Bill Black: Our System Is So Flawed That Fraud Is Mathematically Guaranteed

Tyler Durden's picture

Submitted by Chris Martenson

Bill Black: Our System Is So Flawed That Fraud Is Mathematically Guaranteed

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."

- Frederic Bastiat

Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse.

In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system. 

A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators. In a number of cases, they clawed back the funds and profits that the convicted parties had fraudulently obtained.

Flash forward to the 2008 credit crisis, in which just the related household sector losses alone were over 70x greater than those seen during the entire S&L debacle. So how many criminal referrals did the same agency, the Office of Threat Supervision, make?


Similar dismal action was taken by such other financial regulators as the Office of the Comptroller of the Currency, the Federal reserve and the FDIC. 

Where is the accountability?, you may be asking. Or perhaps, how did we allow things to get this bad?

To find out, click the play button below to listen to Part I of Chris' interview with Bill Black.

Fraud is both a civil wrong and a crime and it's when I get you to trust me and then I betray your trust in order to steal from you. As a result, there’s no more effective acid against trust than fraud and, in particular, elite fraud, which causes people to no longer trust folks, economies break down, families break down, political systems break down and such if you don’t have that kind of trust. So that’s what fraud is.


But what my work focuses on is: what kind of frauds are the most devastating? And it turns out that the most kind of problems that we’re seeing, systemic problems and such, arise when we have, what we call in criminology, control fraud. And control fraud simply means when you have a seemingly legitimate entity and the person who controls it uses it as a weapon to defraud others. And so in the financial sphere the weapon of choice is accounting and the losses from these kinds of control frauds exceed the financial losses from all other forms of property crime combined.


So for example, in the current crisis, as with the prior ones, if you’re a lender there’s an easy recipe for maximizing fake accounting income. And it goes like this. You need four ingredients:

  1. grow like crazy
  2. by making really, really crappy loans but at a premium yield (yield just means 'interest rate')
  3. while employing extreme leverage, and
  4. while setting aside only the most trivial reserves or allowances for the inevitable losses this kind of behavior produces.

George Akerlof and Paul Romer wrote the classic article in economics about this in 1993. And their title really says it all in terms of the dynamic:Looting the Economic Underworld of Bankruptcy for Profit. The idea is you have a seemingly legitimate entity, the person at the top is looting it. They loot it by destroying it but they walk away wealthy. Of course, in the modern era we don’t necessarily, we may bail out the entity. So it may not even fail in that sense.


But here’s what Akerlof and Romer also said that was so critical as an understanding. They said these four steps, these four ingredients: it's just math. It is – and I’m quoting them now “a sure thing.” So you’re mathematically guaranteed if you do these four things to report, not just substantial income, but record levels of income.


The big thing about the seemingly legitimate entity when the CEO is the crook is, first, everybody reports to the CEO ultimately, right? So the CEO is the point failure mechanism where if he or she goes bad, almost everything may go bad as well. So all those things that we call internal and external controls, all report to the CEO and the CEO therefore can, as I’ll describe, use compensation, hiring, firing, praise, and such to produce the environment that will commit, create allies for his fraud. Now, note that what I’m saying. The CEO, the art of this is not to defeat your controls. The elegant solution as in mathematics is to suborn the controls and turn them into your most valuable allies. And therefore, for example, when you’re running accounting control fraud where your weapon of fraud is accounting and that weapon of choice in finance is accounting. You’re going to want to hire the most prestigious accountants as your outside auditors because it is precisely their reputation that is most valuable when you can suborn them. And, they give you that clean opinion that you just described that will help you deceive other shareholders. So one enormous advantage is internal and external controls come to the CEO level.


A second incredible advantage is the CEO can optimize the firm as a weapon of fraud. And the CEO can do that. Basically, this falls into two big categories. One, you can put it in assets that have no readily verifiable market value because then it's a lot easier to inflate asset valuations and to hide real losses. And the second thing you do is grow like crazy. And, of course, that is the essence of something your listeners have all heard about, and that is a Ponzi scheme. And so these accounting control frauds have strong Ponzi-scheme like elements, which is why they tend to cause such catastrophic losses.

Click the play button below to listen to Part I of Chris' interview with Bill Black (58m:28s):

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To listen to Part 2 - Click Here.

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Miss Expectations's picture

In paragraphs 3 and 4 do you mean to say Office of Threat Supervision as a joke or do you mean Office of Thrift Supervision?


Maybe that's why none of these crooks have been thrown in jail because they are too many offenders. lol

Badabing's picture

In god we trust.

whos god?

