by Guest Author William K. Black, New Economic Perspectives
The 60 Minutes December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.
“I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.”
Obama did not explain what Wall Street behavior he found least ethical or what unethical Wall Street actions he believed was not illegal. It would have done the world (and Obama) a great service had he been asked these questions. He would not have given a coherent answer because his thinking on these issues has never been coherent. If he had to explain his position he, and the public, would recognize it was indefensible. I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment. I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine. The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.
- Only fraudulent home lenders made liar’s loans
- Liar’s loans were endemically fraudulent
- Lenders and their agents put the lies in liar’s loans
- Appraisal fraud was endemic and led by lenders and their agents
- Liar’s loans could only be sold through fraudulent reps and warranties
- CDOs “backed” by liar’s loans were inherently fraudulent
- CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
- Liar’s loans hyper-inflated the bubble
- Liar’s loans became roughly one-third of mortgage originations by 2006
Each of these frauds is a conventional fraud that could be prosecuted under existing laws. Hundreds of lenders and over a hundred thousand loan brokers were “accounting control frauds” specializing largely in making fraudulent liar’s loans. My prior work explains control fraud, why accounting is the “weapon on choice” for fraudulent financial firms, and why liar’s loans were superior “ammunition” for committing massive accounting fraud. These accounting control frauds caused greater direct financial losses than any other crime epidemic in history. They also drove the financial crisis that produced the Great Recession and cost millions of Americans their jobs.
In considering my scale of unethical conduct it is important to keep in mind that it is highly likely that anyone that causes very large numbers of people to lose their homes will cause multiple suicides and indirect deaths that arise from the greater vulnerability of the homeless and the blue collar crime effects of destroying neighborhoods inherent to widespread foreclosures. I ignore for this purpose the fact that the fraudulent loans caused the bubble to hyper-inflate and drove the financial crisis that caused millions of people to lose their jobs. The financial accounting control frauds are the weapons of mass destruction of wealth, employment, and happiness. I also ignore the fact that the frauds described here made the perpetrators wealthy. My scale, therefore, systematically and dramatically understates the perpetrators’ moral turpitude. I have also excluded the massive foreclosure frauds from my scale because they did not cause the underlying crisis. When Obama reveals the bankers actions he claims to be legal but highly unethical readers should keep my conscious understatement of the moral depravity of the illegal acts by bankers that drove this crisis in mind when they compare the relative ethical failings.
As a criminologist, I do not favor sentencing criminals to the fates they richly deserve. I would never torture prisoners or place them at risk of assault, rape, or psychological trauma. I do not believe that extremely longer terms of imprisonment are desirable except in rare circumstances. As a lawyer and a criminologist I emphasize that any sentence should come only after a conviction in a trial providing due process protections or a guilty plea. My scale provides a label for the comparative moral depravity of the perpetrator, the deserved punishment (which when vicious is not the far more humane one I would actually impose), and a brief description of the specific frauds that are characteristic of this level of immorality and the number of perpetrators falling in each category. My inspiration was Dante’s circles of hell as described in his Divine Comedy.
The Scale of Ethical Depravity by the Frauds that Drove the Ongoing Crisis
Level 10: Septic tank scum
Eternal Hell: these banksters deserve a physical hell of infinite torment and duration
Officers that directed control frauds that involved making predatory loans to more than 10,000 homeowners who lost their homes as the result of the frauds. Predatory loans in this context mean deliberately seeking out the elderly or minorities for such loans because they were easier to con into taking loans they could not repay – at a premium yield (interest rate). Dozens of CEOs fall in this category.
Level 9: Pond scum
Time in Hell: These banksters deserve a term in hell
Officers that directed control frauds that led to more than 10,000 homeowners losing their homes. Hundreds of CEOs fall in this category.
Level 8: Generic scum
Gitmo: Hell’s starkest suburb
Officers that directed control frauds that led to more than 1,000 homeowners losing their homes. Thousands of CEOs fall in this category.
Level 7: Dante’s deserved denizens
Supermax: No view, and no way out
The professionals that aided and abetted the overall control frauds by inflating appraisals, giving “clean” audit opinions to fraudulent financial statements, “AAA” ratings to toxic waste, and accommodating legal opinions to the frauds. Thousands of professionals fall in this category.
Level 6: Aspiring to great wealth through fraud
Alcatraz: Great view, but no way out
The senior lieutenants of the control frauds who committed the frauds that caused more than 10,000 homeowners to lose their homes. Thousands of senior officers fall in this category.
Level 5: A large cog in a smaller fraud
Generic Hardcore Prison: A life of boredom and the almost total loss of freedom
The senior lieutenants of the control frauds who committed the frauds that caused more than 1,000 homeowners to lose their homes. Thousands of senior officers fall in this category.
Level 4: The banksters who cost us our money instead of our homes – Goldman Sachs & friends
Generic Prison: A life of boredom and a severe loss of freedom
The officers that led the control frauds who targeted their customers for the purchase of more than $10 million in fraudulent product. Dozens of officers fall in this category.
Level 3: The banksters’ senior lieutenants who cost us our money instead of our homes
Prisons designed for serious, but less physically dangerous felons
The senior officers of the control frauds who targeted their customers for the purchase of more than $10 million in fraudulent product. Scores of senior officers fall in this category.
Level 2: Banksters who defrauded other bankers (who were willing to be defrauded)
Privatized prisons: Let them enjoy the consequences of their odes to privatization
The largest control frauds sold tens of billions of dollars of fraudulent loans to each other through fraudulent “reps and warranties.” The kicker here, as Charles Calomiris has emphasized, is that the control frauds on both sides of the transactions knew that they were engaged in a mutual fraud. Hundreds of senior officers fall in this category.
Level 1: Small fraudulent fry
Catch and release: Convict them and put them on probation if they cooperate with the investigations
The small fry are the loan officers, loan broker employees, and borrowers who knowingly participated in making fraudulent mortgage loans. Over 100,000 individuals fall in this category.
We Need to End the PAC Doctrine
To date, Bush and Obama have prosecuted none of the mortgage frauds in the top nine levels. I urge reporters to ask him to explain three things about his statements to 60 Minutes.
• Why are there no prosecutions of the felons that drove the crisis and occupy the nine worst rungs of unethical and destructive acts?
• Explain the five unethical acts by elite financial institutions that you consider the most destructive and least ethical – but which you believe to be legal. How do you rank the degree of unethical conduct and destruction in those acts?
• What specific statutory provisions did you propose to make those five unethical acts illegal? As enacted, which provisions of the Dodd-Frank Act made those five unethical acts illegal? Who has been prosecuted for those formerly legal but seriously unethical and destructive acts that were made illegal by the Dodd-Frank Act?
Reporters will have to be persistent in coordinating their follow-up questions to get Obama to provide direct answers to these questions.
I request that private citizens write President Obama to ask him to provide specific, written answers to these three questions. I will be proposing a series of questions that I will urge citizens to demand answers to because it is clear that the regular media will rarely ask demanding questions of elite politicians or bankers. It is up to us to hold them accountable and end the doctrine of Presidential Amnesty for Contributors.
Analysis Blog and Opinion Blog articles by William K. Black
About the Author
William K. Black is the author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him at: @WilliamKBlack
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