William Black Tells The Truth On Lehman's Failure: "A Story In Large Part Of Fraud"

Tyler Durden's picture

There is at least one person left who isn't afraid to speak the truth.

Courtesy of Firedoglake

FDL Contributor Bill Black scorched everyone with his testimony on the failure of Lehman Brothers before the House Financial Services Committee today.  His prepared remarks can be found here (PDF).

CHAIRMAN KANJORSKI: And now we’ll hear from Mr. William K. Black, Associate Professor of Economics and Law, the University of Missouri, Kansas City School of Law. Mr. Black.

BILL BLACK: Members of the Committee, thank you.

You asked earlier for a stern regulator, you have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.

We stopped a nonprime crisis before it became a crisis in 1991 by supervisory actions.

We did it so effectively that people forgot that it even existed, even though it caused several hundred million dollars of losses — but none to the taxpayer. We did it by preemptive litigation, and by supervision. We broke a raging epidemic of accounting control fraud without new legislation in the period of 1984 through 1986.

Legislation would’ve been helpful, we sought legislation, but we didn’t get it. And we were able to stop that because we didn’t simply consider business as usual.

Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and liars’ loan operations.

Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.

Financial institution leaders are not engaged in risk when they engage in liars’ loans — liars’ loans will cause a failure. They lose money. The only way to make money is to deceive others by selling bad paper, and that will eventually lead to liability and failure as well.

When people cheat you cannot as a regulator continue business as usual. They go into a different category and you must act completely differently as a regulator. What we’ve gotten instead are sad excuses.

The SEC: we’re told they’re only 24 people in their comprehensive program. Who decided how many people there would be in their comprehensive program? Who decided the staffing? The SEC did. To say that we only had 24 people is not to create an excuse — it’s to give an admission of criminal negligence. Except it’s not criminal, because you’re a federal employee.

In the context of the FDIC, Secretary Geithner testified today that this pushed the financial system to the brink of collapse But Chairman Bernanke testified we sent two people to be on site at Lehman. We sent fifty credit people to the largest savings and loan in America. It had 30 billion in assets. We had a whole lot less staff than the Fed does.

We forced out the CEO. We replaced the CEO. We did that not through regulation but because of our leverage as creditors. Now I ask you, who had more leverage as creditors in 2008? The Fed, as compared to the Federal Home Loan Bank of San Francisco, 19 years earlier? Incomprehensible greater leverage in the Fed, and it simply was not used.

Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions.

And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads — there was an interagency effort — killed it. They came out with something pathetic in 2006, and stalled its implication until 2007, but it ’s meaningless.

We have known for decades that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure
because of the leadership in this era.

We have the Fed, the Federal Reserve Bank of New York, finding that this is three card monty. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?

That’s what was done. Oh they met a lot — they say “we only had a nuclear stick.” Sounds like a pretty good stick to use, if you’re on the brink of collapse of the system. But that’s not what the Fed has to do. The Fed is a central bank. Central banks for centuries have gotten rid of the heads of financial institutions. The Bank of England does it with a luncheon. The board of directors are invited. They don’t say “no.” They are sat down.

The head of the Bank of England says “we have lost confidence in the head of your enterprise. We believe Mr. Jones would be an effective replacement. And by 4 o’clock that day, Mr. Jones is running the place. And he has a mandate to clean up all the problems.

Instead, every day that Lehman remained under its leadership, the exposure of the American people to loss grew by hundreds of millions of dollars on average. Auroroa was pumping out up to 300 billion dollars a month in liars’ loans. Losses on those are running roughly 50% to 85 cents on the dollar. It is critical not to do business as usual, to change.

We’ve also heard from Secretary Geithner and Chairman Bernanke — we couldn’t deal with these lenders because we had no authority over them. The Fed had unique authority since 1994 under HOEPA to regulate all mortgage lenders. It finally used it in 2008.

They could’ve stopped Aurora. They could’ve stopped the subprime unit of Lehman that was really a liar’s loan place as well as time went by.

