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OpEdNews Op Eds    H2'ed 4/11/15

Hillary Remains Clueless About Regulation on the 28th Anniversary of the Keating Five Meeting

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'[Greenspan] has power, but what's really driving this economy is the dramatic change that's taking place in the private sector in this country,' he continued. 'We've had government deregulation, which has held.'"

A technical note, Lachman is quoting from an NPR transcript and the audio is no longer available on the web site. I suspect that the last word, "held," should read "helped." Lachman does not explain why "progressives" loath Greenspan -- or why such loathing should be limited to "progressives." If "progressives" loath Greenspan for bad reasons then this represents a defect on their part, not a failure by Greenspan or Hormats. In the same interview Lachman is quoting, Robert Reich issued a vibrant endorsement of Greenspan's reappointment by Clinton that included one of the funniest (unintentional) descriptions of Greenspan: "Alan Greenspan is a pragmatist, an empiricist." When it came to regulation to stop the fraud epidemics, I show below that Greenspan was still Ayn Rand's faithful cultist. He was dogmatic and rather than an "empiricist" he religiously refused to allow real data to be presented.

Here are the primary reasons Greenspan (and Bernanke) make my list of the Scandalous Seven.

  • The Fed had the unique authority under HOEPA (enacted in 1994 under Clinton) to ban all "liar's" loans -- regardless of whether they were originated by federally insured lenders. As the name implies, such loans were known to be pervasively fraudulent and it was known that lenders and loan brokers overwhelmingly put the lies in liar's loans. Greenspan, and then Bernanke, refused to use this authority to stop an obvious, massive epidemic of "accounting control fraud. The FBI's senior agent in charge of dealing with mortgage fraud, Chris Swecker, warned in September 2004 that there was an "epidemic" of mortgage fraud developing and predicted that it would cause a financial "crisis" -- and Greenspan refused to stop the fraud epidemic. Greenspan's colleague, Governor Gramlich, warned Greenspan of the developing epidemic of bad loans and urged him to send the Fed examiners in to the sleazy bank holding company affiliates that were pumping out hundreds of thousands of fraudulent loans. Greenspan refused not only to stop the fraudulent loans -- he refused to send the examiners in to find the facts. When Richard Spillenkothen, the Fed's top supervisor, requested to brief the full Fed board on the fact that every major bank involved with Enron had eagerly aided and abetted Enron's accounting fraud and tax evasion the senior leadership of the Fed was enraged -- at its supervisors! While Spillenkothen does not name individual names, this could not have occurred without Greenspan's active support.

When another Fed supervisor, Sabeth Siddique, several years later presented the Fed board and Regional Bank Presidents with data from the Nation's largest banks showing that they were moving massively into making loans that were known to be pervasively fraudulent and exceptionally likely to default the Fed split into a civil war in which the supervisor was subjected to "personal" attacks -- for providing data from the banks to the Fed!

"Some people on the board and regional presidents . . . just wanted to come to a different answer. So they did ignore it, or the full thrust of it," [Federal Reserve Governor Bies] told the Commission.

Within the Fed, the debate grew heated and emotional, Siddique recalled. "It got very personal," he told the Commission. The ideological turf war lasted more than a year, while the number of nontraditional loans kept growing"." (FCIC 2011: 20-21).

This is significantly insane. The Fed leadership, under Greenspan and Bernanke, was so dogmatic and passionate in its hatred for regulation, supervision, enforcement, and prosecution and so rabid in its faith in "markets" and the inherent sainthood of financial CEOs that it conducted an unholy war against its own supervisors and reality. Simply providing data from the industry to the leaders of your agency became a CLG for Fed supervisors ("career limiting gesture").

It is important to recall four other matters in this context. We (OTS-West Region) figured out liar's loans in 1991 -- and drove them out of the S&L industry, which was the limits of our statutory powers (unlike the Fed after the passage of HOEPA in 1994). We got it right because unlike Greenspan and Bernanke we were reality-based regulators eager to get the facts. So we listened to our examiners (as we had in 1984 about prior epidemics of accounting control fraud). The loans were not yet called "liar's" loans by the industry and there was very limited experience with "low documentation" loans but our examiners realized that failing to underwrite the borrower's income had to lead to "adverse selection" and produce severe losses. We realized that only fraudulent CEOs running accounting control frauds would make liar's loans. Greenspan and Bernanke had no need to reinvent the supervisory wheel and the disastrous loss data on the 1990-1993 experience with liar's loans was available to them. Banning liar's loans was one of the easiest calls any regulatory could make. There was zero upside to liar's loans -- they harmed every honest borrower.