Richard Chesler's picture

Kleptocracy you can believe in.

disabledvet's picture

that's the problem with Europe..."the don't believe in it." And unfortunately "making it INCREDIBLE" doesn't work either. Here it the good 'ol USA "we have trillion dollar deficits"...why, while INCREDIBLE...somehow are "okay." don't ask me how. "in God we trust" indeed is the best i can come up. who knew? "Sound money through wicked sarcasm!"

Oh regional Indian's picture

Our system is So fraud, so fraud. That is what the Japanese are saying too. They've been de-frauded. Possibly of the same system that spawned Bill Blacks Flawed Fraud.

To really meet fraud, you should come east though. The east was de-frauded of it's culture, took about 5 flawed fraud walks, honesty soxx.

someone wrote me and said "Seen Apple go Vertical?, Unreal, blow-off, never seen before".... just like that with fraud. I keep thinking that Al was Goring us with the message that EVERYTHING is going to go vertical. 

Peak Fraud, FTW...



engineertheeconomy's picture

mathematically it is impossible for one person to pay off a loan without someone else defaulting, because they only print the principle. The paper to pay it back , since it is more than the principle, has to come from somewhere. That is why we should all be allowed to print money. End the ponzi sooner rather than later.


Oh regional Indian's picture

Is that how you would engineer the economy?

You must work at HP.


Caviar Emptor's picture

Spain suspends Schengen Treaty, imposed border controls incl Barcelona/Gerona airports to deter protesters before ECB Thurs mtg in Barcelona

AldousHuxley's picture

Truth is that we are all like wives of mobsters. We get the benefits of being associated with the top mob, but we also see how dirty the money is gained.


So Bill Black calling fraud is like mobster wife calling her husband a bad guy while wearing diamonds gifted by the same guy.


People like Bill Black live in relatively poorer conditions if you put his contributions at a global market price.

Cathartes Aura's picture

I like that analogy AldousHuxley - applied to amrkns in particular - recipients of the largesse, decades of military & secret services dominating other nations and their people, claiming resources, undermining their sovereignty, steamrollin' over everything, hands grabbin' - all the while parading about in the fancy, as if it wasn't the result of covert dealings, sucking up the majority of "resources" as the world turns. . .

and now that "mobsters" have moved on, more or less, to "gift" their next fancy with supposed shiny trinkets of consumer-ville, the truth is staring us in the mirrors. . . party's over.

It's a mystery to me
We have a greed with which we have agreed
And you think you have to want more than you need
Until you have it all, you won't be free


Society, you're a crazy breed
I hope you're not lonely without me


When you want more than you have, you think you need
And when you think more than you want, your thoughts begin to bleed
I think I need to find a bigger place
Cause when you have more than you think, you need more space


Society, you're a crazy breed
I hope you're not lonely without me
Society, crazy indeed
Hope you're not lonely without me


Eddie Vedder ~ Society

fiddy pence haff pound's picture

that's Trickle Down Voodoo Economics. Soon to be replaced by 

Eat-Shit Economics.

I think the banking profits these days are all being offshored, like the jobs

at the biggest manufacturing companies on the stock markets.

So, not only are the bankers soaking every country of all its real money (like pensions),

they're killing the real economy and deflating the bubbles (real estate, credit) they created

over the last 40 years.

I'm with Krugman. Bring on the aliens. This place is f^*&*ked.


False Capital's picture

Not true. You forget about the dimension of time. So long as loan repayments are released by the bank back into the borrowers hands again then repayments can continue indefinitely. For example, the borrower may sweep the floors of the bank and thereby receive wages (e.g. from his own prior payments) to pay the banks interest demands. Money must pass through the bank and circulate for all to be "well" (another example of the flow, not the stock, being the key?). Essentially, the banker holds the reins of the economy and plays slave master to anyone who holds that currency.

barroter's picture

The Invisible Hand of the market place is picking our pockets.

Ignatius's picture

When Frontline recently did what I consider to be a 'lightweight'  treatment of the GFC, Bill Black was not invited to the party.  Go figure.  Might be that pesky word 'fraud' that he keeps mentioning.

Blammo's picture

Your right Ignatius. Fraud is such a buzzkill

Seasmoke's picture

Well , Blankfiends of course

MassDecep's picture

"In god we trust.

whos god?"


Your about to find out....

BlackholeDivestment's picture doubt!  

The revelation of mercy is risen and sustaining. The Truth is not a choice, it is the love of our Father in Christ and the Holy Spirit among the Saints.

dizzyfingers's picture


No, it's because after Black no one of Black's stature as an investigator and prosecutor every was a appointed again!

BidnessMan's picture

The US has the world's largest prison system by far. Lack of space to put offenders in jail is not the problem.

Unprepared's picture

I think he meant "Office of Theft Supervision". It's a special department in the Mafia organization.

CPL's picture

aka accounts recievable.

DeadFred's picture

How can I get a job in the Office of Threat Supervision? I could do nothing by telecommuting and wouldn't even have to quit my other job. Sweet.