(Kanjorski bangs the gavel)

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Cursive's picture

Bill Black is what America needs right now.  Less Bernanke/Geithner/Summers and a whole hell of a lot more William Black.

Cognitive Dissonance's picture

Truth is mortally dangerous to the Ponzi and thus it will always be given the heave ho. It is only when the masses recognize that they have willingly allowed their own theft will they tune out WIIFM (What's In It For Me). Until then, they will continue to believe the lie that their continued existence depends upon the well being of the Ponzi.

JW n FL's picture

Germany... was already in a depression... before, the loans went bad in Cleveland, Chicago or other $0.25 on the dollar secondary market places in America.


Liars Loans did not cause the World to faulter, considering the World was already faultering...





Utility Output Slows the Increase in Industrial Production





hbjork1's picture


I don't understand.  The utility output is normally an issue of supply and demand until local capacity issues arise.  My understanding is that utility output, at least here in Michigan, is reduced by lack of demand.

Would appreciate your comment on this.



JW n FL's picture


The Tail that Wags the Dog

  • Although it comprises less than 12 percent of total output, utility production has been the X-factor in recent reports on industrial production. An exceptionally cold winter followed by an unseasonably warm spring resulted in a 6.4 percent decline in utilities output, the sharpest drop in more than four years. Manufacturing output was strong, increasing 0.9 percent for the month as the manufacturing recovery continues.


    I thought it was interesting that power production is hindering manufacturing, I am in Florida and suffer JEA and more often that not FPL... so I am un-aware of the problems suffered in the great white north, although I do hear that offshore or lake power is on the rise in your neck of the woods. Sorry I could not be of more service to your question directly, it was not my intent to be ignorant on the matter presented.

    Be well, JW

    macfly's picture

    He is one of the greatest voices for us the people. It is completely clear that everyone from Wall St to Washington is complicit in this ridiculous scam, the engineered collapse. If you haven't seen his Bill Moyers interview it is well worth watching...


    mudduck's picture

    I like Blacks little dig at the end, "By the way, the folks who are the better regulators, they pay their taxes so you can get them through the vetting process a lot quicker."

    Double down's picture

    Bill Black and a bunch of 9mm arguments

    Marvin_M's picture

    I absolutely love this guy's moxy.  The efforts to marginalize the truth speakers to date have been successful.  When Bill Black (and others like him) begins to be taken seriously, we will finally see the unmovable begin to move.  All America now knows what the freedom movement by African Americans in the 50s and 60s looked like from the inside.

    vote_libertarian_party's picture

    Watch the video again.  Watch the guy popping in and out on the left.  His expressions seem to be "OH SHI*!  He isn't on script."

    Hulk's picture

    That idiot annoyed the shit out of me...

    No More Bubbles's picture

    Yeah, that guy bothered me too. I wanted to punch that prick.   I was also infuriated at the scumbag hitting the gavel in the last minute over & over. 





    AntiMort's picture

    He trimmed the beard... Nice!  Makes him more credible.

    Cursive's picture

    LOL.  He could slap on some crazy Dr. Hugo (Dune reference) eyebrows and I'd still listen to every word.

    Cognitive Dissonance's picture

    Someone made a Dune reference last week in the comment section of ZH that drove me to my library to resurrect my copy. Rereading Dune in the current economic and political environment has convinced me that Frank Herbert was definitely a clairvoyant or great seer.


    Cursive's picture


    That was a messed up movie.  I hope we don't end up with heart plugs.  Few things creepier than the scene of Baron Harkonin (sp?) taking that dude out.  If Benron could, he would.

    crosey's picture

    Hell, we could eat some Melange, fold space, and get the hell out of here.

    WaterWings's picture

    Oh, yeah. Nobody warned me - I was raised pretty quietly so my worldview was skewed for a day or three.

    Commander Cody's picture

    You're welcome.  Harkonen.  He who controls the spice controls the universe!

    House Atreides's picture

    My father once told me that respect for the truth comes closer to being the basis for all morality. "Something cannot emerge from nothing", he said. This is profound thinking if you understand how unstable "the truth" can be.

