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You have to go back to the George W. Bush era for the only real prosecution related to the subprime crisis. Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin are accused of securities fraud for not telling investors in 2007 about the shaky nature of their fund — based on subprime mortgages — before it collapsed. While the act was typical of the times, the two are far from the top rungs of Wall Street, and there seems to be little else going on in the justice process. Elite white-collar defense attorneys report no clamor for their counsel from major financial managers. Regulators talk of no demand for their services and for evidence from prosecutors. As they say in the trade, there's no buzz.
So far, then, the common person has reaped little relief. Well, maybe clearer credit card statements, plain vanilla mortgages with slightly less fine print, and probably some "green" infrastructure jobs. But these have been slow to arrive, and so far, there is no great morality-based thrust as there was in the New Deal. About $1 billion has been dedicated to putting and keeping "cops on the street." Remember the poignant vignette during the State of the Union address, in which Obama talked about saving 57 police jobs in Minneapolis? Well done and warranted, yes, but keeping the public safe from financial criminals is another story: The administration and Congress have failed to bulk up white-collar fraud enforcement with either new FBI agents or new forensic specialists.
Which annoys the hell out of proven financial-crime fighter Bill Black. Athletic and red-bearded, he looks more like a lumberjack than a scholar, criminologist, and bureaucrat who, in 2005, wrote The Best Way to Rob a Bank Is to Own One, the definitive history of the S&L debacle as well as an insider's report. A legend among regulators, he faced down House Speaker Jim Wright and the "Keating Five" senators (including McCain), who fought to protect that corrupt industry, and overcame stiff resistance from within the Reagan administration and from Keating himself.
Wright, who later resigned in disgrace over ethics charges, called Black a "red-bearded son of a bitch." Keating hired detectives to get dirt on Black. When that failed, the thrift magnate told his Washington lobbyists to "kill him dead," which he probably meant figuratively, in the sense that Keating wanted Black's power shut off. It wasn't, and Keating, though he was as plugged in to the Republicans as Franklin Raines is to the Democrats, ended up doing hard time.
Black always has a big smile and a ready joke, but he burns with the intensity of an Old Testament prophet, especially against "control fraud," the lawlessness that emanates from the top of legitimate businesses. He contends that it causes bigger financial losses than all other forms of property crime combined. Corporations practice these frauds with crooked accounting and perverse compensation systems, using bonus formulas that lead executives to loot their companies rather than serve them.
Now an associate professor of law and economics at the University of Missouri at Kansas City, Black has continued the fight against fraud and for regulatory controls as a consultant to a gamut of agencies from the FBI — where he trained agents in white-collar forensics — to the World Bank.
In 2007, Black was hired by the Office of Federal Housing Enterprise Oversight to investigate the problems at Fannie Mae. His 70-page report plainly described how Raines and his lieutenants used "fraudulent accounting" and "perverse incentives," and took "unsafe and unsound risks" that "collectively caused Fannie to violate the law and deceive its investors and regulators."
So almost two years before the financial crisis broke in late 2008, Black, the FBI, and others outlined the structural problems that would wreck the economy, but Washington did nothing and continued to exercise "regulatory forbearance." In fact, the crisis did not have to happen, and there was certainly no need for Washington's panicky response to it last fall.
Black vents particular ire at Geithner, who, as New York Fed chair, fiddled while Wall Street imploded; and Henry Paulson (and Geithner again), who, as Treasury secretaries, refused to enforce a key banking law, the Prompt Corrective Action (PCA) law. Congress passed it in the wake of the S&L scandal in 1991, and the first President Bush signed it. It's probably the best, fairest, and clearest piece of financial legislation since the New Deal.
Under the law, Federal Deposit Insurance Corporation (FDIC) examiners initially rate banks as "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." The tags determine the examiners' actions, if any. Undercapitalized banks must build up their capital and get FDIC approval for acquisitions and opening new business lines. When a bank becomes significantly undercapitalized, a regulator can order serious sanctions, from firing management to restricting stock sales and forcing divestitures. Critically undercapitalized banks must be placed in receivership, unless the FDIC determines that some other action like a merger or sale would better protect the depositors. That's it in a nutshell — obviously, regulators were allowed to do a lot more, like forcing a change in accounting systems and blocking bonuses. Bottom line: PCA worked like a charm.
In the entrepreneurial Reagan-Bush era, the banking system had become a mess. Often, more than 100 banks failed annually, as has happened this year. After PCA, banks cleaned up and failures became rare — only a handful per year, and sometimes none. U.S. Treasury secretaries even pushed the PCA idea to Japan during its "lost decade."
But in the U.S., after George W. Bush's election in 2000, PCA began to wither from disuse, especially because of opposition from the megabanks and laissez-faire policy makers. Toward the end of the Clinton administration, Washington caved in to the financial lobby and passed new laws that promoted risk. Congress repealed the Depression-era Glass-Steagall Act, which had drawn a sharp line between commercial banks and investment banks. Another new law immunized securitizers from lawsuits even if their products were rubbish. A third new law allowed the wildest form of derivatives — "naked" credit default swaps, side bets on CDOs that could be placed by investors who didn't even own the bonds. The old prudent, conservative banking model gave way to the sleek megabank casino, which was fine with the Fed. Ben Bernanke, then a Fed regional governor, spoke in 2004 of the new "Great Moderation," which the industry took to signal a period of ultralax regulation.