Unprepared's picture

Please proceed to your closest SEC's office.

Gully Foyle's picture

Fraud only exists when someone gets caught.

Until that point it is a wise business practice.


Unprepared's picture

What do you think the SEC and other regulating bodies are there for?

vh070's picture

Secure Economic Cronies?

Woodyg's picture

Obama calls them 'savvy businessmen'.....

Silver Bug's picture

The system and fraud are one in the same now. It is a sad time we live in.

evolutionx's picture

ECB accepts Portugal Bonds due Dec. 31, 9999

No joke: the European Central Bank accepts a Portuguese bond from the year 1943 as collateral due for repayment on Dec. 31, 9999. The ECB has turned into the dumping ground for European banks' junk bonds. The practice could harm the central bank's reputation as well as the Euro. The ECB issues Euros for almost everything.

Withdrawn Sanction's picture

Sounds like a consol.  If so, it's not new and probably not the most important thing to be worrying about, let alone screaming about in bold.


WhiteNight123129's picture



I let you guys figure with google translate of babelfish.


CPL's picture

Brakes are obviously for pussies when running a train off a cliff.


It will be the most beautiful pension explosion ever.  The governments of the world can't help but drink deeply from them when it comes down to it.  Not public pensions.  There's no money in them.


Private public service pensions have a tasty bite to them.



CPL's picture

Every heard about a Canadian Teachers Pension Fund with unfunded liabilities?  

One of the forces of nature of the entire WORLD market place.  Bigger than any investors group in any nation next to it's own nation's Ontario Teachers Pension Fund.  It's short and just starting to find out how deeply.


NS teachers pension plan's unfunded liability tops $1.65 billion The annual report released Friday by the Nova Scotia Pension Agency says the unfunded liability for the plan is $1.65 billion as of Dec. 31, 2011. Diminished investment returns accounted for nearly half of the increase to the unfunded liability, ...


The US pension funds in terms of weight and economic strength are tiny in comparison.  I would guess they've already been looted.


Sean7k's picture

You're lightweights. In Illinois, 84 billion in unfunded liabilities alone.

You canucks need to pick up the pace.

CPL's picture

We're light weights in debt...the pension systems have a lot of assets.  Assets that were there last year and magically vanished in a brief audit.  The big pig I want to see do a review is the OTPP

The worlds largest asset holder on the planet.  If NSTPP which mirrors the OTPP is in shit, it means they all are.  OTPP is the gold standard in how pensions are managed for large government organisations.   If one thing Leo and I could agree on is that single fact.


Yeah Illinois is insane.  But I'm talking about national federal government level pensions in the US that flow the leader of the World.  I mentioned this in another thread.  All that money is fungible, it's a big managed pool.  If money is missing in one "pot", it's missing by the scale of the theft in all others minus the contributions to that date.


I'll guess they are all going to start "discovering" stuff about how everyone got ripped off and anything being offered financially in pensions is fantasy with a side of crazy.

John_Coltrane's picture

Interesing comment.  That's why pensions are never made in a lump sum up front.  That way they can cut you off anytime the ponzi explodes.  Then its back to work (so keep up your skills if you have any) or starvation (unless you've been converting fiat into gold or other hard assets (e.g. food, medicine, fuels and chemicals)). 

Lesson:  Maintain your most valuable assets:  skills and abilities, and things you need to live (energy and food) while everything "seems" to be under control.  Once trust is broken via fraud its every person for himself.

CPL's picture

It's such a mess, what's worse is people bought into the lie which is a black swan all by itself.

ClassicalLib17's picture

" In Illinois, 84 billion in unfunded liabilities alone"  and that is just for teacher and state worker pensions.  There is another 63 billion in unfunded liabilities for current and future retiree healthcare benefits.  Next year, retirement spending for the state university retirement system will consume 2 billion dollars of a projected 3.5 billion dollar budget.

Sobering facts that may explain the reason I don't get much kick from my bourbon anymore 

CPL's picture

Or Argentina...

Financial Times (blog)
The official gazette reported on Friday that the Treasury had borrowed
$342m from the state pensions agency, Anses (to be precise, its Pension
Sustainability Guarantee Fund, or FGS), on April 19 by selling it a
dollar-denominated one-year bond with a 5 .

CPL's picture

This one is my favorite. A new Madoff scam disguised as a pension fund to sell to the Arabs in MENA and fleece those investors as well.

Misean's picture

So, what would money printing by the Feral Reserve be called...

Sean7k's picture

Private corporation. The constitution does not apply. As David says below- counterfeiting.

DavidC's picture



DeadFred's picture

I hope you don't mind my copying your newish term. "Feral Reserve" has only 12K google hits yet is sounds so right.