How to rob a bank | William Black | TEDxUMKC

so today's top chef class is in how to rob a bank and uh it's clear that the general public needs guidance uh because the average bank robbery Nets only $7,500 rank amateurs who know nothing about how to cook the books the folks who know of course run our largest banks and in the last go round they cost us over 11 trillion that's what 11 trillion looks like that's how many zeros and cost us over 10 million jobs as well so our task is to educate ourselves so that we can understand why we have these recurrent intensifying financial crisis and how we can prevent them in the future and the answer to that is that we have to stop epidemics of control fraud control fraud is what happens when the people who control typically a CEO a seemingly legitimate entity use it as a weapon to defraud and these are the weapons of mass destruction in the financial World um they also follow in finance a particular strategy because the weapon of choice in finance is a counting and there is a recipe for accounting uh control fraud and how it occurs and we discovered this recipe in quite an odd way that I'll come back to in a moment first ingredient in the recipe grow like crazy second by making or buying really crappy loans but loans that that are made at a very high interest rate or yield three while employing extreme leverage that just means a lot of debt compared to your equity and four while providing only trivial loss reserves against the inevitable losses if you follow those four simple steps and any bank can follow them then you are mathematically guaranteed to have three things occur the first thing is you will report record Prof Bank profits not just High record two the CEO will immediately be made incredibly wealthy by modern executive compensation and three farther down the road the bank will suffer catastrophic losses and will fail unless it is bailed out and that's how that's a hint as to how we discovered this recipe because we discovered it through an autopsy process during the Savings and Loan debacle in 1984 we looked at every single failure and we looked for common characteristics and we discovered this recipe was common to each of these frauds in other words a coroner could find these things because this is a fatal recipe that will destroy the banks as well as the economy and it also turns out to be precisely what could have stopped this crisis the one that cost us $1 trillion just in the household sector that cost us 10 million jobs was the easiest financial crisis by far to have avoided completely if we had simply learned the lessons of epidemics of control fraud particularly using this recipe so let's go to this crisis and the two huge epidemics of loone origination fraud that drove the crisis appraisal fraud and Liars loans and what we're going to see in looking at both of these is we got warnings that were incredibly early about these frauds we got warnings that we could have taken advantage of easily because back in the Savings and Loan debacle we had figured out how to respond and prevent these crises and three the warnings were unambiguous they were obvious that what was going on was an epidemic of accounting control fraud building up let's take appraisal fraud first this is simply where you inflate the value of the home that is being pledged as security for the loan right in 2,000 the year 2000 that is over a year before Enron fails by the way the honest appraisers got together a formal petition begging the federal government to act and the industry to act to stop this epidemic of appraisal fraud and the appraisers explained how it was occurring that Banks were demanding that appraisers inflate the appraisal and that if the appraisers refuse to do so they would they the banks would Blacklist honest appraisers and refuse to use them now we've seen this before in the Savings and Loan debacle and know that this kind of fraud can only originate from the lenders and that no honest lender would ever inflate the appraisal because it's the great protection against loss so this was an incredibly early warning 2000 it was something we'd seen before and it was completely unambiguous this was an epidemic of accounting control fraud led by the Banks what about liars loans well that earning warning actually comes earlier the Savings and Loan debacle is basically the early 1980s through 1993 and in the midst of fighting that wave of accounting control fraud in 1990 we found that a second front of fraud was being started and like all good Financial frauds in America it began in Orange County California and we happened to be the regional Regulators for it and our examiner said they're making loans without even checking what the borrower's income is this is insane it has to lead to massive losses and it only makes sense for entities engaged in these accounting control frauds and we said yeah you're absolutely right and we drove those Liars loans out of the industry in 1990 and 1991 but we could only deal with the industry we had jurisdiction over which was was Savings and Loans and so the biggest and the baddest of the frauds Long Beach savings voluntarily gave up its Federal Savings and Loan Charter gave up Federal Deposit Insurance converted to become a mortgage bank for the sole purpose of escaping our jurisdiction and changed its name to airquest and became the most notorious of the Liars loans frauds early on and to add to that they deliberately predated a on U minorities right so we knew again about uh this crisis we'd seen it before we'd stopped it before we had incredibly early warnings of it and it was absolutely unambiguous that no honest lender would make loans in this fashion so let's take a look at the reaction of the industry and the regulators and the prosecutors to these clear early warnings that could have prevented the the crisis start with the industry the industry responded between 2003 and 2006 by increasing Liars loans by over 500% these were the loans that hyperinflated the bubble and produced the economic crisis by 2006 half of all the loans called sub Prime were also Liars loans they're not mutually exclusive it's just that together they're the most toxic com combination you can possibly imagine by 2006 40% of all the loans made that year all the Home Loans made that year were Liars loans 40% and this is despite a warning from the industry's own anti-fraud experts that said that these loans were an open invitation to frauders and that they had a fraud incidence of 90% 9 Z in response to that the industry first started calling these loans liar loans which lacks a certain subtlety and second massively increased them and no government regulator ever required or encouraged any lender to make a liar's loan or anyone to purchase a liar's loan and that explicitly includes Fanny and Freddy this came from the