Saturday, February 28, 2009

The Bush owned economic crisis

Yes, Democrats participated in causing it.

William K. Black
Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle
As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)
The FBI correctly identified the epidemic of mortgage control fraud at such an early point that the financial crisis could have been averted had the Bush administration acted with even minimal competence. To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud.
Don't ask; don't tell: book profits, "earn" bonuses and closet your losses
The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:…
These two documents are enough to begin to understand:
the FBI accurately described mortgage fraud as "epidemic"
nonprime lenders are overwhelmingly responsible for the epidemic 

the fraud was so endemic that it would have been easy to spot if anyone looked 

the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy 

willful blindness was essential to originate, sell, pool and resell the loans 

willful blindness was the pretext for not posting loss reserves 

both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed 

the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses 

the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
Black: The Best Way to Rob a Bank is to Own One.

Read the entire post
http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html
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