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.
VIDEO ON MSN MONEY
Only 1 in 3 Americans work full time. So we are going to blame a CEO for Americans being lazy? Face it, people in other parts of the world are just more hungry for the jobs that exist.
Even here - people sit in front of their cable tv on welfare, while a hardworking guy comes here from a Foreign country, no education, and no English - but they find work.
We tried nanny state handouts and all it did was make people fat, lazy and "too" good for work in their own minds.
Gov't had interest rates near zero - and so people pigged out at the all you can eat loan bar. I guess it's easy for some to blame the banks - otherwise you have to look at the people who got greedy with their too expensive homes and investment properties. This is a consumer driven economy - the blame lies with the consumer when they don't pay their debts and cause a recession.
J H - no one forces me to pay the CEO. I don't have to use their company or their product.
Compare that to Gov't - the nly monopoly that forces you to use their "product" at gunpoint.
Also, handouts are over $2 TRILLION a year in the US. All the CEO's COMBINED (all levels) might make $50 Billion.
And at least the CEO did something for the money they get.
All you leftists who want to kill capitalism need to step up to the plate and tell us what you want to replace it with ...
You can't just call for blind revolution without a plan.
Put your plan out there, and let's vote on it
what a bunch of BS,,,, all CEO's are the causing the problem??? LMAO really?? the guy that owns a small business with 10 employees is causing the financial melt down and he should be hung along with the wall street guys??
the reason there is a problem is simple -- wall street and bankers people got smart. that's right, they got smart and figured out not to be judges or CEO's of manufacturing firms,,, they figured out like willy said, i rob banks cuz that's where the real money is!!!
so quit blaming CEO's in general, blame the problem. every person in the US believes he should have a home, the congress gave these guys the wiggle room to get votes,,, blame the congress not the messenger.
CEO's are hired & paid by the board of directors, all answer to the share holders of the company. If you are upset by their pay & actions become a voting share holder & work with the others to get rid of them. Unions would do much better to buy up stock in the company they work for instead of donating to democrats, but then they would see the financial losses from their demands.
The home loan mess was created by democrats as a pay back for the 2000 Gore / Bush election. When republicans tried to look into what was a growing problem, Barney & friends said everything was just fine. As things got worse the low oil supply, due to years of democrats holding back any new drilling of some of the large oil fields, gas shoot up, destroying the tight budgets of home owners & businesses. Then Obama gained popularity with all of his talk to raise taxes, keep gas at $4 +, cap & trade, unions for all, health care no one can afford, & many other spending programs, things dropped even faster.
The Obama job losses began from the fall of 2008 on, along with many years of a democratic controlled congress.
Wow MSN encouraging class warfare. Suprise. Not. How about you people who have a problem with "the rich" create a new product or invent something like Windows or Google or the lightbulb and then invest your life savings into bringing it to the marketing place hoping that you succeed.
Applaud success, applaud ingenuity. Boo on people who have nothing better to do with their lives than to worry that other people have more than them. Boo on those who aren't old enough to remember the USSR and think that Socialism and communism are legitimate options.
The US is the greatest country in the world BECAUSE of capitalism. Because of free markets. If you want to blame anyone for the job situation right now, blame those who make it hard for business to do business. Jobs do NOT come from the gov't or taxes. Jobs come from entrepeneurs, corporations, and small businesses and those "greedy rich" Poor people do NOT provide jobs.
So they are suppossed to go after hundreds of mortgage brokers instead of hundreds of thousands of people who lied on their loan applications?
Fraud is fraud.
This article seems to completely forget that the total amount of fraud created by false info on loan apps dwarfs the amount of fraud by the bankers/mort. companies.
Also, while loan app. fraud is an easy case to win, proving fraud by a bank is far harder. I'm sure we could easily put a few hundred thousand people in prison for the lies on loan apps - which is a Federal Crime (Felony).
check to see how many more luxuries, and limosines the government has now under your ruling class leftist politicians.
It is completely hypocritical to point a finger at people who know how to earn money, then steal money from tax payers for personal gain.
Reply to your biased FHFA numbers is above...
(part 2 regarding the other 2 cites you gave)
You've only cited two OPINION pieces (even the Stanford report acknowledges this by giving a "dissenting views" section; your other cite was even more obviously an opinion piece; and you haven't given any of YOUR OWN supporting facts.
You referred me to a long paper which has supporting facts both for the "dissenting views" and for your own opinion -- which is opposite of those "dissenting views". In addition to your "dissenting views" working in my favor, I referred you to WSJ (they've published multiple FACT-based exposees of Fannie), cato's congressional testimony predicting this economic mess gives the facts+reasoning for WHY they and the WSJ predicted it would cause fiscal upheaval; and yet you still act as though what you've presented somehow gives better "factual" support than my position has, even as your own reference acknowledges that the "dissenting views" have their own supporting facts.
In addition to both of us referencing where people can get more information (as covered in my last paragraph), in this paragraph I'll cover the fact that I've given some supporting opinions/theory with easily-verifiable facts to support some points I made (e.g. GDP and forex are the most easily verifiable: would I really need to hold your hand & show you how to create financial-history charts??) and in contrast, you haven't given us anything to show any PERSONAL comprehension of the fiscal issues being talked about by the wonks on both sides, let alone an understanding of what's being said by the wonks you've cited.
Its sad that since you have no data to show that Fannie and Freddie were the main cause of the crisis, you need to resort to name calling. Its actually pathetic
That fhfa.gov link twists the numbers so as to not include the mortgages that FNMA/FMCC "bundled" for the private-sector, i.e. the "WHOLESALE" mortgage market to quote the MSN article.
(and you've supposedly read and did you understand this MSN article, or have you not understood what the author meant by "WHOLESALE" mortgage-lending?)
