Mark McHugh

MUST SEE – BILL BLACK ON LEHMAN!

In Open Thread on Wednesday, April 21, 2010 at 5:15 pm

Know this.  Chris Dodd’s a crook and anything he proposes should go right in the trash.  Before anyone considers anything called “financial reform” don’t you think it would be nice to understand what the fuck just happened?  Bill Black breaks it down in very simply with 8 minutes of searing truth.

Hat tip, James H!

Transcript (corrected) from Firedoglake

You asked earlier for a stern regulator, you have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.

We stopped a nonprime crisis before it became a crisis in 1991, by supervisory actions.

We did it so effectively that people forgot that it even existed, even though it caused several hundred million dollars in losses — but none to the taxpayer. We did it by preemptive litigation, and by supervision. We broke a raging epidemic of accounting control fraud without new legislation in the period of 1984 through 1986.

Legislation would’ve been helpful, we sought legislation, but we didn’t get it. And we were able to stop that because we didn’t simply continue business as usual.

Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and their liars’ loan operations.

Lehman was the leading purveyor of liars’ loans in the world, for most of this decade. Studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.

Financial institution leaders are not engaged in risk when they engage in liars’ loans — liars’ loans will cause a failure. They lose money. The only way to make money is to deceive others by selling bad paper, and that will eventually lead to liability and failure as well.

When people cheat you cannot as a regulator continue business as usual. They go into a different category and you must act completely differently as a regulator. What we’ve gotten instead are sad excuses.

The SEC: we’re told they’re only 24 people in their comprehensive program. Who decided how many people there would be in their comprehensive program? Who decided the staffing? The SEC did. To say that we only had 24 people is not to create an excuse — it’s to give an admission of criminal negligence. Except it’s not criminal, because you’re a federal employee.

In the context of the FDIC, Secretary Geithner testified today that this pushed the financial system to the brink of collapse. But Chariman Bernanke testified we sent two people to be on site at Lehman. We sent fifty credit people to the largest savings and loan in America. It had 30 billion in assets. We had a whole lot less staff than the Fed does.

We forced out the CEO. We replaced the CEO. And we did that not through regulation but because of our leverage as creditors. Now I ask you, who had more leverage as creditors in 2008? The Fed, as compared to the Federal Home Loan Bank of San Francisco, 19 years earlier? Incomprehensible greater leverage in the Fed, and it simply was not used.

Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions.

And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads — there was an interagency effort — killed it. They came out with something pathetic in 2006, and stalled its implication until 2007, but it’s meaningless.

We have known for a decade that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure because of the leadership in this era.

We have the Fed, the Federal Reserve Bank of New York, finding that this is three card monte. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?

That’s what was done. Oh they met a lot — they say “we only had a nuclear stick.” Sounds like a pretty good stick to use, if you’re on the brink of collapse of the system. But that’s not what the Fed has to do. The Fed is a central bank. Central banks for centuries have gotten rid of the heads of financial institutions. The Bank of England does it with a luncheon. The board of directors are invited. They don’t say “no.” They are sat down. The head of the Bank of England says “we have lost confidence in the head of your enterprise. We believe Mr. Jones would be an effective replacement. And by 4 o’clock that day, Mr. Jones is running the place. And he has a mandate to clean up all the problems.

Instead, every day that Lehman remained under its leadership, the exposure of the American people to loss grew by hundreds of millions of dollars on average. Auroroa was pumping out up to 3 billion dollars a month in liars’ loans. Losses on those are running roughly 50% to 85 cents on the dollar. It is critical not to do business as usual, to change.

We’ve also heard from Secretary Geithner and Chairman Bernanke — we couldn’t deal with these lenders because we had no authority over them. The Fed had unique authority since 1994 under HOEPA to regulate all mortgage lenders. It finally used it in 2008.

They could’ve stopped Aurora. They could’ve stopped the subprime unit of Lehman that was really a liar’s loan place as well as time went by.Thank you very much.

  1. Hey, did you hear that Eric Holder just announced that he’s going to hire Bill Black as a special consultant, and that many of the top executives at Goldman, JPM and Citi are likely to be indicted?

    Of course you didn’t. Because I just made it up. That will NEVER happen. O’Banksta says that Jamie and Lloyd are his pals, and gosh darnit, they’re “very savvy businessmen.”

    LOL Glad you liked the Bill Black.

  2. You just love to get me goin’….

    I wanted to bold the really good parts, but the whole thing kicked ass!

