Tuesday, April 07, 2009

Finance Industry Control Fraud - It's Time To Take Back Our Economy And Our Country From Corrupt Wall Street Banksters

--Have you ever wondered why society has bailed out Wall Street again and again and gain over the last century? With enough money that would give every American a home, a free college education, free health care, a retirement pension and save Social Security? Yet, we never seem to get transformational reform.
--Have you ever wondered why our "free trade" agreements benefit financial institutions who mint billions in profits while financing trade that destroyed much of our manufacturing might and our industrial wage base under the guise of free markets?
--Have you ever wondered why Wall Street firms were allowed to invest with reckless abandon in commodities without government crackdowns? Even though people around the world were even starving from its impact?
--Have you ever wondered why this legalized gambling crisis in derivatives developed? A crisis completely contained within Wall Street? Truly legalized gambling using our society's bank deposits? Something that no sane person would have never allowed to develop?
--Have you ever wondered why Wall Street firms were allowed to lever up to incredible levels of margin not even seen before the financial collapse in 1929? And destabilize our economy and destroy our national savings?
--Have you ever wondered how private equity was able to get access to endless cheap financing to do trillions and trillions of dollars of buyout deals that had absolutely no economic value? Deals that are now imploding? Deals that will ultimately cost America much more than the housing crisis in both tangible and intangible terms?
--Have you ever wondered why there is no government voice holding the financial industry accountable for the greatest frauds this country has ever seen? Not only in this crisis but every financial crisis?
--Have you ever wondered why GM has to grovel for a few billion dollars to actually save a wealth-creating business while the government has thrown $12 trillion at banks without batting an eye?
--Have you ever wondered how so many opaque scams threatening a nation's savings could be run right under regulator's noses? Including mortgage backed securities, off exchange trading, credit default swaps, Madoff's Ponzi scheme, derivatives, leveraged buyouts, leveraged balance sheets and on and on?
--Have you ever wondered why every major Wall Street firm just so happened to be insolvent at the same time?
--Have you ever wondered why every major bank in the U.S. would have failed by now without the tyranny of future burdens on American citizens courtesy of government bailouts? All in the name of "required to save our banking system"?
--Have you ever wondered how Enron, a highly regulated company in a highly regulated industry, could actually survive and even thrive with its financial Ponzi scheme? A scheme many knew was a scheme as it was being executed?
--Have you ever wondered why senior executives were able to loot companies of what is cumulatively hundreds of billions if not trillions of dollars for the past few decades while real wages declined for most Americans?
--Have you ever wondered why 30 million Americans are on food stamps while Wall Street paid themselves hundreds of billions of dollars in bonuses for destroying our economy? Enough capital in the economy to provide private sector jobs for those 30 million Americans?
--Have you ever wondered why financial firms were able to prey on citizens with any number of shady practices that became more and more corrupt over the decades? Be that credit card schemes, predatory lending, housing schemes or any other number of crises?
--Have you ever wondered why financial firms and senior executives were allowed to set the economic agenda for decades? An agenda that led to a self-fulfilling prophecy of economic collapse?
--Have you ever wondered why taxpayer money was allowed to be used to pay bankrupt financial executives billions in bonuses with taxpayer bailouts, yet government officials ostracized auto workers making $40,000 a year and demanded they take pay cuts?
--Have you ever wondered how all CEOs saw their economic value increase exponentially over the decades while the productive work of employees that actually created corporate wealth grew at well below the rate of inflation or even didn't grow at all?

Have you ever wondered? Have you ever really wondered? We aren't going to see our financials pundit talk about any of this because it jeopardizes their book of business. The status quo. The bias for self-preservation or even personal gain is too intense to honor truth. Quite frankly, this is why we should look beyond voices entrenched in the current financial system for answers on our path forward. Now that Wall Street has been laid bare we now sees the American economy is experiencing the greatest financial crisis in its history. This country is in a fight for its future and powerful interests are lined up to prevent the transformational change necessary.

When this crisis first started there was a common argument by many on Wall Street that this environment could not be a result of conscious wrongful deeds because it involved an entire industry. How could an entire industry be complicit in wrongdoing? It's simply impossible. It had to be a black swan. A once in a lifetime event that could not be predicted. Or so it has been wrongly stated by those either seeking to suppress the truth or those blinded by a misguided and even manipulated belief system.

