Too Big to Jail?

By Bill Moyers, Moyers & Company

06 October 14

 

ttorney General Eric Holder’s resignation last week reminds us of an infuriating fact: No banking executives have been criminally prosecuted for their role in causing the biggest financial disaster since the Great Depression.

“I blame Holder. I blame Timothy Geithner,” veteran bank regulator William K. Black tells Bill this week. “But they are fulfilling administration policies. The problem definitely comes from the top. And remember, Obama wouldn’t have been president but for the financial contribution of bankers.”

And the rub? While large banks have been penalized for their role in the housing meltdown, the costs of those fines will be largely borne by shareholders and taxpayers as the banks write off the fines as the cost of doing business. And by and large these top executives got to keep their massive bonuses and compensation, despite the fallout.

But the story gets even more infuriating, the more Black lays bare the culture of corruption that led to the meltdown.

“The Clinton, Bush and Obama administrations all could have prevented [the financial meltdown],” Black tells Moyers. And what’s worse, Black — who exposed the so-called Keating Five — believes the next crisis is coming: “We have created the incentive structures that [are] going to produce a much larger disaster.”

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BILL MOYERS: This week on Moyers & Company, the crusading Bill Black.

WILLIAM K. BLACK: No one can claim with a straight face that if we prosecuted bankers, as opposed to banks, that it would have any negative effect. It would have huge positive effects in sending the right message of accountability and the right message of deterrence.

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BILL MOYERS: Welcome. As you’ve heard, Eric Holder has announced that he’s resigning as Attorney General. He will leave behind a mixed scorecard: A for civil rights, C for civil liberties and F for failing to prosecute the banking executives who brought about the financial calamity of 2008. Holder let the bankers off the hook individually as he negotiated civil settlements with their institutions for issuing mortgage-backed securities tied to faulty subprime loans. The billions of dollars in penalties the banks are paying will largely be borne by shareholders and by taxpayers as the banks write off the fines as the cost of doing business. The executives get off scot free.

But hold on – don’t close the file yet. As Michael Hiltzik wrote in the Los Angeles Times last week, "Given the government's failure to bring criminal cases against bankers and other Wall Street figures for collapsing the US economy in 2008, it's been left to the little guy to strike back." And the “little guy” did just that, in a case in Sacramento, where a federal jury acquitted four mortgage holders charged with fraud after hearing testimony that bank executives had pulled out all the stops to seduce them into taking out those toxic loans.

One of the key expert witnesses in that case is with me now. Bill Black’s testimony helped blow up the prosecution’s contention that the little guy was the culprit, when in fact it was the bank executives who had deliberately created the fraudulent loans to enrich themselves. They pulled off the classic shell game. Bait and switch. Take the money and run. Let ordinary people suffer the consequences.

It’s a story Bill Black knows well. A scholar, litigator, and regulator, he helped prosecutors convict more than 1000 crooked bankers during the horrific savings and loan scandals back in the l980s and 90s. He exposed five United States Senators – the so-called Keating Five – who took big campaign contributions from bank executive Charles H. Keating, Jr, and then tried to help him hide his crimes from bank examiners. His classic book "The Best Way to Rob a Bank Is to Own One" is now available in an updated edition. He holds two academic appointments – one at the University of Missouri-Kansas City and also at the University of Minnesota School of Law. And welcome back.

WILLIAM K. BLACK: Thank you.

BILL MOYERS: In a nutshell, what did the jury decide in Sacramento? And why should we care?

WILLIAM K. BLACK: Well, this is the first time that a jury has ever got to hear what actually caused the crisis. And the jury was horrified. Because it was the lenders who deliberately made massive amounts of fraudulent loans and then sold these massive amounts of fraudulent loans through additional frauds to the secondary market and eventually brought down the global financial system.

And the testimony that came out in the case is that the agents, the FBI agents and the IRS agents simply assumed that the banks were the victims and the bankers were the victims and simply assumed that the little people, the mice, were the problem in all of this. So they never even investigated the banks and the bankers.

BILL MOYERS: The mice?

WILLIAM K. BLACK: Yeah, the saying in the savings and loan debacle is you never wanted to be the guy that was chasing mice while lions roamed the campsite. So the mice are these alleged tiny frauds type of thing, where they ignore the lions, who are the CEOs of the banks and such.

BILL MOYERS: And the jury said, no, it's the lions.

WILLIAM K. BLACK: It's--

BILL MOYERS: Not the mice.

