Thirty-Year History of Deregulation

By William K. Black, New Economic Perspectives The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support.  The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed …

The Great Debate©: Will Dodd-Frank be Effective?

Written by Elliott Morss, Bradley G. Lewis and William K. Black Editor’s note: The question of whether the 2010 Dodd-Frank Act will be effective in reducing systemic risk in the financial sector was brought into new focus by a a featured article written by Gabriel Sherman last month in New York magazine.  Sherman discussed ways …

The Great Debate©: Does Government Create Uncertainty and Prolong the Recession?

This is a debate between Scott R. Baker (Stanford Univ.), Nicholas Bloom (Stanford Univ.) and Steven J. Davis (Univ. of Chicago) PRO and William K. Black (Univ. of Missouri Kansas City) ANTI The first presentation in the debate (the PRO position) is an article from Bloomberg, dated October 5, 2011.  This is followed by the …

The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk

by William K. Black

One of the most revealing things about this crisis is the unwillingness to investigate whether “accounting control fraud” was a major contributor to the crisis. The refusal to even consider a major role for fraud is facially bizarre. The banking expert James Pierce found that fraud by senior insiders was, historically, the leading cause of major bank failures in the United States. The national commission that investigated the cause of the S&L debacle found:

“The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures…. [E]very accounting trick available was used…. Evidence of fraud was invariably present as was the ability of the operators to “milk” the organization” (NCFIRRE 1993)

Two of the nation’s top economists’ study of the S&L debacle led them to conclude that the S&L regulators were correct – financial deregulation could be dangerously criminogenic.

Lenders Put the Lies in Liar’s Loans and Bear the Principal Moral Culpability

By William K. Black

A reader has asked several important questions about liar’s loans that are critical to understanding the causes of the ongoing U.S. crisis. By 2006, half of all loans called “subprime” were also liar’s loans. Roughly one-third of all home loans made in 2006 were liar’s loans. The crisis was originally called a “subprime” crisis, but it was always a liar’s loan crisis. The reader is correct to inquire about causation and moral culpability… Yes, “liar’s” loans are what the industry called “stated income” and “alt-a” loans when they were talking among themselves. Income was the primary category that was “stated” – i.e., listed without any verification as to accuracy – in a liar’s loans. Some liar’s loans, however, also “stated” employment, assets, and liabilities. “Stated income” is a euphemism for a liar’s loans, but it is at least honest about its insanity. Readers get it right immediately – they understand that no honest mortgage lender would make loans on this basis. (I expand on this point below.)