I've seen so much deception in the press blaming housing speculators, spend happy consumers, housing appraisers, smaller mortgage companies and quite a few other "groups". As we have stated, there is no such thing as a consumer-led recession. It is an economic fallacy. That said, it is the responsibility of the government to protect the people via consumer protection laws. And the Constitutional duty of the press to educate the people. Both have failed in their duty. Instead Americans were encouraged, even miseducated, to adopt a lifestyle that suited Wall Street. Did individuals make mistakes? Sure they did. But they often did so because a government allowed and even encouraged it. No society can protect itself when miseducated. And, I do mean miseducated. Who exclusively benefited from this environment? What this deceptive blame game, either planted by special interests with the microphone or ignorantly posited, fails to take into account is that all of these resources in the economy were needed by Wall Street to steal from society. One might consider the possibility that greater and greater absorption of credit by Americans is needed to create a perfect fraud.

Where am I going with this? 2009 has become a time to talk about a book I read about a year ago. A book that elucidated much of the web of deceit and misinformation before us. Why write about it now? Well, a few reasons. Primarily because the author, William Black, was just on Bill Moyers a few days ago. And because we have finally seen this crisis gain enough momentum that the sovereign are awakening to a very disconcerting reality. A reality that includes the intertwined complicity of government and Wall Street. In other words, much of society is now ready to accept an alternative truth. One that would have been generally rejected a few years ago. Ironically, Moyer's interview with Black has seemingly gone unreported by the blogosphere and the press. (As an educational tool, I highly recommend Bill Moyers's weekly show and I absolutely encourage everyone to watch the William Black interview in particular.)

The theme of this post is based on the academic work of Mr. Black. And, specifically about this ground-breaking research in a book titled The Best Way to Rob a Bank Is to Own One - How corporate executives and politicians looted the S&L industry.

Before I continue, I feel the need to preface much of the content of this post. I am well aware of conspiratorial notions and an undercurrent of radical ideas that are often proliferated on the internet. There are many voices on the internet who often feel marginalized by society. And, with that comes a never-ending cry of wrongdoing or conspiracy. As I have said before, I don't subscribe to conspiracy theories. I subscribe to fact and theory that can be quantified beyond a reasonable doubt. And, when additional data is available to supersede existing fact and theory, then I will adjust my positions accordingly. The point is that William Black is not a fringe element in society. He is not a conspiracy theorist. In fact, Black is a highly esteemed fraud expert and economics & law professor whose research and knowledge is highly prized in the fraud prevention community. Black actually became a fraud expert through various and substantial positions in United States government banking and regulatory agencies. This includes being the deputy director of the very commission created by the United States Congress to identify the root causes of the last financial crisis that rocked this country's financial system to its core. In other words, when William Black talks, everyone in society should listen.

Black's book is an academic and research work about a type of financial fraud that he terms as Control Fraud. Control Fraud is a fraud perpetrated by those who control corporations and then use said corporations as a weapon or shield against prosecution. In more simple terms, fraud which uses positions of authority and power as a shield by manipulating laws and government to avoid prosecution. Fraud such as seen in the S&L crisis of the 1980s or Enron a decade later or possibly the crisis we see today. From Black's academic work we might surmise boards of directors, CEOs and senior executives could possibly be the "control" points in such schemes.

bu - reau - crat : an official who works by fixed routine without exercising intelligent judgement.

I tend to believe the majority of power elite (bureaucrats) in Washington are simply doing what they have always done. They are serving the system without any particular judgement. And, they are often doing so for self-interest. Whether this is a Congressperson, officials at the SEC, Office of Thrift Supervision, Comptroller of the Currency or Treasury. That is, they either seek money for re-election in a system that encourages said behavior and/or seek relationships that will benefit them when they leave office. In other words, most people unthinkingly serve a broken system as Thoreau told us in Civil Disobedience. So I tend to give most government officials a pass. They simply operate within a structure that has morphed into one that promotes self-interest over the common good. A system that needs to be completely transformed to promote the common good over self-interest. Black's research and first hand experience draws a more ominous conclusion of government corruption. At this point we are mincing words. Regardless of whether it is a system that is broken or individuals in the government that are corrupt or both, the end result has the same impact - a broken economic model. But the bankers and their lobbyists, that is a different story. They knew exactly what they were doing. They had a plan and they needed a compliant government to achieve it. They were paying billions of dollars for favors to gain an environment where they could overturn laws to do as they pleased with society's money. It was for nothing but personal financial gain. It is as happened with ancient Rome when greed and self-interest amongst the elite ultimately destroyed society. Now because of this corruption, the United States is, for all practical purposes, insolvent.

To date this banking crisis has been left without any reasonable explanation by government. There are many people with various explanations as to what created this crisis but these have all been incomplete perspectives using limited information gained by looking through the rubble in the rear view mirror. Or, often symptomatic issues such as derivatives which are really irrelevant to any root cause analysis. More ominous in all of this chatter is the seeming lack of urgency or desire to understand what has happened by either government or business leaders. Instead, amazingly all we hear is that exogenous events have led to an unforeseen crisis. A crisis that has left everyone, including Wall Street, as its victim.