WILLIAM K. BLACK: Yes. So this is a crisis created by the lenders. And the reaction of the US attorney, who's Benjamin Wagner there was, well, we're not going to be deterred in prosecuting mortgage fraud. Well, we don't want them to be deterred. We want them to prosecute but prosecute the lions and stop this nonsense.

BILL MOYERS: Even Eric Holder never seemed in doubt about who was responsible. I mean, his own words indicate that he knew that guilt lay at the feet of those who run the banks. Here he is being interviewed by NBC's Pete Williams.

PETE WILLIAMS on NBC Nightly News: Mr. Attorney General, what does JP Morgan admit that it did wrong in the settlement?

ERIC HOLDER on NBC Nightly News: Well, it packaged loans that it knew did not pass its own stated due diligence test. We have a whistleblower who indicated that she expressed concerns about what the strength of these mortgage-backed securities were. And they put them out there to the market and said that they were perfectly fine when in fact they were not.

PETE WILLIAMS on NBC Nightly News: So to be clear, you're saying that JP Morgan's conduct here contributed to the housing collapse?

ERIC HOLDER on NBC Nightly News: Not only the conduct of JP Morgan. It was the conduct of other banks doing similar kinds of things that led directly to the collapse of our economy in 2008 and in 2009.

BILL MOYERS: Yet Eric Holder didn't bring one criminal case against any executives in charge of the banks' lending. You've called this the greatest strategic failure in the history of the Department of Justice.

WILLIAM K. BLACK: Yeah, in baseball terms they’re batting 0.000. But they’re not just batting 0.000, they took called strikes. They never got the bat off their shoulder and even swung. They didn't even try.

BILL MOYERS: Do you remember when President Obama told “60 Minutes,” I think it was late December of 2011 that, “Some of the most damaging behavior on Wall Street…wasn’t illegal?”

WILLIAM K. BLACK: I do.

BILL MOYERS: What did you think?

WILLIAM K. BLACK: I thought that he was wrong. That in fact if he listened to what the United States of America has demonstrated in court and through investigations, the activity was clearly illegal, it was a violation of a whole series of laws that make it felonies.

And these are just the frauds that caused the crisis. In addition to the frauds that caused the crisis, which are massive and we could talk about, we have the largest cartel in world history. This was the bid rigging of Libor, which is an international standard that sets the prices on over $300 trillion in contracts.

A trillion is a thousand billion, right? And then we have the foreclosure frauds where we have false affidavits. Over 100,000 felonies in that context. And then we have the bid rigging on bond prices where all the major banks, according to the Justice Department, were involved.

And then we had the Federal Housing Finance Administration, a federal agency suing virtually every largest, of the largest 20 banks in the United States of America, saying they defrauded Fannie and Freddie through false sales. And it goes on and on.

The savings and loan debacle, we made over 30,000 criminal referrals. Here, zero criminal referrals as far as we can get any public information. So the first thing Holder should’ve done is reestablish the criminal referral process. Because, you know, banks don’t make criminal referrals against their own CEOs.

BILL MOYERS: Do you tell yourself, well, there is a justifiable and understandable reason why they don't prosecute?

WILLIAM K. BLACK: No, there is no justifiable reason. Apparently modern financial regulators are vastly more sophisticated than we were as financial regulators 25 years ago. Because we had never figured out that the key to financial stability was leaving felons in charge of the largest financial institutions in the world.

BILL MOYERS: But they do claim with a straight face that they can't prosecute.

WILLIAM K. BLACK: They make it sound like the only choice we have is to prosecute banks as opposed to bankers. And that's nuts, right? We've always prosecuted bankers. We prosecuted successfully over 1,000 bankers in the savings and loan and bank crises.

And those are just the major cases and such. And it, of course, it greatly enhanced financial stability instead of the other way around. Indeed, none of the people in that era came back in this crisis and were able to lead frauds. And they couldn't because they had criminal records. But in the next crisis, these folks have no criminal records. They'll easily be able to come back. In fact, if you want to create the next crisis and make it vastly worse, leave the people in charge who led the frauds in the senior ranks at the banks in charge of those banks. So now they have all the postgraduate education in how to run a fraud. And they learned that there are no consequences other than good consequences.

BILL MOYERS: How does it feel to be right? Because when you said that this is the greatest strategic failure in the history of the Department of Justice, it was before the Justice Department inspector general himself issued a report that determined the FBI Criminal Investigative Division "ranked mortgage fraud as the lowest ranked criminal threat in its lowest crime category."

