6/9/2011 11:53 AM ET|
Why no punishment for CEO greed?
One lesson of the financial meltdown is that if regulators aren't looking for fraud, they aren't going to find it. And they still aren't looking.
The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity and the failure of regulators to do their jobs.
We have seen this in the financial crisis that started in 2008 and in an earlier era, when the savings-and-loan industry collapsed.
In the Texas "Rent-a-Bank" scandal of the 1970s, for example, two ringleaders created a fraud network of 50 lenders that caused billions of dollars in losses. The watchdogs removed and sanctioned one of the main culprits, but because the crimes weren't prosecuted, the same crooks reappeared in the 1980s to do it all over again, only on a bigger scale. Unless you imprison the fraudsters, sophisticated financial scams grow ever more destructive.
It seems as if we have forgotten this lesson.
Take the seven senior officials convicted in the failure of one of the lenders that drove the 2008 credit crunch. All of the cases arose from an investigation of Taylor Bean & Whitaker Mortgage. The first trial occurred earlier this spring -- 6 1/2 years after the FBI warned publicly that there was an "epidemic" of mortgage fraud and predicted that it would cause a financial crisis if it weren't contained. The trial and conviction of Taylor Bean's former chairman, Lee Farkas, occurred nine years after his crimes were suspected.
Taylor Bean was a small Florida mortgage broker before the fraud began as the housing boom took off. Fannie Mae had cited Farkas for multiple violations but had never filed a criminal referral, which would have triggered an investigation. Had it done so, Farkas might have been prosecuted and Taylor Bean shut long before it caused so much damage. Instead, it expanded, then failed, pulling down a bank with it at a cost of $2.8 billion to the Federal Deposit Insurance Corp. Farkas plans to appeal the verdict.
The Office of Thrift Supervision, the successor to the S&L regulator where I worked, made no criminal referrals in the latest crisis. The Office of the Comptroller of the Currency and the Federal Reserve made less than a handful. Mortgage and investment banks also made very few referrals -- and never against their senior officers.
While it is true that banks made thousands of criminal referrals, almost all involved low-level figures. The volume overwhelmed the FBI, which failed to devote adequate resources. As late as 2007, the agency assigned only 120 investigators spread among 56 field offices to probe thousands of cases. More than eight times that number probed the S&L frauds, a far smaller epidemic.
Unlike the S&L debacle, there was no national task force and no comprehensive prioritization. This made it difficult to investigate the huge, fraudulent subprime lenders. And because there were no criminal referrals of these firms, the FBI wasn't even attempting to pursue them.
The two great lessons to draw from this epidemic of fraud are that if you don't look for it, you don't find it, and that wherever you do look, you do find fraud.
The FBI was concentrating on retail banking, or individual borrowers and smaller lenders. But the big problems were being created in the wholesale end of the business, where loans were pooled, packaged, sold and securitized. Because the FBI looked at only relatively small cases, it found only relatively small frauds.
The FBI has been processing no more than 2,000 mortgage-fraud cases a year. There are two things to consider, though: Not only were they the wrong cases to focus on, but they amounted to nothing in light of the estimated 1 million fraudulent mortgages made annually during the housing bubble years.
The FBI -- deserted by the banking regulators and undercut by the Justice Department -- was so desperate that it formed a partnership with the Mortgage Bankers Association in 2007. The trade association had created an absurd definition of mortgage fraud under which accounting frauds by a lender were impossible and bankers were the victims. By 2009 the financial crisis had become so acute that Treasury Secretary Timothy Geithner discouraged criminal investigations of the large nonprime lenders.
Loot the bank and walk away
Nobel laureate George Akerlof and Paul Romer wrote a classic article in 1993. The title captured their findings: "Looting: the Economic Underworld of Bankruptcy for Profit." Akerlof and Romer explained how bank CEOs can use accounting fraud to create a "sure thing" in the form of record short-term income, generated by making low-quality loans at a premium yield while making only minimal reserve allowances for losses.
While it lasts, this fictional income allows the chief executive officer to loot the bank, which then fails, and walk away wealthy.
In criminology, we call these accounting-control frauds, and we know that they destroy wealth at a prodigious rate. There's no "if" about the losses -- the only questions are when they will hit, how big they will be and who will bear them.
The record income produced explains why those involved get away with it for years. Private markets don't discipline companies reporting record profits. They compete to fund them. Fraudulent CEOs can control the hiring and firing and can create the perverse incentives that produce a dynamic in which bad ethics drive good ethics out of the marketplace.
Sophisticated accounting-control frauds not only sucked in employees who should have known better, but also loan brokers. The result is that the large fraudulent lenders -- those making a lot from liar's loans -- produced an echo epidemic of deception.
Fraud, it turns out, begets fraud.
William K. Black is an associate professor of economics and law at the University of Missouri-Kansas City and the author of "The Best Way to Rob a Bank Is to Own One." The opinions expressed are his own.
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Actually, this is one of the few good articles I have seen posted on MSNBC.
The banking and investment execs and their political stooges have caused more damage to the US economy than any middle eastern terrorist could have dreamed of. They all need to be held accountable for their criminal acts and then charged with treason!!!
I don't care how much the ruling azzhats at Goldman Suchs and Citibank make or made, I care that they have the ability to devastate our economy and the selfishness to do it.
By buying politicians and getting their former executives into powerful positions at the Fed, Treasury & other gov't positions, they have managed to strip away regulations that protect US from their greed. This is not me being jealous or anti-capitalist or left-wing radical (I'm none of these things), it's non-partisan fact.
