missing a chance to miss a chance after the great financial crisis. And they said, you know what really needs to happen in supervision?
We need to give the economists more power. Now, the economists had been the problem at all top ends in central financial regulation. And so the answer was to give more power to the people who are the problem. And as I say, get rid of any independence and put you inside treasury. Okay, so they created FSOC, Financial Stability Oversight Council, which is the economists’ dream. They’re supposed to be this cloister of monks.
That do deep thoughts and deep research and are always looking for the next problem before it occurs. So you aren’t being generals fighting the last war. And then they’re supposed to come out with real answers to how to intervene to get left of boom so that there isn’t a problem. Except that economists are the last people in the world to think that way.
So I will now paraphrase, but it’s almost a direct quote, what FSOC did when it did circa 2014, a special report to Congress on interest rate risk, forward thinking. And it said, as I say, this is almost a direct quotation and the entire substance of the recommendation. One: banks should continue to monitor interest rate risk. Two: regulators should continue to monitor interest rate risk. Whoa. Thank you.
[00:30:48] Grumbine: Blinding flash of the obvious.
[00:30:50] Black: Whoa, what a PhD in economics will do for you. Okay, so that’s useless, right? And it’s deliberately useless. So you’re not even trying. And then they did, because they’re economists, 75 PowerPoint slides of which exactly zero included the two slides you needed. Which is how big are the market value losses due to interest rate risk, and how much will they increase?
And if you wanna get wonky, because banks can play yet another accounting game I haven’t described, they can move these assets from different accounts. Some of which they can vary the loss for nearly forever and others where they can recognize a gain due to interest rate changes that are in their favor. Right? So you might also want a chart on how many people were gaming the system.
And if you had extra time, you’d do a chart on how many people were gaming it by inadequately doing hedges like interest rate swaps that I just described, and then selling the swap prematurely to book a gain when there was actually a loss, net net due to interest rate risk. I have not heard a single treasury or regulator talk about any of those charts, or frankly, those issues.
[00:32:41] Intermission: You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon. Like and follow our pages on Facebook and YouTube and follow us on Periscope, Twitter, Twitch, Rokfin, and Instagram.
[00:33:32] Grumbine: If I am a person that’s planning to create a regulatory environment for this space, we need people, we need money, we need tools, we need laws and access that support our mission, and then we need the green light from whoever we report to, whether it be the president, the treasury secretary. We need to have the buy-in that our mission matters and that we’re free to conduct our operations as we require.
How would you structure a regulatory environment in terms of staffing and ratios between institutions? It seems like we underfund these kind of efforts. We understaff them and then don’t allow them to do their jobs. What would an effective regulatory agency look like?
[00:34:31] Black: Okay, so part of that was like consultants speak and that’s the worst thing in the world that you would wanna do. And it’s therefore, of course, their absolute default. That’s exactly how they would phrase it, except for the people part. Okay, so let me tell you what worked. First, it was 95% people, maybe 98% people, in terms of changing things in the savings and loan debacle.
It’s easy to see because when you change from Dick Pratt, the libertarian economist and creature of the industry, to Ed Gray, it takes about six months. But that’s when you get the complete change. And Ed Gray was a personal friend. Not just a politico, a personal friend, not only of Ronald Reagan, but Nancy Reagan, which in this world was actually very important.
And despite that, and despite the fact that he knew that Ronald Reagan would hate what he was doing, he reregulated and resupervised the industry, because he felt that’s what Ronald Reagan would have done if Ronald Reagan was willing to be open to the facts. Interesting way of phrasing it. Right.
[00:36:04] Grumbine: Uh huh.
[00:36:04] Black: Second thing, which we could do now and which any president could do, Ed Gray proceeded to ask everybody he ran into who was in a position to give substantive guidance. Who are the two best financial supervisors in America? Then he personally recruited them and hired them and put them in the two epicenters of the savings and loan debacle. So they’re almost always epicenters.
It’s almost always not just randomly split in geographic terms in the United States. So you look for where the problem is worst, you get the best people, you put them there and you tell them, change it. Fix it. I don’t want process. I don’t want tons of reports. I want you to fix it. You do what you need to do to do that. So they proceeded to recruit people as well.