    - from "Conversations with Muad'Dib' by the Princess Irulan

    monmick's picture

    Like my wife would say: "He looked like Easy Top"!

    Kina's picture

    So everybody was part and parcel of the fraud. Unless they want to claim extreme ignorance and incompetence the regulators have to admit they were part of the scam, effectively against the country.


    There are some regulators that no doubt should be in prison for criminal negligence.

    Cognitive Dissonance's picture

    You have quite eloquently illustrated how the big lie becomes so completely assimilated into the very fabric and core of a culture. This is precisely why everyone gets a taste or a piece of the action in organized crime. It's then in every one's interest to keep their mouths shut. It also makes for some strange (but satisfied) bed fellows. 

    DaveyJones's picture

    Reminds me of the Catholic priest scandal. Everyone has something on everyone

    or as someone else described it, a banana republic without bananas

    crosey's picture

    Not true.  No doubt bad shit has happened.  Coverups for sure.  But the vast majority of Catholic clergy are clean.  Let's not impune the entire lot.

    pan-the-ist's picture

    It is a big lie- I did nothing to cause this problem.  I bought a house I could afford, I avoided a stupid ARM loan, etc - yet I suffer the bad economy because of loan sharks and goldman. As Mr. Black said, if the the existing regulators hadn't turned a blind eye to the awful loans this could have been stopped.  No McMansions, no run up on house prices.  I get angry when people say the banks were forced to make these loans - the fuck they were - they were enabled to make the loans and their agents were given bonuses to deliver.

    There are guilty people who should be punished and they are identifiable!

    hbjork1's picture


    Nobody in a politically vulnerable position wants to spoil the party.  "Kick the can down the road and let someone else deal with it.

    Maybe the problems will go away.


    Sqworl's picture

    Bravo...three snaps from me!!!

    scatterbrains's picture

    I was shaking while listening to him live..   I need to chill

    Rogerwilco's picture

    Kabuki Theater -- Black is just one more character in this ongoing charade. Congress gets big bucks from the likes of GS and BAC, and how much did Mr. Obowma take from these guys during his campaign? Over $900K?

    Give the proles a false sense of justice, play to the cameras, and let the Wall Street types continue to do what they do best -- loot and pillage.

    THE DORK OF CORK's picture

    I seem to remember only 2 questions directed towards Black after his opening statement.

    The committee seemed to concentrate on Fulds ramblings which was a classic stalling exercise filled with inane banking babble.

    Black rightly was pointing the finger to the top of the manure heap which was/is occupied by the Wash / NY FED

    This will not end until it is over.

    sushi's picture

    Why doesn't the administration hire the guy? Why don't Americans demand the administration hire the guy? Call it a Pecora moment and have him start busting some chops.

    arkady's picture

    You know Pecora was just a Rockefeller lackey right?  Pecora and his "findings" simply gave the Rockefellers more teeth while clamping down on the Morgan interests.  Giving birth to the famous Glass-Steagall that I am sure everyone this board just adores, along with the useless FDIC and even more useless SEC. 

    THE DORK OF CORK's picture

    Sushi if I were a rat the last thing I would want in my house is a rat catcher.

    sushi's picture

    That is exactly the reason pitchforks were invented. The French improved the same technology. They called it the guillotine.

    anynonmous's picture

    the key phrase in all of this was:


    Kanjorski bangs the gavel



    arkady's picture

    I never understood Bill Black.  How can a guy who understands so much about our big banking be such a raging liberal working hard to get Obama elected.  Obama, who by the way, was the largest recipient of Goldman contributions.  Is Black just a finance genius and political idiot...or?

    arkady's picture

    I won't even mention that the entire point of the speech is to make it quite clear that fraud was running rampant and that our regulatory agencies FAILED.  Not because they were not in place, but because people did not want to act.  So why is the answer more regulation when existing regulation failed miserably. 