WILLIAM K. BLACK: And that it had diminished the number of FBI agents assigned, that the number of investigations and cases was falling still, that they were misleading the public by claiming that they were making it a higher priority, and that they had lied about the number of criminal cases they had brought against the mice, and that they persisted in using the false statistics when they knew that they were false. All of those things were found by the inspector general. It feels terrible to be right about those things.

BILL MOYERS: There's clearly been a culture of deference toward the banks in the Obama administration. You would agree with that?

WILLIAM K. BLACK: Absolutely. Again, I blame Holder. I blame Timothy Geithner. But they are fulfilling administration policies. The problem definitely comes from the top. And remember, Obama wouldn't have been president but for the financial contribution of bankers.

And it's an extraordinary political story. Because the Clintons, of course, have been close to banking for decades and very supportive of it. But a junior senator from Illinois was able to outraise by a substantial margin political contributions from the banking industry to win that nomination.

And then outraise his opponent, who was, of course, famously or infamous for his support of banking, John McCain, by more than two to one. And a person who led that effort to take big finance money and get it to then Senator Obama was, of course, Jamie Dimon, the CEO and chairman of the board of JP Morgan.

BILL MOYERS: Whom the “Times” has referred to as President Obama’s “favorite banker.”

WILLIAM K. BLACK: As his favorite banker even though, as Holder now admits, JP Morgan was one of the leading, what we call criminology, accounting control frauds in the world. It takes “The New York Times” six pages to list the violations on its website of JP Morgan Chase. So these are serial fraudsters.

And Jamie Dimon has even said out loud to his own shareholders what we call the accounting control fraud recipe. His phrase is, it's easy to produce low quality revenue. Bad underwriting means income today and losses tomorrow. Now, of course, it doesn't mean real income today. It means fictional income through accounting fraud.

So he gets it. If you have terrible, terrible underwriting, you will be mathematically guaranteed to report record profits that will make the executives wealthy through modern executive compensation. And if there's a problem, well, the government will bail you out and give you massive subsidies if you're too big of fail. And, of course, JP Morgan is the quintessential example of too big to fail, too big to jail.

BILL MOYERS: Do you remember when Obama was elected president he called the bankers to the White House and he said, I'm all that's standing between you and the pitchforks, meaning between you and a wronged and indignant public.

WILLIAM K. BLACK: I thought that was an obscene statement, slanderous about the American people. The American people don't want pitchforks. They want justice. They want these senior officers to be prosecuted. If they're found guilty, they want them to be sent to prison. And they want their fraudulent proceeds, the bonuses and compensation to be recovered. And that is a very good thing about the American people.

BILL MOYERS: To man that wall between the bankers and the public he chose Eric Holder as everyone knows who at the time was at the elite law firm of Covington & Burling which represents some of the very banks he would later exonerate from criminal prosecution. Within that justice were three other top lawyers from Covington & Burling, including the firm's star lawyer defending against white collar crime who became Holder's right hand man running the criminal division of the Justice Department. What are we to make of that coincidence?

WILLIAM K. BLACK: Well, first, you should avoid it. But I want to caution that it isn't just the conflict, and indeed that in some ways takes one away from where the primary focus should be. So in the savings and loan crisis, President Bush, the first, brought in a Covington & Burling lawyer when they represented banks and such.

And he promptly, his name is Harris Weinstein, increased enforcement actions by fivefold. And we went after the biggest folks and we had by far our greatest victories. Because Harris Weinstein was picked because he was tough and competent and because he was given a mission which was you will go after the worst folks and you will demonstrate the rule of law exists in the United States. And that there was a political subtext of, I inherit, I, President Bush, inherited this crisis and I'll be seen as fixing it. Show the American people that there is no exception to the rule of law. Whereas Holder had exactly the opposite instructions which are, you know, don't rock finance. And that was reinforced by Timothy Geithner. But again Obama picked Timothy Geithner who was notorious as the worst failed regulator in the United States of America in the field.

BILL MOYERS: Why do you think on any evidence you have that they didn't want to fix the problem?

WILLIAM K. BLACK: Because two things. One, they were wrapped into this insanity that Timothy Geithner and Ben Bernanke were pushing that said, we must not do anything negative about the banks. We must instead “foam the runway[s],” is the infamous phrase of Timothy Geithner.

BILL MOYERS: To make a soft, safe landing.

WILLIAM K. BLACK: For the banks.

BILL MOYERS: For the banks.

WILLIAM K. BLACK: Not for the people. We will use the people as the excuse to get these programs. But the programs we all know are really for the banks.

BILL MOYERS: You do acknowledge that there have been some big settlements, I mean, and not all of them by Holder, but there've been settlements of over, you know, 125 or more billion dollars so far.