And because they had stellar reputations, guess what? People wanna work for people with stellar reputations who are actually gonna do something. So that gets you through much of the stuff now. There were innumerable things that Gray had to deal with, that even with the craziness of the modern era, you wouldn’t have to deal with because the Reagan administration was insane. Right.
And it wasn’t just the Reagan administration, it was a Democrat leadership as well. So when Gray started to reregulate and close the worst thrifts, because when you’re being looted by the CEO, every day you stay open, can be tens of millions of dollars in additional losses. So you really, really wanna prioritize those and you wanna take chances, you wanna put them in receivership before you have the perfect case made.
Because the perfect case might be three years from now and at 10 million dollars a day in additional losses, that would be insane. So you have to get people who are not only good, but are willing to take chances, prudent chances that make sense. Who are willing to lose sometimes, to fail sometimes to do these things. Okay. Gray does that, and the OMB, Office of Management and Budget, threatens to make a criminal referral against Gray personally on the grounds that he was putting too many insolvent thrifts into receivership.
The next time someone tells you that the regulators were always pushing for forbearance, that was the predecessor, that was the economist, Dick Pratt. The opposite under Ed Gray. And the second is when we went forward with regulations. Charles Keating that you mentioned had so much political juice that within three weeks of beginning the effort, he got a majority of the House of Representatives to hear that statement, a majority of the members of the House of Representatives to not just vote in favor of, to co-sponsor a resolution calling on us to back off of reregulation.
And that wasn’t just a majority, it was the entire leadership of both parties. And Ed Gray therefore said no to a president that he loved, no to threats that they would criminally prosecute him for doing his job and no to a majority of The House, including the bipartisan unanimity of the leadership of The House telling him not to go forward. So, one Ed Gray is worth 2000 of these useless people that want careers.
Now, this ended Ed Gray’s career. The two people that were the best supervisors in America. One was Joe Selby. He, in fact, was the most distinguished, and gray put him in the absolute worst place, which in the savings loan debacle was Texas. And with the substantial aid of Jim Wright, a Democrat Speaker of the House, Selby was forced out on the grounds that he was a homosexual. Beginning to sound like familiar times.
[00:41:16] Grumbine: Yeah, wash rinse repeat.
[00:41:18] Black: And Mike Patriarca had his jurisdiction removed over Lincoln Savings when the five US Senators, the Keating five and Jim Wright came together to extort Gray’s predecessor, who of course caved to that kind of pressure. So you should not assume that you can create something that works for all time as a regulatory apparatus. Eventually, there will be times when there will be people in who give in to political pressure, who have career aspirations.
We, at the big law firm I started at, always referred to the thing that was my greatest skill as a CLG, a career-limiting gesture. And, and we were all very good at CLGs, and that’s what you need. People quite willing to have their career in that field end, but they’re dedicated to the public and they won’t give in to the intimidation. Now, the other thing that you’ve talked about is true and is particularly important on a long run basis, and that is budget.
And there’s actually a term in criminology for this, and it’s the deliberate creation of systems incapacity, and it is political. For 30 years, the House of Representative Republicans have had an unholy war against the Securities and Exchange Commission and the Commodities Futures Trading Commission at the behest of very rich investors who do not want honest markets.
And so even today, when overwhelmingly trading is done by these ultra fast methods, they have denied the SEC and the CFTC sufficient budget to even get computers that could possibly monitor the trades. They want to make it impossible for the SEC to get left of boom. So sometimes it is political and that is why Senator Warren put the Consumer Financial Protection Bureau, CFPB, in the Fed because the Fed of course, makes profit, huge profit.
And so Congress couldn’t deny the Fed the budget because the Fed doesn’t have a budget from Congress. And the Republicans have always hated that and are continuing to make efforts. And let me now bring up the third huge new problem that’s gonna get vastly bigger. And that is the federal judiciary.
[00:44:26] Grumbine: Oh.
[00:44:26] Black: Particularly under this new Supreme Court, they are determined to make effective regulation illegal. Not impossible, unlawful. So they are bringing back their own version of substantive due process in which they say, no, you shouldn’t be able to constrain that because you have a market right to do these things. And no, you can’t use regulators to do regulations.