    It’s so great to finally hear someone (especially an academic) hold the regulators accountable for not stopping the train wreck. What I’ve been trying to say all along is the Fed & SEC had more than enough authority to stop Lehman (and Countrywide & Citi & Merril & GS & Bear Stearns……) long before the thing reached critical mass. They chose not to and that makes them every bit as guilty as the fraudsters. My old man used to say evil can only triumph when the good do nothing.

    I thought the way he compared it to other frauds, like the S & L and Enron was brilliant. Fraud is fraud and if you don’t know what it smells like and how to stop it, you shouldn’t be a regulator. How come a dunce like me could see this train wreck acomin’ and the so-called sharpest financial minds in the world did not? Anyone who truly believes this was an unforssen accident is either insane or a fool.

    Black articulated what happened better than I ever could.

  3. I agree. This is the best Bill Black I’ve seen anywhere. Academics, when they’re good, can give a written speech/testimony like nobody’s business. A+, professor.

    BTW, if the whole crash wasn’t an accident, what did they expect to happen? Did they just expect the Fed to keep them liquid no matter what? Or was it simply a case of gettin’ while the gettin’ was good? Do you have a theory? Even if black helicopters are involved, I’m open to believing just about anything at this point.

    I mean, I still can’t believe that Tim Geithner and John Dugan, TO SAY NOTHING OF Ben Bernanke, still have jobs.

  4. OK, this is probably where I start to sound crazy….

    It started out just getting while the getting was good, but certain players got more reckless, and instead of going to jail, they were getting rich…so everybody piled in.

    It’s like when you see a cop car driving the speed limit on a six lane highway. Eventually, you’ve got a hundred cars right behind him and a half mile of open road in front of him….Finally one knucklehead gets up the nerve to pass….next thing you know EVERYBODY’S flyin past him and nobody’s getting a ticket.

    Anyway, I think Greenspan realized how bad it was gonna be and planned his exit (I actually think Greenie’s very smart) and Bernanke’s “helicopter” ideology made him a logical choice for the banksters. Again, I actually see logic in Bernanke’s thesis – print money and give it away to prevent deflation. Sure you trash your currency, but you stop the end of the world. But here’s the thing – you’ve got to give money away to everybody for the helicopter scheme to work. The helicopters only flew to the banks.

    So Bernanke was selected, knowing he would be a gutless regulator and knowing what his fall back plan would be. Treasury Secretary John Snow was only too happy to get out of Dodge…Enter Hank Paulson, who by most accounts made a career of lying and bullying others. All’s he had to do was bully some patsies (Ben, Tim Chris Cox) and make congress pee themselves (no problem there) and viola! The banksters excessive risk-taking became the burden of our grankids.

    I don’t think it happened by design – cheating and greed begot more cheating and greed until it blossomed into an absolute catastrophe. By 2005, I think it was abundantly clear the meltdown was going to happen and it was just a matter of moving a few pieces to get the outcome we got.

    The outcome we got is class warfare. The problem is most of the middle class doesn’t believe it yet. They see those happy numbers in their 401k statements – and that means the problem was solved and there’s a pot o’ gold with there name on it at the end of the rainbow.

  5. But I put the biggest share of blame on the cowardly cops.

  6. “What I’ve been trying to say all along is the Fed & SEC had more than enough authority to stop Lehman (and Countrywide & Citi & Merril & GS & Bear Stearns……) long before the thing reached critical mass.”

    Sounds like the SEC has been more interested in porn, instead of doing their job…

  7. True.

    The thing that drives me wild is the SEC has no reason to be under-staffed. All you need is a computer. Regulators could work from home.

    And even if you couldn’t afford to pay them, you could start a program for volunteers and pay bounties for finding fraud. But here’s the thing, they don’t want to find fraud. Given access, I think I could find more fraud in a month, than the SEC has found in the last five years. They also know that someone like me would publish details of the frauds that they refused to prosecute.

    All this talk about greater transparency and tougher regulation is just talk, nothing more.

    The wierdest part of all of this is I am a true believer in capitalism, but for capitalism to work, it must me allowed to puke up the garbage from time to time. Wall St., the Fed and the government absolutely refuses to allow this and it will be our ruin.

    I spend a lot of time wondering if it’s already too late and to be perfectly honest, I think it probably is.

  8. The law defends the plunderer Mark.

    Have you been following the loan modification scams banks like BOA have been perpetrating to not only keep the TARP money, but end up with the properties as well?

    Many who did loan modifications are making the payments put forth to them, and finding out that the money they paid is not going to their payments.

    I to believe in capitalism, but it was killed off some time ago…

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