"He was the most culpable in a number of ways. He was the only one ...
who had a personal financial stake in the dispute. His wife and his
father-in-law stood to lose a significant amount of money if we had
enforced the direct-investment rule. The entire purpose of the
meeting was to pressure us not to take any course of action against
Lincoln's massive violation of rule to the tune of over $600 million."
In an interview recorded last September, William Black is referring here to John McCain's role in the S&L crisis. He described the senator as the most culpable of the Keating Five. Of course, McCain got off with a short whipping with a wet noodle and now was the Republican party nominee for president. Bill Black, who was a respected senior regulator during the savings and loan debacle in the early '90's, was moved to speak out about McCain's lack of integrity and veracity at a time when we were all watching McCain-Palin's every move and worried about a possible Republican victory in November. Black's informed account of McCain's role in the S&L mess was just one more black mark against the candidate.
Bill Black was one of the participants in an NPR discussion today about AIG 's contracts guaranteeing bonus payments for executives involved in credit default swaps. The former regulator doesn't think we should let AIG's senior execs get away with their involvement in an exponentially larger fraud. Now a professor at the University of Missouri and author of a book: "The Best Way to Rob a Bank Is To Own One: How Corporate Executives and Politicians Looted the S&L Industry," Black spoke out today about the growing AIG scandal.
NPR: You say the government should sue. Tell us on what basis you believe they should sue and how effective a lawsuit might be.
William Black: My background includes being litigation director for a federal banking agency, an enforcement director, and deputy director of the insurance fund. So we had to bring these kinds of actions fairly frequently. The government can bring successful actions through at least two different routes. One is bankruptcy -- which has provisions for getting rid of the ability to collect on these kinds of contracts. These are used against workers all the time. The second is by establishing that there has been widespread accounting fraud at AIG and that the bonuses were not in fact due, particularly past bonuses -- I'm talking about going back several years and recovering them.
NPR: So you're saying not just the 2008 bonuses but years before as well?
WB: Correct.
NPR: When you say there was accounting fraud, as recently as last July AIG was reporting that it was highly profitable and well-capitalized. Are you saying there were shenanigans going on even then?
WB: No. Shenanigans is too polite a euphemism! I'm saying that there was fraud going on then and that it's accounting fraud to declare the income but not establish the loss reserves. In other words, these are mostly credit default swaps and they are allegedly insurance. They aren't for many important reasons, but they are certainly this: you get the income up front and you have the potential expenses down the road. So if you do not put appropriate loss reserves on currently, you will report record income and of course provide, in the modern era, huge bonuses. But that is inappropriate. That is accounting fraud -- to not recognize the losses down the street.
NPR: And you're saying that on that basis -- you believe -- the US government can sue AIG?
WB: Right. They should bring enforcement action as well as civil suits. To one of your earlier guests [who said NY Attorney General Andrew Cuomo's move against AIG was politically motivated] that AG Cuomo is not simply "some politician". We have good empirical evidence about [former NY AG Elliot] Spitzer. For all the criticisms against Spitzer, when Spitzer brought cases the recoveries were much greater. The same may well be true of Cuomo. So I wouldn't simply downgrade him as a "politician."
NPR: ... You believe that there has been some hesitation on the part of the Obama administration to assume its rightful position as owner of AIG. Why do you believe that that has been the case?
WB: Well, they've used AIG secretly to bail out a significant number of major financial institutions, most of them foreign.
NPR: Such as?
WB: Such as Deutsche Bank, SG, UBS -- French, German and Swiss banks. That would be deeply unpopular in the US. It wasn't necessary. It was terrible public policy. And it will at some point ignite a populist rebellion against this program.
NPR: Now -- isn't Goldman Sachs one of the US banks that was helped by the [AIG] bailout.
WB: It was apparently the largest recipient and of course that was Treasury Secretary Paulson's investment banking firm. More to the point: Paulson, when he was there at Goldman Sachs, was the one that led them into non-prime investments -- subprime stuff and the [inaudible]. It's a terrible conflict of interest. It makes Teapot Dome look like a teacup.
NPR: Let me ask you about Lehmann Bros. Had Lehmann Bros not gone down, do you think the outcome here might have been somewhat different?
WB: I think we have to be careful about what "going down" means. It's perfectly appropriate to take insolvent banks and investment bankers and insurance companies' trading arms and put the into bankruptcy. You can do that in ways that don't create systemic crises. The problem is not necessarily that Lehmann was dealt with, it's that it was dealt with ineptly.
NPR: You've written about the S&L's and what happened to them. How does this compare with what happened to the S&L's?