It’s an important issue. They’re creating a new doctrine and on important issues only Congress can proceed and it can only proceed by statute. Now, Congress has no ability to do the regulations necessary, and that was when Congress was semi-functional. And now in the House it’s a clown car show again. Right? Again, a literal clown show with public urination discussions that go on for 20 minutes.
So we are not gonna be able, as regulators, we’re going to have to either win the judiciary, we have to save the judiciary. If you wanna save American democracy. Democrats have been way too quick to say, oh yeah, no, we’ve won a number of these things. Yes, but that tells you how ultra extreme Trump’s positions were, that there was no conceivable way.
And even then you saw that one judge that was dealing with the warrant, the seizure of the information who created new procedures and tried to win for Trump. Anyway, what we’re seeing is fantastically anti-regulatory, but also extreme hostility against convicting elite white collar criminals among the Trump appointees and indeed the Bush appointees before them. So we’re going to have to have ferocious rear guard strategies unless and until we can save the judiciary and save democracy in America.
[00:46:51] Grumbine: You’re talking about it, but Congress doesn’t understand money and they have Article 1, section 8 driving their purpose as they are the ones in control of the purse strings. They clearly do not really understand banking. They’re reliant on people in industry to advise them about this stuff. We have to have representatives to debate or go through whatever process, but are these people really the people we need doing this? They don’t have any pre-knowledge to even judge whether they’re being hoodwinked.
[00:47:24] Black: True, but to be serious, it was easy to find Mike Patriarca
[00:47:29] Grumbine: Okay. Fair enough.
[00:47:30] Black: after the great financial crisis, and you knew when President Obama didn’t seek out any of us, that they didn’t want to succeed, and they had no clue how you would succeed. You have to remember that the Democrats went all in on reinventing government. And that the purpose of reinventing government was to make sure we would not get left of boom.
So I left the government when it became clear they had made it impossible for me to succeed going forward. When they told us, and this wasn’t some general advisory, this was official training on how under reinventing government we were to be regulators, which became an oxymoron. And the phrase, which I heard personally in not some casual conversation, but in their official training was we were to “treat the bankers as our customers”.
[00:48:41] Grumbine: Ugh god,
[00:48:42] Black: That is virtually word for word, quotation.
[00:48:46] Grumbine: Isn’t the customer always right?
[00:48:48] Black: Well, you don’t mess with customers, and it was expressly phrased that if we had to prosecute and convict someone, that was a regulatory failure. As you recall, we got over 1500 elite convictions.
[00:49:09] Grumbine: We haven’t seen too many since then, though, have we?
[00:49:12] Black: No, but again, that’s the point. So yes, they don’t know what they don’t know, but it’s not hard to do what Ed Gray did. Start there. Who are the people with courage and competence who are willing to have a very limited career in public service if that’s necessary to do the right thing.
[00:49:38] Grumbine: I like that part. I look at regular politicians and I say, wouldn’t it be better if you were willing to be a one termer and to say the things that no one else has said than to try and be a lifer and do absolutely nothing remarkable?
[00:49:53] Black: And feel good about yourself? Y
[00:49:55] Grumbine: Yeah. To me it doesn’t make any sense. I would rather do my four years or two and a half. If I got kicked out, I’d do it with honor and bust some chops and fix things than to just coast along and keep going on with it. I would definitely be in the group that said, yeah, sign me up for one term or less.
[00:50:15] Black: Well, you have to be willing to do the things that will make you unelectable. I’m not positive that if someone actually did that, they would be defeated for reelection necessarily. They certainly wouldn’t get donors. Big donors,
[00:50:32] Grumbine: They wouldn’t get donors. They wouldn’t get party support.
[00:50:34] Black: Right. So we had a bunch of people who had exactly that, who were willing to lose their jobs, and we did. But you keep your sanity and your conscience and you don’t have to avoid looking in mirrors.
[00:50:53] Grumbine: One of the things that is really painful, having not really had a great deal of experience with whistleblowers, then. Having met your band of friends who are all serial whistleblowers, such as yourself, and to realize that once you cross into the whistleblower territory, you’re perpetually having to try to explain to people that you did the right thing and having to tell the story. Because ultimately they’ll do everything they can to silence you and to make you ineffective.
[00:51:24] Black: Yeah.
[00:51:24] Grumbine: Just thinking about Michael Winston’s story, there’s so many people that you hear the things they did when they raised their hand and said something ain’t right, and their lives become scary.