    It's hard to stomach all this especially as he advocates more Central Bank powers as if a more powerful Fed is what America needs.  How about he address the central bank involved in buying 1 trillion dollar worth of toxic paper and maintaining a liquidity pump program for 30 years using artificial interest rates. 

    What is more damaging to our economy?  Central planning of our financial industry or creating more inept regulators. 


    I cannot be the only one seeing this.

    Rick64's picture

    I don't think he is advocating it, just destroying the FED's reasoning for not getting involved when clearly they could have stopped the madness and did have the authority. Instead they played along. As far as his political choice, maybe he was fooled just like many others. Those campaign contributors give to both sides, they cover all bases. These people always play both sides in wars,elections, and finance.

    arkady's picture

    I certainly see your point about covering bases, they certainly seem to do that which makes voting for either of the two parties a grave error.

    Imagine though Rick, if Black would advocate the dismantling of the Federal Reserve solely based on his utter failure and perhaps even complicity.

    Rick64's picture

    He would be discredited as an extremist. It probably makes more sense to him to bring accountability to the system already in place rather than dismantling the whole system, because when they try to pass legislation against the banking cartel or corporations they are unsuccessful. If they are unsuccessful at that level then to dismantle the whole system (or the FED) is out of the question.

    arkady's picture

    You could be quite right, except that he is already saying "The Fed failed".  It would not be a stretch to add "therefore we should reconsider the system". 

    All one has to do is prove failure, most Americans have no clue what the Fed does or the consequences that we have to live with because of it. 

    Rick64's picture

    I agree with you the FED should be abolished, but the reality is abolishing it would require a revolution whereas introducing accountability would be more acceptable and could gain support. Steps in the right direction and just maybe towards abolishing the FED. You are right most Americans don't have a clue about our monetary system or political system. There is collusion between the two.

    arkady's picture

    Fair enough, I guess it always struck me as wasted opportunity to not expose the machinations of our centrally planning masters to the public.  Then again, who is going to even watch this testimony? People who already know what's up. 


    M.B. Drapier's picture

    Yes, in the video he's very clearly talking about what the Fed could have done with the powers it already has. Even in his written submission, where he moots structural changes at the Fed and other regulators, very few of them could be described as giving extra powers to the Fed. (Though arguably, if the Fed gets into the habit of deposing bank chiefs BoE-style, then that might be an expansion in its de facto powers, which might be problematic.)

    As far as his political choice, maybe he was fooled just like many others.

    He's been fairly open in accepting that he was rolled by the Obama campaign/administration, at least up to now.

    arkady's picture

    With all due respect to Mr. Black - he got rolled by a socialist?  What the hell did he expect to happen?  Every single person who is surprised by what Obama truly is boggles my mind.  Obama to his credit, despite being a socialist, was pretty straight forward with his intentions.  I can forgive stupid Americans enraged with 8 years of Bush to fall for the song and dance, but not people like Bill Black. 

    M.B. Drapier's picture

    How about he address the central bank involved in buying 1 trillion dollar worth of toxic paper and maintaining a liquidity pump program for 30 years using artificial interest rates.

    He's spoken out against the Greenspan/Bernanke put and mark-to-model elsewhere. In his testimony to Congress he has to stay on-topic and (as you can see) inside his limited time.

    arkady's picture

    Fair enough, if that is true, then it certainly boosts his credibility at least in my eyes. 

    Seer's picture

    Yes and no... Doesn't matter how good people are, tossing a limited number at huge entities like a Goldman Sachs is like David vs. Goliath.  You better be sure that you can justify your time and energy: and what you use (time and energy) in one case you cannot use in another (the rest of the industry would just run wild).

    The SEC was basically gutted under the Bush administration.  The wolves go into the chicken coop and there weren't enough guardians available.

    So, yes, the SEC was a political tool, a tool to help pay back campaign supporters.

    Don't like enforcers?  Get rid of the laws: and then perhaps some of us would be free to apply some lead that we couldn't otherwise use.

    Moral of the story: careful of what you wish for (esp when not understanding the big picture).