What I find most ridiculous is a recent argument posited by politicians that no laws were broken. Implying we should come together as a nation and move past this crisis. To do what it takes to clean it up without a public investigation or understanding of what happened or how to prevent it in the future. That is, other than shallow calls for regulation. Regulation we had before government dismantled it at the request of Wall Street. Well, need I remind anyone that slavery was perfectly legal as well. Nor were laws broken when Japanese Americans were forced into internment camps and had their livelihood destroyed during World War II. Or, that women weren't allowed to vote. And, if I really want to make an extreme point about laws often serving the state's wishes and not being representative of truth, Hitler didn't break any laws either. Now, I am not comparing anything in this environment to Hitler. I am making a point about truth and the rule of law. Wall Street firms and their lobbyists paid government officials via lobbying, campaign contributions and promises of riches when they left office. And, they did so for the sole purpose of rewriting and dismantling our regulatory codes across a wide swath of the economy. These changes impacted wages, executive compensation, unregulated capital, risky financial schemes, defacto industrial policy, Social Security, economic opportunity, etc. Of course there were no laws broken. Wall Street and major corporations simply paid to have the rules rewritten so that their fraud would be perfectly legal. But, the acts were indeed criminal or corrupt or both.

Remember as we have often written, a bureaucracy never leads change. Instead, as we have noted more than once, a bureaucracy's primary objective is to sustain the bureaucracy. The status quo. Self-preservation. We have never seen change in this country that was not the result of direct and significant political struggles by the sovereign. Never. There is no enlightened government. There has never been an enlightened government at any time in history. Anywhere. There is only an enlightened people. Why would the state seek to change a system that is serving its needs perfectly well?

The crisis Black writes about took place over twenty years ago. That crisis was fueled by Control Fraud. A fraud he clearly articulates is still at work in the economy today. Twenty years after the initial fraud he gets an audience with Bill Moyers. Yet, has he been invited to CNN? Fox? CNBC? ABC? NBC? CBS? In prime time where tens of millions of viewers can become educated as to potential causes of this crisis? No. He's on a reasonably obscure late night public television program. Personally, I believe Black's work needs to be seen by every American. Needs to be aired on every news source. Not because his work is necessarily a complete truth. Or that all of his research is completely accurate. I am not in a position to make that statement. But, I am in a position to state that his work educates the sovereign as to what is possible with a private banking system able to influence public policy, society's beliefs, government and our livelihood as a nation. And, as our founding fathers told us, the sovereign must be educated to lead a nation. And, indeed, it is the sovereign who must lead this nation. Not Wall Street. And, not politicians seeking personal gain at public expense. In this case, a public airing and accountability is necessary to recover from this calamity. That is, permanently clean up Washington and to do so with Constitutional amendments that can never be broken without the oversight and will of the sovereign. The bureaucracy will resist at all cost.

Below are some specific excerpts from the book to enlighten you to the general concepts Black discusses in his research. That said, the book is a substantial work and these excerpts don't do his research justice. It is the only complete explanation I have encountered for the mess that engulfs Wall Street and much of the economic environment in which we live. Remember, this is not some type of ex post facto account of what happened on Wall Street written with the benefit of hindsight. There is no other source of research or scholarly work that so clearly exposes the causes of the crisis before us. William Black told us this was going to happen and he saw the seeds of crisis decades before it happened. You are likely to be astonished because he actually anticipated in very specific terms what we are witnessing today. For many, Black's work will destroy much of their belief system. But, then that is a primary goal of my blog. Because, to become enlightened, one must first release unsubstantiated beliefs. To transform society, society must first realize a transformation is necessary. And, society is quickly realizing, regardless of what is reported in the press, there are many apparent truths they can easily draw from their own inductions. New truths. Ultimate truth.

I would highly recommend Mr. Black's very original and lucid work. You can likely find his book at your local library or any book store. And, I would highly recommend everyone share a link to Bill Moyer's interview with Mr. Black. An educated society is an enlightened society.

Book excerpts:

A control fraud is a company run by a criminal who uses it as a weapon and shield to defraud others and makes it difficult to detect and punish the fraud. Fraud is theft by deception: one creates and exploits trust to cheat others. That is one of the reasons the ongoing wave of corporate fraud is so devastating: fraud erodes trust. Trust is vital to making markets, societies, polities, and relationships work, so fraud is particularly pernicious. In a financial context, less trust means more risk, and more risk causes lower asset values.