[00:51:40] Black: Yeah. Let me give you two specific examples of your point from the savings and loan debacle from high level officials who would’ve been considered the adults in the room unlike us. So one was the chief of staff to the new chairman that removed our jurisdiction over Lincoln Savings, the name of Jim Boland. And he knew Mike Patriarca from the old days and said to him, we did you guys a favor when we removed your jurisdiction over Lincoln Savings because Keating is so powerful, they’ll get you in ways you’ll never know you’ve been gotten.
That is word for word. So obviously that’s what they felt, you know, that they had to give into him, give him this incredible sweetheart deal. That led to incredible tragedy because otherwise he would get them. And the other one was Jordan Luke. Jordan Luke was the chief counsel top lawyer in the agency talking to me. And this is not a friendly talk. He’s trying to put a shot across my bow in Naval terms.
And he goes: do you know why Danny Wall, the new chairman of the agency after Ed Gray doesn’t trust you, Bill? No. Well, because you took on Jim Wright. Jim Wright was this incredibly powerful Speaker of the House. And I go, what? He said, well, first he thought substantively Jim Wright is so powerful and so vindictive that you put the entire agency at risk by not giving into his demands to do sleazy things for the frauds. Including by the way, fire Joe Selby on the quote, unquote grounds that he was homosexual.
The second thing is it meant that Danny didn’t trust your judgment because it meant you would do something so insane in terms of your own risk and therefore you couldn’t be trusted. So I think your point, those two illustrations you were dead on in terms of your analytics, that’s exactly what it is. And those guys both thought that they were morally superior because of the positions they took.
[00:54:15] Grumbine: I remember when Richard Bowen was talking about what he experienced as he tried to get his story out to Congress about the fraud he had seen and him trembling at home, fearing getting in his car that it would blow up. It is not a safe environment to be somebody who’s a man or woman of integrity within the system.
[00:54:38] Black: You’re telling this to the guy that Keating put in writing: “Highest priority. Get Black. Kill him dead”.
[00:54:47] Grumbine: I was trying to lead to that, but you got there. Yes, that’s exactly my point though, Bill. We are in a country that the Libertarians won going back to the sixties. They have done everything they could to rip this joint down to the bones and the power elite, the powers that be, that live a different life than we do have empowered that mindset of free markets.
All the things you’ve already stated, we didn’t get here overnight and we certainly didn’t get to this point by only a couple of bad eggs we got here by an extreme level of disregard for mankind and the global citizen and the power elite are winning every day. There’s capture of our government by industry and the revolving door from industry to government and back to industry again. How do we put an end to that when we have the proverbial wolf guarding the henhouse here? How could we do this when the people that would pass the laws are in on it?
[00:55:54] Black: Quis custodiet. So you can’t end it. There’s no such thing in this context as a decisive battle that you win it and it’s over. Every generation has to fight for a rule of law and democracy and some basic humanity towards each other and doing your duty. So I’d make a friendly amendment. They’re not libertarians, they’re faux libertarians.
[00:56:26] Grumbine: Okay. Fair enough.
[00:56:27] Black: They make their money off of the government typically. They constantly manipulate the government. I like markets. I like effective markets. You know, I got no problem with effective markets. I saw my job as helping to create those. So part of the answer, and it comes back to your broader question about how do you work as an effective regulator. We had two slogans and one is immediately to the statement you just made.
It’s a variation of the House of Orange, by the way, in the Netherlands that eventually won a hundred year civil war against the most powerful army in the world, which was then Spain. The short version of it is, it is not necessary to hope in order to persevere. So we persevered. The second slogan was: Never chase mice while lions roam the council. And currently regulatory leaders, and currently meaning the last 20 plus years, exclusively chase mice. And actually they don’t chase mice. They have minions who they direct to chase mice and they rarely catch even the mice.
[00:57:54] Grumbine: Is this just a distraction technique to give the appearance that they’re doing something while doing nothing.
[00:58:00] Black: It isn’t just that you feel you’re supposed to be doing something, but yes, it’s resumes as well. So remember in the great financial crisis response, they didn’t prosecute any of the elite criminals, but they brought civil cases, not against the individuals, but against the corporation. Where effectively the CEO was getting immunity for himself by giving a bunch of shareholder money to the government, it’s a win-win.
