William Black continues with his campaign to not only bring sanity and transparency to an administration wrapped in secrecy, legacy cover ups and fraud, but to finally do what had to be down two years ago: bring down the big banks, force a balance sheet restructuring at the TBTFs, and force a systemic reset which is the only thing that could bring the much promised "change for good" to this country. " Don't talk about doing the right thing -- do it -- and do it to a major contributor. Don't do it because it's a contributor, but because a bank that commits tens of thousands of frauds should immediately be placed in receivership." We once again hope that more people like Bill Black (if not he himself) will decide to run for president, and make the difficult choices necessary to begin the impossible task of truly fixing the mess this country finds itself in.
No Mr. President, Larry Summers Did Not Resolve the Financial Crisis for a Pittance, He Just Papered Over the Problem, originally appearing in Huffington Post
I passed up the obvious title: "Heckuva Job Larry!" That was the moment of President Obama's appearance on The Daily Show
with Jon Stewart that set all Americans cringing. Yes, he really said
that Summers "did a heckuva job." The candidate that was gifted the
opportunity to run against the legacy of one of the worst presidents in
U.S. history has, as president, used Bush as his role model to continue
many disastrous policies. It was strangely fitting that he would
channel Bush's infamous praise ("Heckuva job Brownie") for the FEMA
chief who failed New Orleans so badly in the hurricane.
President Obama understandably wishes to focus attention on the
economic disaster he inherited from President Bush. But Jon Stewart's
question to him, which led to the president's gaffe, correctly asked
about the message that Summers' appointment sent about the
administration's commitment to fundamental change.
Summers had financial red ink on his hands at the time he was appointed. He was Rubin's chief minion
in the successful effort to defeat effective financial regulation and
supervision. (Yes, the effort was bipartisan and the Republican
leadership shares in the guilt.) Summers was not simply wrong, but also
arrogant and brutal, in blocking effective regulation at the SEC and
the Commodity Futures Trading Commission. Summers was made rich by Wall Street in one of those sordid consulting arrangements designed to buy influence and reward past and future favors.
President Obama's appointment of Summers as his chief economic
advisor made the administration's overall response to the crisis
predictable. (Robert Kuttner gives a detailed explanation of the
policies that Rubin's protégés championed in his new book, A Presidency in Peril.)
The response would follow the disastrous Japanese model that has
harmed their economy and damaged their integrity. The dominant
characteristics can be summarized quickly: (1) the government would act
for the benefit of the largest financial firms and their CEOs, even
when they directed massive frauds, by (2) engineering a cover up of the
banks' losses and the CEO's misconduct; (3) the administration would
use the fictional reports generated to conduct the cover up to declare
victory (due to their brilliance); and (4) the same strategy would
impair the recovery. (For more on the cover up, see here and here.)
The strategy was also an assault on integrity, the rule of law, and
the core precepts of the Obama campaign for president. This is why we
warned from the beginning that the cover up could enrage the nation and
make him a one-term president.
President Obama on Wednesday night told Jon Stewart that the
administration had resolved the crisis for a pittance -- vastly less
than their measure of the costs of resolution in early 2009. He also
claimed that the administration deserved credit for preventing a second
The first claim is too good to be true. Ask yourself the key
analytical question: Does the administration claim that the crisis
proved far worse or far better than its original estimates? Look at the
administration's initial estimates about employment or its initial
views about how deep the fall in housing values, and how quick their
recovery, would be? The administration has repeatedly emphasized that
the housing and employment crises are significantly worse than initially
forecast. That means that their initial loss estimates should have
proven significantly too low. The losses should be much greater than
their initial estimates.
Losses on homes are not driven only by employment and housing values.
Mortgage fraud causes dramatically greater losses. How much mortgage
fraud did the administration initially estimate? That's almost a trick
question, for the administration rarely uses the "F" word (fraud) and
gave no evidence at the time of its initial estimates that they took
into account fraud losses. Since the time of the administration's
initial loss estimates it has become indisputable that fraud was endemic
in liar's loans and that liar's loans were not simply enormous, but
also far more common than was originally reported. We have discovered
since the administration's initial loss estimates that it was common for
the SDIs to lie about the liar's loans they originated, sold, and
purchased. Fannie, Freddie, Lehman and many others falsely called their
liar's loans "prime."
