Bill Black Statement to Congress April 20, 2010

20 Apr

If you were looking for some seriously clear and in depth reading on the way the entire mortgage/financial bubble/crisis all came about here is where you need to go:

< Bill Black’s Statement To Congress April 20, 2010

Keep in mind that Mr. Black was answering a list of questions prepared for him by Congress, and in main part addressing the Lehman Brothers (Aurora was Lehman’s Sub Prime Lender/Partner; as well as First Alliance); but his answers go far beyond the questions raised regarding Lehman to the larger structure of the epidemic of fraud. And please DO take the time to read the entire statement, it is not that long, and it is definitely worth the full reading.

Please reflect on the appropriateness of accounting practices such as Repo 105 or 108 and the adequacy of the disclosure of such accounting practices.
The reason accounting approaches are used to attempt to achieve GAAP treatments that are contrary to the true economic substance of the transaction is to deceive. There are no social benefits to such deception and there are enormous harms. At law, the element that distinguishes fraud from other forms of larceny is deceit. Fraudsters get the victim to trust them – then betray that trust in order to cheat them. This is why fraud is the most effective acid for destroying trust. We need trust in most areas of life, including economics and finance. When bankers no longer trust bankers, markets fail rather than “clear.” This can cause global contagion. The economic substance, in every case, of Lehman’s Repo transactions was a loan, not a true sale. The sole purpose of entering into the transactions was to attempt to achieve an accounting treatment directly contrary to the true nature of the transaction for the purpose of deceiving investors and regulators. If these transactions are not frauds, then accounting and accountancy have ceased to have any value or integrity. It is time for accountants, business people, and regulators to demand an end to the deliberate use of accounting to deceive.

And then there’s this:

The most crippling limitation on the regulators’, FBI’s, and DOJ’s efforts to contain the epidemic of mortgage fraud and the financial crisis was not understanding of the cause of the epidemic and why it would cause a catastrophic financial crisis. The mortgage banking industry controlled the framing of the issue of mortgage fraud. That industry represents the lenders that caused the epidemic of mortgage fraud. The industry’s trade association is the Mortgage Bankers Association (MBA). The MBA followed the obvious strategy of portraying its members

as the victims of mortgage fraud. What it never discussed was that the officers that controlled its members were the primary beneficiaries of mortgage fraud. It is the trade association of the “perps.” The MBA claimed that all mortgage fraud was divided into two categories – neither of which included accounting control fraud. The FBI, driven by acute systems incapacity, formed a “partnership” with the MBA and adopted the MBA’s (facially absurd) two-part classification of mortgage fraud (FBI 2007). The result is that there has not been a single arrest, indictment, or conviction of a senior official of a nonprime lender for accounting fraud.

One of the most dramatic, and unfortunate differences between the S&L debacle and the current crisis is that the financial regulatory agencies gave the FBI no help in this crisis – even after it warned of the epidemic of mortgage fraud. The FBI does not mention the agencies in its list of sources of criminal referrals for mortgage fraud. The data on criminal referrals for mortgage fraud show that regulated financial institutions, which are required to file criminal referrals when they find “suspicious activity” indicating mortgage fraud, typically fail to do so. There is no evidence that the agencies responsible for enforcing the requirement file criminal referrals have taken any action to crack down on the widespread violations.

The crippling mischaracterization of the nature of the mortgage fraud epidemic came from the top, as the New York Times reported in late 2008.
But Attorney General Michael B. Mukasey has rejected calls for the Justice Department to create the type of national task force that it did in 2002 to respond to the collapse of Enron.

Mr. Mukasey said in June that the mortgage crisis was a different “type of phenomena” that was a more localized problem akin to “white-collar street crime.”

The nation’s top law enforcement official swallowed the MBA’s mischaracterization of the mortgage fraud epidemic and economic crisis hook, line, sinker, bobber, rod, reel, and boat they rowed out into the swamp. Because Mukasey refused to investigate the elite frauds he created a self-fulfilling prophecy in which the FBI and DOJ pursued only the “white-collar street crim[inals]” (the small fry) and therefore confirmed that the problem was the small fry. The pursuit of the small fry was certain to fail.

There are also several sections where Black roundly criticizes the complete lack of regulation by all parties, saying in one section

“The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity. It constructed three, progressively weaker, stress tests –”


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