And so I guarantee you every one of those Justice Department lawyers has on his resume “negotiated 12 billion settlement with X, Y, Z bank” as a key thing. And of course, what happened to the stock price in almost every case when they announced those settlements? It went up.
[00:59:03] Grumbine: And that’s something. Bill, I really appreciate you taking us through this. It’s easy to see the problem. Well, it’s not always even easy. It is if you can have clear eyes and have somebody eliminate the noise so you can just hear the facts. But having a real effective approach to attacking it is usually the thing that we don’t have. We hear the problem, we don’t hear the solution.
And to me, what I heard was we need people with moral conviction that are willing to be a short timer in their career to make a difference and make an impact. And each generation is gonna have to fight this fight. There’s no one silver bullet. It’s gonna come up again. We have to find a way to put it down.
[00:59:48] Black: Yeah, and here’s the good news about that. The constant thing from Richard Bowen, from Michael Winston, from Joe Selby, even when he was driven out of government. From Mike Patriarca for me is all of us would do it again in a heartbeat, knowing what the outcome would be. We’d do it again.
[01:00:14] Grumbine: You’re a hero.
[01:00:15] Black: No, we’re not. We’re normal people and we had the great privilege to work with other people like us, and there were lots of them. There are a whole bunch of really, really good people. And again, it’s easy to recruit. If you hire the Mike Patriarcas of the world, the right people reflect to work with him or her.
[01:00:45] Grumbine: Well, I’m gonna let that be the final word, sir, you are a brilliant man. I appreciate you taking the time, and it’s been too long. It’s so nice to have been able to say hello to your lovely wife, June, and just to hear your voice again, Bill, it means a lot to me. I’m really glad to have had you on, and I hope you won’t be a stranger.
[01:01:05] Black: Not at all. It’s good to be back. Thank you.
[01:01:07] Grumbine: Absolutely. All right, friends. My name’s Steve Grumbine. I’m the host of Macro N Cheese. My guest Bill Black. Please check out our other podcasts. They’re evergreen. They’re intended to be there for you to learn. We’re a nonprofit. We’re all volunteers. We don’t make a lot of money here as an organization, but it does take money to keep these lights on. So by all means, please consider becoming a donor. Bill, thank you so much once more for joining me. We are out of here.
[01:01:43] End credits: Macro N Cheese is produced by Andy Kennedy. Descriptive Writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.
“It is not necessary to hope in order to act, nor to succeed in order to persevere.” William of Orange
Bio
William K. Black is Associate Professor of Economics and Law at the University of Missouri, Kansas City, where he teaches White-Collar Crime, Public Finance, Antitrust, Law & Economics. He covers markets and regulation with his speech “Unsound Theories and Policies Produce Epidemics of Fraud and Regulatory and Market Failures.”
https://billmoyers.com/content/william-k-black-on-u-s-financial-fraud/
https://www.pbs.org/moyers/journal/04032009/profile.html
PEOPLE
Brian Romanchuk
Dr. Brian Romanchuk is a consultant and author with 15 years of experience as a senior quantitative analyst in fixed income.
https://talkmarkets.com/contributor/brian-romanchuk/
Charles Keating
Charles Humphrey Keating Jr. (December 4, 1923 – March 31, 2014) was an American sportsman, lawyer, real estate developer, banker, financier, conservative activist, and convicted felon best known for his role in the savings and loan scandal of the late 1980s.
https://en.wikipedia.org/wiki/Charles_Keating
Michael Winston
https://americanswhotellthetruth.org/portraits/michael-winston/
James Boland
Jordan Luke
https://www.c-span.org/person/?4213/JordanLuke
M. Danny Wall
https://apnews.com/article/22cf149735ef608f838c720053d3b90b
Richard Bowen
https://americanswhotellthetruth.org/portraits/richard-bowen/
Paul Jay
Paul Jay is a journalist and filmmaker. He’s the editor-in-chief and host of theAnalysis.news, a video and audio current affairs interview and commentary show and website.