FHFA is not an unbiased source for "info" (to quote you) nor is it peer-reviewed data, it's propaganda (FHA & many others were accused from the very start of giving out predatory/unsafe loans, right alongside the accusations at FNMA/FMCC ...did you not know that?? If you didn't know, you should learn something about the topic before posting; if you did know, then you're purposely trying to spread biased data that involves "fuzzy math"). You're either being duped by that propaganda, or trying to dupe others into believing it's valid & unbiased "data".
@ MT: yes, I blame also the politicians ("powers that be"... see "with history unlearned" and on upwards for many facts implicating them.)
I ask you for data supporting your opinions, and you just come back and restate your opinions, must be because you can't find any data that supports them
"independent ?" voter: You cite FHFA on ARM mortgages, as though it's an unbiased source. Worse, you're still citing that FHFA "data" despite that I already showed exactly HOW they've tweaked the data to exonerate themselves & similar gov't agencies to try and make it SEEM as though the private-sector was giving more ARM's/subprimes/Alt-A/NINJA/other risky mortgages -- i.e. I do understand the FHFA's data, and understand that it uses self-serving biased & "fuzzy math" to omit THE FULL TRUTH (i.e. your FHFA cite tells a half-truth, it omits the "WHOLESALE"/bundled mortgages given out by government banks (GSE's) & other agencies, they also didn't only do that later). WSJ are not bloggers, WSJ = Wall Street Journal FFS, exposing again that you're a NOOB in economics (as well as showing your willingness to assume something strange, out of ignorance about who the WSJ even is. Lesson #1 is to assume nothing, grasshopper...if you don't know what "WSJ" means, ask or google for it... but you especially should assume nothing when listening to FHFA's GI-GO methodology or other biased sources LOL). You're either being duped or trying to dupe others, so GFY, troll.
Evidence supporting MT's last claim:
media clips showing which D.C. politicians helped the bankers cause THE BIG ONE (i.e. biggest recession of our lifetime): http://youtu.be/Z5z9lD4C2Io ...then lying about it, blaming their opposition
CSPAN video footage showing the congressional crooks who caused the EPIC FAIL ...in their own words: http://youtu.be/_MGT_cSi7Rs
the pay-off (bipartisan group started by congressmen from both parties, compiles FEC.gov data): opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html
Left wing Liberals fail to remember, THEY, as well as I have control IF we don't like what a CEO is doing with the company and/or profits. Keep your money in YOUR pocket and the CEO salaries come down...Boils down to simple concept: Supply and Demand...
I can clearly see by the posts of so many of you eager to blame Corporate America that you find it much easier to BLAME someone else and are forgetting to look in the mirror. IF you follow Supply and Demand, private business can and will take care of itself..Well, unless the FEDERAL GODVERNMENT continues to GROW. Do you guys not understand? Godvernment is growing, bigger and bigger and it's not Democrats OR Republicans, it is MANY of both...LOOK at what our FOUNDING FATHERS wanted as Government...SMALL..
5 Quick QUOTES FROM Thomas Jefferson...to HELP you LEARN US HISTORY..which tends to escape MOST of today's LIBERALS...
1: A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government.
2: Advertisements contain the only truths to be relied on in a newspaper.
3: I believe that banking institutions are more dangerous to our liberties than standing armies.
4: Never spend your money before you have earned it.
5: My reading of history convinces me that most bad government results from too much government.
Points of EACH quote:
1: Gov't should take very little from the pockets of it's citizens...There were rich, middle and poor people then, and Gov't shouldn't become Robin Hood anymore than it should impoverish those struggling.
2: Today's newspaper is TV news...Don't buy it, be it CBS, CNN, FOX, MSNBC, etc...they are all riddled with lies, surrounded by real news, which exists somewhere inbetween.
3: It's your money, giving to BANK and/or borrowing is to be used rarely.
4: Uh, pretty OBVIOUS...and it DATES BACK BEYOND BUSH, so Obama can't blame Bush...
5: Gov't is getting bigger, not a Democrat or Republican problem, it's ALL...The Gov't should be small and meant to protect the country, and care for those who CAN'T....NOT riddled with battles irrelevant to our protection, NOR should our Gov't be providing for those who choose not to...
We can all CRY things are different...but here are FEW FACTS to assist your BRAIN...
On one side, My Grandma never had a paying job, Grandpa worked, my parents and her 4 siblings lived moderately to low, but did well and raised wonderful kids...Very little help, they taught my mom and her siblings how to cook, garden, fish and hunt. They've passed those things on to me. NEVER did Granny take a dime from Gov't, and she could have done like so many today do. She died a few years ago, after being widowed for 25 years, Grandpa had paid off the house and they had a savings which kept her going. She survived 2 broken hips, multiple injuries as she aged and again NEVER asked for a FREE RIDE, or hand out. TODAY, people with much more do much less and don't think it's enough...
On the other side, Both Grands worked, children still lived moderate, they learned to cook, garden, fish, hunt and live w/o GODVERNMENT providing for them. They both passed away at 90 years of age and NEVER took anything beyond what they paid in....They left the family in excess of 2 million in "inheritance" to support our future. POINT...today we have too many people sponging and refusing to DO...That's why US jobs are low...Not CEO's greed...
WAKE UP AMERICA, get back to your roots of HARD WORK and INDEPENDENCE, which was MORE than FREEDOM from Britain and RELIGION...Foreign people used to FLOCK to US for the opportunity for MORE CHANCE, well by DOING MORE, our Gov't is taking that FREEDOM away...PERIOD. QUIT crying about what SOMEONE ELSE HAS and GET UP and DO...PERIOD...MIRROR determines accountability...LOOK IN IT...
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