.... To use a term from economics, fraud causes terrible "negative externalities" because it inflicts injury on those who were not parties to the fraudulent transaction.
Control frauds are financial superpredators that cause vastly larger losses than blue-collar thieves. They cause catastrophic business failures. Control frauds can occur in waves that imperil the general economy. Control frauds do not simply defeat internal and external controls such as outside auditors. They pervert intended controls into allies.

.... the accountants "made the money" (albeit fictitiously). All of the S&L control frauds were accounting frauds. All of them were able to get clean audit opinions from top-tier audit firms, typically for many years. No audit firm exposed an S&L control fraud.
Individual control frauds should be a central regulatory concern because they cause massive losses. The worst aspect of control frauds is that they can cluster.

..... Economists distinguish between systemic risk that applies generally to an industry and risks that are unique to a particular company. Systemic risks can endanger a regional or even a national economy. Systemic risks pose a danger of creating many control frauds. In the S&L case, the systemic risk in 1979 was to interest rates. S&L assets were long term fixed-rate mortgages, but depositors could withdraw their money from the S&L at any time. If interest rates rose sharply, every S&L would be insolvent.
In 1979, the Federal Reserve became convinced that it only had the will to stop inflation. Chairman Paul Volcker doubled interest rates. By mid-1982, on a market-value basis, the S&L industry was insolvent by $150 billion. This maximized the incentive to engage in reactive control fraud and make it far cheaper for opportunists to purchase an S&L. These factors ensured that there would be an upsurge in control fraud, but the cover-up of the industry's mass insolvency, deregulation, and desupervision combined to create the perfect environment for a wave of control frauds.

Criminologists call environment that produces crime "criminogenic".
Control fraud's investments are concentrated and driven by fraud, not markets. This causes systemic regional, or even national, economic problems. One of the remarkable things about the S&L debacle is how alike the control frauds were. Almost all of them concentrated in large, speculative real estate investments, typically the construction of commercial office buildings. Because the control frauds grew at astonishing rates, this quickly produced a glut of commercial real estate in markets where the control frauds were dominant. Moreover, being Ponzi schemes, they increased their speculative real estate loans even as vacancy rates reached record levels and real estate values collapsed. Waves of control frauds produce bubbles that must collapse. They delay the collapse by continuing to lend, thus hyperinflating the bubble. The bigger the bubble and the longer it continues, the worst the problems it causes. The control frauds were major contributors to, not victims of, the real estate recessions in Texas and Arizona in the 1980s.

What we have, then, is a triple concentration. Systemic risk causes control frauds to occur at the same time. They concentrate in the particular industries that foster the best criminogenic environments. They also concentrate investments best suited for accounting fraud. That triple concentration means that waves of control fraud will create, inflate, and extend bubbles.

Pontell's systems-capacity theory can help us limit or even prevent future waves of control fraud. Systems capacity refers to the inability of the prosecutorial or regulatory system to cope with crime of misconduct adequately because of resource limitations. ....It is a self-fulfilling prophecy that government will be ineffective if one designs it to be ineffective. ....... One of the great advantages of control frauds is their ability to cause the firm to make political contributions. Audacious control frauds use this ability to help shape their regulatory environment. They seek to undercut effective regulation. There is no "Brotherhood of Burglars" that has apparent respectability and regularly lobbies for restrictions on the quality of door locks or the number of police assigned to neighborhood patrols. Deregulation can aid control fraud in four ways. It can radically change the environment because we are poor at predicting untested dynamic events. ... Third, deregulation may allow investment in assets that lack a readily ascertainable market value. One of the keys to accounting fraud is to find such assets...... Fourth, deregulation may provide the authority to enter into reciprocal (fraudulent) transactions used to transmute bad investments into good ones. It may also provide the authority to create an entity that will be used as a straw party. (Sounds like legalized money laundering to me.)

Mr. Black has presented us a great work of research. A work that should be used as one of the inputs to a framework of transformational oversight and regulation of the finance industry and necessary changes into transparency and oversight of our government.

In closing, Thomas Jefferson's perspectives on State's Rights as a check against a hegemonic federal government were indeed more than prescient. The lack of appreciation for State's Rights has allowed concentrated power in Washington to all but obliterate State's Rights and accordingly many Jeffersonian ideals that placed the sovereign above government. And, many other ideals seekers of truth hold dear. This must not be allowed.

The time has come to take back our economy and our country from an elitist culture of exclusion. To restore the ideals of freedom and opportunity based on merit. On democracy. The only way this will happen is by sovereign participation in the democratic process to force transformational change on an elitist culture robbing our country of its wealth and the people of their economic livelihood. We the people.......
posted by TimingLogic at 7:17 AM