https://theanalysis.news/about/
https://www.huffpost.com/author/paul-jay
Richard Pratt
https://www.latimes.com/archives/la-xpm-1989-03-05-fi-95-story.html
https://www.upi.com/Archives/1983/03/14/Savings-and-loan-business-survives-crisis/3439416466000/
Edwin Gray
Edwin J. Gray is an American politician and businessman who served as the chair of the Federal Home Loan Bank Board in the 1980s.
https://en.wikipedia.org/wiki/Edwin_J._Gray
Joe Selby
Jim Wright
James Claude Wright Jr. (December 22, 1922 – May 6, 2015) was an American politician who served as the 48th speaker of the United States House of Representatives from 1987 to 1989. He represented Texas’s 12th congressional district as a Democrat from 1955 to 1989. -From Wikipedia
https://history.house.gov/People/Detail/24127
Michael Patriarca
https://www.c-span.org/video/?15176-1/savings-loan-senate-ethics-investigation
Elizabeth Warren
https://www.warren.senate.gov/imo/media/doc/Official%20Bio%20with%20photo.pdf
Keating Five
The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger savings and loan crisis of the late 1980s and early 1990s. The five senators; Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle, Jr. (D-MI)—were accused of improperly intervening in 1987 on behalf of Charles H. Keating, Jr., chairman of the Lincoln Savings and Loan Association, which was the target of a regulatory investigation by the Federal Home Loan Bank Board (FHLBB). The FHLBB subsequently backed off taking action against Lincoln.
https://en.m.wikipedia.org/wiki/Keating_Five
Ronald Reagan
https://www.reaganlibrary.gov/reagans/ronald-reagan
INSTITUTIONS
Federal Home Loan Bank Board (FHLBB)
https://en.wikipedia.org/wiki/Federal_Home_Loan_Bank_Board
Fannie Mae
Lehman Bros
https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
Bear Stearns
https://www.history.com/this-day-in-history/bear-stearns-sold-to-j-p-morgan-chase
American International Group (AIG)
Freddie Mac
https://www.freddiemac.com/?gclid=EAIaIQobChMI56H54c6n_gIVO9_jBx0luQOuEAAYASAAEgIyPvD_BwE
Office of Management and Budget (OMB)
https://www.whitehouse.gov/omb/
Federal Deposit Insurance Corporation (FDIC)
Financial Stability Oversight Council (FSOC)
Lincoln Savings and Loan Association
https://en.wikipedia.org/wiki/Lincoln_Savings_and_Loan_Association
Securities and Exchange Commission (SEC)
Commodities Future Trading Commission (CFTC)
Consumer Financial Protection Bureau (CFPB)
https://www.consumerfinance.gov
EVENTS
Savings and Loan Scandal
https://en.wikipedia.org/wiki/Savings_and_loan_crisis
https://www.ojp.gov/pdffiles1/Digitization/176104NCJRS.pdf
Silicon Valley Bank (SVB) Collapse
https://www.theguardian.com/business/2023/mar/17/why-silicon-valley-bank-collapsed-svb-fail
Great Recession
https://en.wikipedia.org/wiki/2007–2008_financial_crisis
https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath
House of Orange
https://www.britannica.com/topic/House-of-Orange
CONCEPTS
Swap
In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount. -From Wikipedia
https://www.investopedia.com/terms/s/swap.asp
Bank Run
https://www.investopedia.com/terms/b/bankrun.asp
Hedge
To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged.
https://www.investopedia.com/terms/h/hedge.asp
https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
Liquidity
https://www.investopedia.com/terms/l/liquidity.asp
Bank Stress Test
A bank stress test is an analysis conducted under hypothetical scenarios designed to determine whether a bank has enough capital to withstand a negative economic shock.
https://www.investopedia.com/terms/b/bank-stress-test.asp
Money Market Mutual Funds
https://www.investopedia.com/investing/introduction-to-money-market-mutual-funds/
Article one, section 8 of The United States Constitution
The constitutionally enumerated powers of Congress
https://constitutioncenter.org/the-constitution/articles/article-i#article-section-8
Libertarian
Libertarianism is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state’s encroachment on and violations of individual liberties.
https://en.wikipedia.org/wiki/Libertarianism
https://www.theamericanconservative.com/marxism-of-the-right/
Quis custodiet ipsos custodes
Latin for “who will guard the guards themselves?”
https://www.iclr.co.uk/knowledge/glossary/quis-custodiet-ipsos-custodes/