The second fact is that Greenspan was no virgin when it came to accounting control fraud. As I explained above, Charles Keating, the most notorious S&L fraud, used him as a lobbyist to recruit the five U.S. Senators who became known as the "Keating Five" when they met with us on April 9, 1987

The third fact is that in addition to the FBI's 2004 warning that the developing mortgage fraud "epidemic" would cause a financial "crisis" if it were not stopped the he appraisers had created an extraordinary warning in the form of a public petition explaining that fraudulent lenders were deliberately creating a "Gresham's" dynamic (in which bad ethics drives good ethics from the markets and professions) by extorting appraisers' to inflate the value of homes pledged as collateral -- something only a fraudulent bank or loan broker officer would do. The following astonishing fact is revealed (but also buried) well into the report of the Financial Crisis Inquiry Commission (FCIC): "Swecker, the former FBI official, told the Commission he had no contact with banking regulators during his tenure (FCIC 2011: 164, emphasis added). As a former financial regulator I am almost reduced to tears every time I read that sentence.

  1. Put yourself in the position of Greenspan, Bernanke, Geithner, and Bush -- all in office when Swecker made his very public warnings in the media and his Congressional testimony in 2004. There is no possible excuse for their total refusal to act against a crime wave led by elite banksters. Worse, their obscene attacks on supervisors to prevent them from presenting these senior officials with the reality of the three raging fraud epidemics demonstrates that they were not simply cowards unwilling to stop a wave of crime by their powerful cronies. These four officials' war on the facts was so intense because they knew that if they ever let reality intrude it would falsify their ideological dogmas and render disgraceful their slavish lifetime devotion to the banksters.

The fourth fact is that within months of Bernanke's ascendancy to running the Fed he knew from the MARI/MBA report that the available data showed that 90% of liar's loans were fraudulent. He refused to use HOEPA to ban liar's loans.

  1. Greenspan also makes the list for his dogmatic position expressed to CFTC Chair Brooksley Born that preventing fraud was never a legitimate basis for regulation.
  1. The real problem is the Clintons.

First, H. Clinton chose Hormats -- in 2009 -- to be her key economic adviser at State at a time when, for the reasons I just explained, it was inescapable that he three "de's" (championed by Hormats) had produced the three most damaging financial fraud epidemics in world history, destroyed the global financial system (it was resurrected only by massive public bailouts by the Treasury and the Fed), and caused the Great Recession.

Hormats was still pushing the three "de's" under H. Clinton. She knew this before she recruited him to be one of her top lieutenants at State. Hormats proceeded to continue to shill for the three "de's" at State -- with no known reprimands from H. Clinton. As I have often noted, economics has the very useful concept of "revealed preferences." Lachman's focus is on Hormats' revealed preferences, but the key is that we are observing H. Clinton's true preference. She picked a known, serial incompetent who was a disaster in his supposed area of expertise (finance) and so dogmatic, intellectually dishonest, and dedicated to the interests of his fellow 1% that he continues to double-down on his failures. Lachman warns H. Clinton that to curry favor with progressives "She Might Want To Distance Herself From This Economic Adviser." But that is not what any progressive should want. Progressives (and everyone else) should be demanding that she repudiate, not merely "distance herself from" Hormats' dogmas. It does nothing good for the world if H. Clinton is able to deceive people by making it appear that she has ditched disastrous deregulatory dogmas by keeping Hormats at a "distance" while she actually maintains those same dogmas.

What H. Clinton should be doing, in alliance with Senator Warren, is leading the charge demanding that the Obama Administration honor the whistleblowers who made public the massive frauds by Citi, JPM, and Bank of America's senior managers and prosecute the banksters. That would be great substantively for America and smart politics. The Clintons have been conspicuously silent about the banksters and the fraud epidemics they led that drove our crises. She could fix that in 15 minutes -- if she wished to.

Second, as I explained above, the Clinton administration enthusiastically embraced the three "de's" through the "Reinventing Government" movement. Al Gore led the charge. I have written about this extensively. Reinventing government was expressly designed not to prosecute elite corporate criminals. Yes, the Bush administration that followed was even worse, but it was Clinton who began what Tom Frank aptly terms The Wrecking Crew. I got out as a regulator when the "Reinventers" ordered us to refer to the industry we were supposed to regulate as our "customer" -- and to treat banks and bankers as if they were "customers." I personally witnessed this directive, and the administration's chief goon in charge of its oxymoronic "Reinvention" proudly cites that directive as one of his top accomplishments and prints praise of his supposed bravery in insisting on that directive.

Hormats was not a powerful adviser to the Clinton administration. Bob Rubin, Goldman Sachs' CEO, was the paramount adviser on economic matters. Hormats is simply one of dozens of Rubinites that infested the Clinton and Obama administrations. But blaming the three "de's" on Rubin is unfair, for B. Clinton and Gore were sincerely and zealously committed to deregulation, desupervision, and the de facto decriminalization of elite white-collar crime. Neither was seduced by Rubin. H. Clinton knows as much as any person alive about the Rubinites' pathologies. She recruited Hormats because he was a Rubinite, not because he deceived her.

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William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)
 
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