What else could affect losses on liar's loans and CDOs backed by
liar's loans? The failure of the secondary market meant that sales of
CDOs and packages of liar's loans had to be individually arranged. Has
the secondary market in nonprime mortgages been restored since the
administration's initial cost estimates? No. That is important because
the administration initially claimed that the secondary market's
collapse was a temporary liquidity problem. The administration
anticipated that the secondary market would soon reemerge. It died more
than three years ago. With any luck it will never be resurrected.
Once more, the changes since the time of the initial loss estimate
should have led to greater losses than the administration's initial
This leaves us with two analytical puzzles. First, since the
administration's anti-regulators have spent nearly two years carefully
not looking at the liar's loans and determining their true value and the
true incidence of fraud, how is the administration estimating losses
without the facts necessary to make estimates? Second, ignoring the
first problem for the moment, what miracle made virtually all the losses
disappear -- at virtually no cost to the public -- even though every
aspect of the administration's initial loss estimates proved too optimistic?
Logically, the losses should be far greater. For the administration's
claim to have any merit they must have discovered the ultimate "silver
bullet" that slays $2 trillion in losses. So what is it -- and how did
it save $2 trillion? It certainly wasn't their brilliant negotiation of
the TARP terms. Any commercial lender that provided such an unlimited
guarantee would have cut a far better deal.
There was no silver bullet. The administration made the losses
disappear the old-fashioned way -- with fictional accounting. I have
already explained how the administration allowed the Chamber of
Commerce, American Bankers Association, and the Fed to enlist the
Congress to extort FASB to pervert the accounting rules so that most of
the SDIs' losses disappeared. The Fed also took over a trillion dollars
in toxic, largely fraudulent collateral -- and carefully avoided
conducting due diligence to discover either the value or the fraud
incidence of the collateral. In essence, the Fed took the toxic stuff
off the balance sheets.
Creating fictional numbers and hiding losses at the Fed doesn't
reduce losses. Unfortunately, it increases real losses. First, it
leaves the looters in charge, lets them pay themselves enormous bonuses,
and lets them cause greater losses. Recall George Akerlof's and Paul
Romer's title -- Looting: the Economic Underworld of Bankruptcy for Profit.
They showed that even without a bailout the fraudulent CEO could grow
wealthy by destroying "his" bank. With a bailout -- and the Bush and
Obama administration's de facto grant of impunity and an unlimited
guarantee to the SDIs -- the CEOs can loot without it leading inevitably
to bankruptcy. This has made banking an even more criminogenic
environment for accounting control fraud and will cause recurrent,
Second, accounting cover ups prevent markets from clearing. That
prolongs the recession. Japan shows how severe this problem can become.
Third, integrity is important. I really shouldn't have to explain
this. It depresses me that I have to argue that it is wrong to lie.
Our democracy, our economy, our society, and our souls depend on
restoring our integrity and the rule of law. Randy Wray and I have proposed a step
that would demonstrate the president's complete repudiation of Summers'
strategy and a return to the rule of law: Place Bank of America in
receivership for its tens of billions of dollars in fraudulent loans
and its multitude of foreclosure frauds. Don't talk about doing the
right thing -- do it -- and do it to a major contributor. Don't do it
because it's a contributor, but because a bank that commits tens of
thousands of frauds should immediately be placed in receivership.
The president told Jon Stewart he was hamstrung by tradeoffs. He
said he could not place an SDI in receivership because it could cause
100 banks to fail. Randy and I explained the absurdity of this claim in
our two-part essay. Receiverships do not cause one hundred banks to
fail. The receiver would continue the bank's operation and pay the
checks. Why are 100 banks supposed to fail when their correspondent
bank ties remain functional, the checks clear, and the ATMs work? This
parade of horribles has never happened.
The administration claimed that it was vital that the Dodd-Frank bill provide it with receivership powers so that it could close
a future Lehman without causing cascade failures. Now, the president
tells us that he refused to follow the Prompt Corrective Action law and
close insolvent SDIs because some official lied to him and told him that
operating (not closing) a bank through a receivership
would cause 100 banks to fail? That's why Obama has allowed the SDIs
to operate with impunity and provided them with an unlimited federal
guarantee? And he, a skilled lawyer, cannot see the contradiction in
Treasury -- his Treasury -- claiming that the Dodd-Frank bill's grant of receivership powers would prevent such cascade failures?