Banking Law

Former FSLIC official, and current college professor, Bill Black, has been trying to paint the banking industry with a broad bush just chock-full of black paint for decades. To me, he is, and has been for some time, a cartoon character who's so over-the-top that it's hard to believe that anyone takes him seriously. Then again, this blog is frequently so over-the-top that the only people who take it seriously are unemployed "management consultants," certain underemployed federal banking regulators, and lawyers for Diana Taylor who fail to understand that the fine line between true love and stalking is not a bright one. Therefore, I understand guys like Black, except for the fact that Black appears to actually believe his own bloviations.

Black was at it again not long ago on the PBS show "Bill Moyer's Journal." Moyer, former press secretary to President Lyndon Johnson and once a respected journalist, whose mind appears to be turning to mush, served up so many softballs and leading set-up questions that Black might as well have been interviewing himself. The relatively short excerpt from the interview embedded below gives you an idea of Wild Bill's major premise, which is that the entire mortgage meltdown--subprime, prime, and all shades in between--was caused by a deliberate and widespread fraudulent "Ponzi scheme" perpetrated by the "top elites" (I don't understand the difference of "top" and "bottom" elites, but perhaps it has something to do with kinky sex) of the "boardrooms and executive offices" of the nation's largest lenders, investment bankers, securitizers, and rating agencies.

So, according to Black, CEOs and directors of both regulated and unregulated banks like IndyMac deliberately concocted a scheme to make "bad loans" (which "pay more than good loans"). The CEOs were able to by-pass ("suborn") internal controls because internal "accountants" report to the CEO and the CEO controls the "accountants'" compensation. I assume that Black meant "auditors" instead of "accountants" and that he's been out of the loop of even overseeing banks (much less working for one) for so long that he forgot that the internal audit function reports to the audit committee of the board of directors.

Black never mentioned the incentive for directors, especially outside directors, to consciously participate in planning and executing a criminal conspiracy which was bound to ultimately fall apart. He discusses the motivation of CEOs (bonuses) but not of directors. Directors may have been negligent, but that's not what Black's alleging. He alleges that directors of the largest lenders committed deliberate "fraud."

Black agrees "absolutely" with Moyer's statement that various mortgage securitization structures were "deliberately created so that swindlers could exploit them," and that ratings by the rating agencies were deliberately, consciously falsified. He states that the rating agencies didn't look at the underlying loan files and that when they did after the loans started going south, they didn't like what they saw. That seems to indicate gross negligence rather than fraud, since if you don't know that the loans are bad, how can you know that you're falsifying ratings, which is what Black is alleging?

Moyers gets an incredulous, and Black a superciliously knowing, chuckle out of the "fact" that what caused the current crisis was a "systemic Ponzi scheme," a criminal conspiracy. Black admits that there are "many laws against fraud." That being the case, then I expect that if Black's allegations are true, we'll see massive criminal prosecutions of CEOs and directors of the nation's largest lenders, especially of those like IndyMac, which Black singles out as a purveyor of "liar loans" (Every Alt-A loan involves every borrower deliberately falsifying his or her income and assets, according to Black). If we don't, then I'm sure Black will scream that the top officials of the FBI and the US Justice Department are deliberately participating in this systemic Ponzi Scheme.

I don't hold out much hope that the recently formed "truth commission" that is supposed to come to some conclusions about the causes of the mortgage crisis will not descend into political posturing by the members. However, I put more trust that such a commission will stumble to some conclusions of real merit, including evidence that there was fraud involved in various segments of the mortgage business, including borrowers, lenders, title insurers, appraisers, lawyers, real estate agents, rating agencies, securitizers, investment bankers and others, than I do that Black's overheated allegations point to any useful conclusion.

Ya' see, Bill, just when you think you've got it all figured out, things turn out to be not what they appeared to be, as the following vignettes from that brilliant source of insight into American culture, Bud Light, so dramatically reveal.