Bill Black: The Banks Are Still Insolvent, And Obama Is Not Only Covering It Up, He's Taking Credit!

Daily Bail

Bill Black says you're doin' a heck of a job, Mr. President.

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A look back at a Bill Black op-ed from last Fall. Nothing has changed.

As part of their TARP propaganda tour, Obama officials from Tim Geithner to the president himself keep repeating the same lie statistic -- that solving the financial crisis will cost far less than the 2.5% of GDP it took to clean up after the S&L crisis. In this piece, Bill Black gives withering criticism of Obama for playing extend and pretend with the TBTF banks -- the very same game the S&L regulators played during the 1980's. It didn't end well back then, and it won't end well this time.

Regardless, says Black in a new op-ed, the results, are clear:

For reasons that only Summers, Geithner, and Obama can know, they chose to adopt Pratt's disastrous and dishonest anti-regulatory strategy and parrot his dishonest claims of brilliance and success. Congress passed the Prompt Corrective Action (PCA) law in 1991 for the express purpose of outlawing any repeat of Pratt's refusal to close insolvent banks. Congress, at the behest of the Chamber of Commerce, the American Bankers Association (ABA), and Chairman Bernanke, successfully (and shamefully) extorted the Financial Accounting Standards Board to change the accounting rules so that banks no longer had to recognize losses on their toxic mortgage paper appropriately until they sold the assets.

Covering up the losses had three real (carefully unstated) purposes: (1) permitting evasions of the PCA [Prompt Corrective Action law], (2) allowing the banks to remove themselves from the strictures of the TARP program even if they are, in reality, insolvent, and (3) allowing insolvent and impaired banks to pay their senior executives huge bonuses on the basis of the (fictional) income that results when a bank does not recognize its losses.

The Bush and Obama administrations have consistently refused to apply any of the successful lessons learned in responding to the S&L debacle - even though the response has been praised by experts in public administration and Treasury Secretaries from both parties for decades. Both administrations refused to even discuss the current crisis with the senior S&L regulators that contained that crisis before it caused a recession. Obama thinks his response to the crisis was brilliant because it did not follow the S&L regulators' much more expensive strategy. Obama cited the comparison to the S&L debacle as the most telling demonstration he could make of why his administration deserves praise.

It's a Miracle!

What Obama does not understand is that his "cover up" strategy and his claims of brilliant success are direct steals from Dick Pratt's playbook. Dick Pratt was the top S&L regulator in 1981-83. When he left (to join Merrill Lynch) he claimed that he had contained the crisis through innovative resolution strategies that slashed the average historic costs (from over 20% to less than 5% of the S&L's assets). Pratt's "resolutions" were accounting scams that did not resolve anything. They did, however, transmute real insolvencies into fake assets and create guaranteed (fictional) accounting income. The scam was so crazy that the more insolvent the S&L acquired, the greater the fictional income that the deal created. Pratt did so many of these scam resolutions that they created so much fictional income and capital that the industry reported it had suddenly returned to profitability.

The reality was quite different. There was no miracle, only the cumulative results of multiple accounting scams. Pratt's resolutions did not resolve failed S&Ls. They were still insolvent.

A summary of Black's op-ed from last week:

* Fictional Accounting Allows Insolvent Banks To Pay Billions In Bonuses

* The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers' trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce.

* The FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional "income" and "capital" at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.

Background:

* William Black Calls On FDIC To Seize Bank Of America

* William Black With Dylan Ratigan: "There Is Bank Fraud Everywhere And BERNANKE Is Leading The Cover-Up," PLUS Part 2 Of 'Seize Bank Of America'

Bonus Video: Ratigan with Black and Inside Job Director Charles Ferguson

Click here for Ratigan's complete interview with Charles Ferguson.

* "There have been ZERO criminal referrals."

* “None of that is happening because the people in charge don’t look.”

* “If you looked you would have seen fraud incidence in these mortgages in the 80% range and they could not have been sold.”

* “The real losses are being hidden bby the Fed to the tune of trillions of dollars RIGHT NOW.”

NYT: Tim Geithner Convinced NY AG Andrew Cuomo To Back Off Wall Street Prosecutions

Daily Bail

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?

Answering such a question — the equivalent of determining why a dog did not bark — is anything but simple. But a private meeting in mid-October 2008 between Timothy F. Geithner, then-president of the Federal Reserve Bank of New York, and Andrew M. Cuomo, New York’s attorney general at the time, illustrates the complexities of pursuing legal cases in a time of panic.

At the Fed, which oversees the nation’s largest banks, Mr. Geithner worked with the Treasury Department on a large bailout fund for the banks and led efforts to shore up the American International Group, the giant insurer. His focus: stabilizing world financial markets.

Mr. Cuomo, as a Wall Street enforcer, had been questioning banks and rating agencies aggressively for more than a year about their roles in the growing debacle, and also looking into bonuses at A.I.G.

Friendly since their days in the Clinton administration, the two met in Mr. Cuomo’s office in Lower Manhattan, steps from Wall Street and the New York Fed. According to three people briefed at the time about the meeting, Mr. Geithner expressed concern about the fragility of the financial system.

His worry, according to these people, sprang from a desire to calm markets, a goal that could be complicated by a hard-charging attorney general.

Asked whether the unusual meeting had altered his approach, a spokesman for Mr. Cuomo, now New York’s governor, said Wednesday evening that “Mr. Geithner never suggested that there be any lack of diligence or any slowdown.” Mr. Geithner, now the Treasury secretary, said through a spokesman that he had been focused on A.I.G. “to protect taxpayers.”

Whether prosecutors and regulators have been aggressive enough in pursuing wrongdoing is likely to long be a subject of debate. All say they have done the best they could under difficult circumstances.

But several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail. Among the best-known: Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida.

Former prosecutors, lawyers, bankers and mortgage employees say that investigators and regulators ignored past lessons about how to crack financial fraud.

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

Leading up to the financial crisis, many officials said in interviews, regulators failed in their crucial duty to compile the information that traditionally has helped build criminal cases. In effect, the same dynamic that helped enable the crisis — weak regulation — also made it harder to pursue fraud in its aftermath.

A more aggressive mind-set could have spurred far more prosecutions this time, officials involved in the S.&L. cleanup said.

“This is not some evil conspiracy of two guys sitting in a room saying we should let people create crony capitalism and steal with impunity,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis. “But their policies have created an exceptional criminogenic environment. There were no criminal referrals from the regulators. No fraud working groups. No national task force. There has been no effective punishment of the elites here.”