Steve you are deluding yourself if you think this is a partisan issue. The deregulation of the financial system in this country goes all the way back to Carter. The wealthy in this country have been "investing" their money in lobbyists for decades. They successfully changed the laws to make legal what was before illegal. Little known fact, corporate contributions are and have always been split pretty much 50/50 across party lines. The republicans are not the party of the "ultra-wealthy" nor are the democrats the party of "the working man". I believe NAFTA was Bill Clintons' baby after all. All politicians, republican as well as democrat have been in collusion with big business for decades. They sold us out so they could assure their place in the new Plutocracy that America has become. This is why they have not and likely never will be punished. because the very people we rely on to watch over these people are the ones that opened the vault and let the crooks in.
Bought and paid for. Why haven't the banks been REGULATED? the banks have gone off to be loan sharks...look at the rates they loan for? Why.....Bought Congress and paid a good price. We should see each and every Elected officials Bank Balances, on all accounts and where all the millions come from. Arabs, CEO's of Banks, Big Businesses, Arms Manufactures etc. Time to Clean House in the Elected offices. Should be called house of LOOTERS (Congress)
We are in a depression.....
What does ILLEGAL mean to Congress? Illegal is ILLEGAL and should not be getting payments every month for housing, medical, food stamps...ILLEGAL Aliens need to be sent home.....and cut immediately from the FREEBIES they get off the US TAX payers backs...
I was being defrauded by two banks. The were also defrauding the IRS. I gave the IRS an iron clad case against these banks, and they refused to take steps. I had to sue, and spent in excess of $100k yet could not get a date in court. My suspicion is that the judge was paid by the banks. This was confirmed when in desperation I called the judge's chambers and said I want my day in court or I will report you to the Attorney General. Days later we had a new judge, the old judge had passed the case over. I still reported the crooked judge to the Attorney General who has never even bothered to respond to my complaint.
I had no money left to pursue, so had to settle. If the IRS or justice system had worked as it is supposed to this would have been done decades earlier. The criminals involved would have gone to jail where they belong. Apparently our justice system is only there for the wealthy to use it against the average little guy.
Please educate us Ryan (and cohorts). Tell us what great things you have done for king and country that makes your opinion valuable.
The internal corporate corruption described in the article is what happens when you have a corrupt culture. It always happens to empires that grow wealthy, old and then stupid as they forget all of the things that they did to become a success.
The current corporate mechanism is flawed. It encourages people (even people who may be decent in other aspects of their lives) to do unethical and immoral things.
The path of ALL corporations is that they start out performing a valuable function. It is how they gain customers and then develop a good reputation. But, once they become big enough, the constant demands to deal with diminishing growth in profits always results in that implicit conflict of interest at the personal as well as the organizational level. At first, the easy ideas become scarce and it then requires ever more work to accomplish any growth that was once easy. Then, it becomes a matter of cost cutting when the ideas run out or if the prior ideas did not work out.
At the personal level, executives begin to convince themselves that what they do is justified and "worth what they are paid". At the corporate level, it becomes a situation where everyone and no one is responsible (people hide in the onbcurity of the corporate machine). All of this is the basis of the sociopathic behavior we have seen out of companies; history shows the type of atrocities humans can produce while convincing themselves that they are not responsible for the consequences of their role in a larger group.
The modern corporation fell off the horse when it ceased to understand that the shareholders are NOT the only STAKEHOLDERS. When you operate with the wrong facts and with an incomplete picture, what you get is always going to be suboptimal (or in like in the case of the financial mess and unscrupulous companies like Enron, WorldCom and Tyco - disastrous) results. When the trust is gone, it is awfully difficult to recover and it results in the sort of frictions that cause a slow growing economy that the U.S. is experiencing right now.
These people were suppose to be our best and brightest. But, it looks like they were only so in a few "favored" dimensions but were completely incompetent in other ways.
What about this is new, exactly?
There is no excuse that greedy bankers, wall street con artists or ceo liars should be let off the hook. The wall street bums are actually proud of themselves - 'Hey, look what we did. We brought down one of the largest economies in the world'. Not supposed to trade dirivitives anymore? No problem, we're doing it anyway.
Not until several bankers, ceo's and wall street brokers are put in jail and their ill-begotten gains seized to repay the federal deficit will it occur to them that they were actually wrong.
CEOs hide behind the corporate veil of every decision they make being the Company's not their own. Can you imagine how much money a company would save by getting rid of their CEO? Millions....much more than laying off their bottom 10% for sure. The higher up the corporate ladder you are, the more you take from the bottom line not add. Customers rarely decide on a purchase based upon who runs a company, but on their product. Your bottom 10% make that product, not your executives...most of them haven't ever been on a factory floor!
Here's the cure for illegal immigrants - jail executives every time a company is caught with an illegal working for their company!! Until it hits them personally they are not going to give a damn!
If we want to change things Then lets have a National no confidence vote on Congress and the whole federal system. That includes the current administration. With that vote passing all would have to resign and not to do so would be an act of Treason. The people could then rewrite the rules that would govern Congress. WE could install term limits. Prohibit paid lobbying.
Other things that would get Congress in line. Have their pay paid for by their respective state. If they want a pay raise then it would have to be passed by the people. If they want to travel then it would have to be approved or they pay out of their pocket. Acceptance of any gift from anyone. ( free travel, Free Vacations ) etc. would mean immediate expulsion from their seat. No appeals allowed.
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