WB: Well, the entire cost of in 1993 dollars of dealing with the savings and loan crisis was only $150 billion! I say "only" but it was widely considered at that time the worst financial scandal in US history. AIG? We're already on the hook for $170 billion. So in terms of scale, it tells you the problem. What was done to resolve the savings and loan crisis was vastly more effective. For 15 years, treasury secretaries of the US went over to Japan and said, "You know, you're doing it all wrong by covering up the bank losses. You should do it like we did it during the S&L crisis." Instead, we're emulating the disastrous Japanese practices of trying to hide the losses. So we have Secretary Geithner saying that it's going to cost $2 trillion to bail out the banks and Federal Reserve chairman Ben Bernanke saying, "Actually no. All the big banks are in wonderful shape and none of them are gonna fail." Well, both of these things can't be true at the same time. You can't have a $2 trillion cost and have all of the big banks healthy.
William Black: My background includes being litigation director for a federal banking agency, an enforcement director, and deputy director of the insurance fund. So we had to bring these kinds of actions fairly frequently. The government can bring successful actions through at least two different routes. One is bankruptcy -- which has provisions for getting rid of the ability to collect on these kinds of contracts. These are used against workers all the time. The second is by establishing that there has been widespread accounting fraud at AIG and that the bonuses were not in fact due, particularly past bonuses -- I'm talking about going back several years and recovering them.
NPR: So you're saying not just the 2008 bonuses but years before as well?
WB: Correct.
NPR: When you say there was accounting fraud, as recently as last July AIG was reporting that it was highly profitable and well-capitalized. Are you saying there were shenanigans going on even then?
WB: No. Shenanigans is too polite a euphemism! I'm saying that there was fraud going on then and that it's accounting fraud to declare the income but not establish the loss reserves. In other words, these are mostly credit default swaps and they are allegedly insurance. They aren't for many important reasons, but they are certainly this: you get the income up front and you have the potential expenses down the road. So if you do not put appropriate loss reserves on currently, you will report record income and of course provide, in the modern era, huge bonuses. But that is inappropriate. That is accounting fraud -- to not recognize the losses down the street.
NPR: And you're saying that on that basis -- you believe -- the US government can sue AIG?
WB: Right. They should bring enforcement action as well as civil suits. To one of your earlier guests [who said NY Attorney General Andrew Cuomo's move against AIG was politically motivated] that AG Cuomo is not simply "some politician". We have good empirical evidence about [former NY AG Elliot] Spitzer. For all the criticisms against Spitzer, when Spitzer brought cases the recoveries were much greater. The same may well be true of Cuomo. So I wouldn't simply downgrade him as a "politician."
NPR: ... You believe that there has been some hesitation on the part of the Obama administration to assume its rightful position as owner of AIG. Why do you believe that that has been the case?
WB: Well, they've used AIG secretly to bail out a significant number of major financial institutions, most of them foreign.
NPR: Such as?
WB: Such as Deutsche Bank, SG, UBS -- French, German and Swiss banks. That would be deeply unpopular in the US. It wasn't necessary. It was terrible public policy. And it will at some point ignite a populist rebellion against this program.
NPR: Now -- isn't Goldman Sachs one of the US banks that was helped by the [AIG] bailout.
WB: It was apparently the largest recipient and of course that was Treasury Secretary Paulson's investment banking firm. More to the point: Paulson, when he was there at Goldman Sachs, was the one that led them into non-prime investments -- subprime stuff and the [inaudible]. It's a terrible conflict of interest. It makes Teapot Dome look like a teacup.
NPR: Let me ask you about Lehmann Bros. Had Lehmann Bros not gone down, do you think the outcome here might have been somewhat different?
WB: I think we have to be careful about what "going down" means. It's perfectly appropriate to take insolvent banks and investment bankers and insurance companies' trading arms and put the into bankruptcy. You can do that in ways that don't create systemic crises. The problem is not necessarily that Lehmann was dealt with, it's that it was dealt with ineptly.
NPR: You've written about the S&L's and what happened to them. How does this compare with what happened to the S&L's?
WB: Well, the entire cost of in 1993 dollars of dealing with the savings and loan crisis was only $150 billion! I say "only" but it was widely considered at that time the worst financial scandal in US history. AIG? We're already on the hook for $170 billion. So in terms of scale, it tells you the problem. What was done to resolve the savings and loan crisis was vastly more effective. For 15 years, treasury secretaries of the US went over to Japan and said, "You know, you're doing it all wrong by covering up the bank losses. You should do it like we did it during the S&L crisis." Instead, we're emulating the disastrous Japanese practices of trying to hide the losses. So we have Secretary Geithner saying that it's going to cost $2 trillion to bail out the banks and Federal Reserve chairman Ben Bernanke saying, "Actually no. All the big banks are in wonderful shape and none of them are gonna fail." Well, both of these things can't be true at the same time. You can't have a $2 trillion cost and have all of the big banks healthy.