WILLIAM K. BLACK: Most of the money is actually deals they would've cut anyway. And it's window dressing, but it's in the interests of both the bank and the Justice Department to claim very large dollar amounts. Step back from what we've just been saying though and think, you know, put my lawyer hat on, of negotiating deals like this.

I'm representing the banks, you're Eric Holder. I know that you believe that I'm too big to fail and that there'll be a disaster if I have any risk of failure. Are you going to ever assess a fine on me that matters to my institution? Of course not, because it was violate all of those conditions.

So what do I want as CEO? Of course I don't want to go to jail and I'm happy to trade off some dollars in a fine to make sure that I never go to jail. But I also don't want the little officers to go to jail because they might be flipped by the prosecutors and the prosecution might move up the chain. So I want to negotiate immunity not just for me, but for everybody.

BILL MOYERS: Otherwise they'll rat on me?

WILLIAM K. BLACK: Otherwise they might rat on me. And this immunity doesn't have to be formal. It's just no cases will occur, right? Right? Right. So often there isn't a formal deal of immunity, but you see a practice of no prosecutions. And the other thing that I want in the best of all worlds, I want to make sure that I get to keep all my bonuses and compensation for all the frauds that I've led.

And that's the other part of the deal. In all of these cases, they get to keep the fraud proceeds. That has never happened in modern United States. That is why it's the worst strategic failure, but it's also failure of integrity at the Justice Department and at the Obama administration. And the Bush administration was no better on this score.

BILL MOYERS: No, the, what you're saying is that more than one administration cooperated in maintaining a system that is based upon deference to the banks and disrespect for the public.

WILLIAM K. BLACK: Right, and, but it's also a component in the case of Obama of we're humans and we are, everything we learn in research about humans is we're reciprocal. And so the finance area is the reason he's president of the United States. When he was in his hour of greatest need, when he had, was written off as a candidate against Hillary in the nomination battle the first time around, he had this miraculous survival. And that took money.

That took lots and lots of money. And who gave that money? It came overwhelmingly from finance at the critical moment when he needed it most. All of us as human beings, the people that helped us in, a friend in need is a friend indeed is the saying that we have as human beings.

BILL MOYERS: Is that a way to run the government of the United States?

WILLIAM K. BLACK: It's a way to run it into the next disaster.

BILL MOYERS: You think that's possible?

WILLIAM K. BLACK: Oh no, not possible, it's certain. We have created the incentive structures that is going to produce a much larger disaster. And just look at it. Again it isn't just the frauds that led to the crisis. It is all the frauds afterwards. HSBC knowingly launders over $1 billion in funds for the Sinaloa cartel, one of the most vicious drug cartels in the world that has caused the deaths of thousands of people.

We don't prosecute. We have them dead to rights. We don't say that you can't do business anymore. We take no serious sanctions, just one of these silly fines again. Standard Chartered, one of the, again one of the largest banks in the world, not only evaded sanctions on funding terrorist groups and nations that we say are funding terror, but actually had training manuals on how to deceive the United States regulators.

So these are banks doing things that used to be in those really bad novels that you would read at an airport when you had only 10 percent of your brain functioning, right, about bankers, these awful conspiracies and they're funding terrorists and such. Well, they actually are. It's the modern reality.

BILL MOYERS: What does it say about our financial capitalism?

WILLIAM K. BLACK: Well, there's no threat to capitalism like capitalists. They are destroying the underpinnings. And when dishonest people gain a competitive advantage in markets, it creates something that in economics and criminology we call a Gresham's dynamic. And that means bad ethics drives good ethics out of the marketplace. And so the key is to have a real rule of law, to have real regulation. Because that not only protects the consumer, it protects the honest banker.

BILL MOYERS: But you've just described a situation which has to discourage folks out there, you know that, that they understand what you're saying but you've also described why it can't be fixed, because of the relationship between Wall Street and Washington.

WILLIAM K. BLACK: So first Citizens United has made this far worse, and that's an atrocious decision and it has to be overturned if we're going to restore our democracy and such. But beyond that, there's never going to be a decisive victory against power and money and finance. We have to fight. Every generation has to engage in this struggle. And if it gives up and says it's hopeless, well, it'll give up and it will be hopeless.

BILL MOYERS: Bill Black, thank you very much for being with me.

WILLIAM K. BLACK: Thank you.

BILL MOYERS: At our website BillMoyers.com see the top five bank bailouts that you probably have never heard about.

That’s all at BillMoyers.com. I’ll see you there and I’ll see you here next time.