lenders because of the fraud recipe right what happened to appraisal fraud it expanded remarkably as well by 2007 when a survey of appraisers it was done 90% of appraisers reported that they've been subject to coercion from the lenders trying to get them to inflate and appraisal in other words both forms of fraud became absolutely indemic and normal and this is what drove the bubble what happened in the governmental sector well the government as I told you when we were the Savings and Loan Regulators we could only deal with our industry and if people gave up their Federal Deposit Insurance we couldn't do anything to them Congress May strike you as impossible but actually did something intelligent in 1994 and passed the home ownership Equity protection act that gave the fed and only the Federal Reserve the explicit statutory authority to ban Liars loans by every lender whether or not they had Federal Deposit Insurance so what did Ben Bernan and alen Greenspan as chairs of the FED do when they got These Warnings that these were massively fraudulent loans and that they were being sold to the secondary Market remember there's no fraud Exorcist once it starts out a fraudulent loan it can only be sold to the secondary Market through more frauds lying about the Reps and warranties and then those people are going to produce mortgage back Securities and exotic derivatives which are also going to be supposedly backed by those fraudulent loans so the fraud is going to progress through the entire system hyperinflate the bubble produce a disaster and remember remember we had experience with this we had seen significant losses and we had experience of competent regulators and stopping it Greenspan and Bernan refus to use the Authority Under the statute to stop Liar's loans and this was a matter first of Dogma they're just you know horrifically opposed to anything regulatory but it is also the international competition in laxity the race to the the bottom between the United States and uh the United Kingdom the city of London in particular and the city of London won that race to the bottom but it meant that all regulation in the west was completely degraded in this stupid competition to be who could have the weakest regulation so that was the regulatory response what about the response of the prosecutors after the crisis after 11 trillion dollar in losses after 10 million jobs lost a crisis in which the losses and the frauds were more than 70 times larger than the Savings and Loan debacle well in the Savings and Loan debacle our agency that regulated Savings and Loans OTS made over 30,000 criminal referrals produced over a thousand felony convictions just in cases designated as major and that understates the degree of prioritization because we worked with the FBI to create the list of the top 100 fraud schemes the absolute worst of the worst Nationwide roughly 300 Savings and Loans involved roughly 600 senior officials virtually all of them were prosecuted we had a 90% conviction rate it's the greatest success against Elite white color criminals ever and it was because of this understanding of control fraud and the accounting control control fraud mechanism flash forward to the current crisis the same agency office of thrift supervision which was supposed to regulate many of the largest makers of liars loans in the country May has made even today no longer exists but uh as of a year ago it had made zero criminal referrals the office the com control of the currency which is supposed to regulate the largest National Banks has made zero criminal referrals the FED appears to have made zero criminal referrals the Federal Deposit Insurance Corporation is smart enough to refuse to answer the question without any guidance from The Regulators they there's no expertise in the FBI to investigate complex frauds it isn't simply that they've had to reinvent the wheel of how to do these prosecutions they've forgotten that the wheel exists and therefore we have zero prosecutions and of course zero convictions of any of the elite Bank frauds the Wall Street types that drove this crisis with no expertise coming from The Regulators the FBI formed what it calls a partnership with the Mortgage Bankers Association in 2007 The Mortgage Bankers Association is the trade Association of the perss and the Mortgage Bankers Association set out it had the audacity and the success to con the FBI it had created a supposed definition of mortgage fraud in which guess what its members are always the victim and never the perpetrators and the FBI has bought this hookline Sinker rod reel in the boat they rode out and and so the FBI under the leadership of an attorney general who's African-American and a president of the United States who is African-American have adopted the Tea Party definition of the crisis in which it is the first virgin crisis in history conceived without sin in the executive ranks and it's those oh so clever hairdressers who were able to defraud the Poor Pitiful Banks who lack any Financial sophistication it is the silliest story you can conceive of of and so they go and they prosecute the hairdressers and they leave the banksters alone entirely so while lions are roaming the campsite the FBI is chasing mice what do we need to do what can we do in all of this we need to change the perverse incentive structures that produce these recurrent epidemics of accounting control fraud that are driving our crisis so we have to first get rid of the systemically dangerous institutions these are the so-called too big to fail institutions we need to shrink them to the point within the next five years that they no longer pose a systemic risk right now they are ticking time bombs that will cause a global crisis as soon as the next one fails not if when second thing we need to do is completely reform modern executive and professional compensation with which is what they Ed to suborn the appraisers remember they were pressuring the appraisers through the compensation system trying to produce what we call a greshams dynamic in which bad ethics drives good ethics out of the marketplace and they largely succeeded which is how the fraud became endemic and the third thing that we need to do is deal with what we call the 3DS deregulation Des supervision and the DEA facto decriminalization because we can make all three of these changes and if we do so we can dramatically reduce how often we have a crisis and how severe those crises are that is not simply critical to our economy you can see what these crises do to inequality and what they do to our democracy they have produced crony capitalism American style in which the large largest financial institutions are the leading Financial donors of both parties and that's the reason why even after this crisis 100 you know 70 times larger than the Savings and Loan crisis we have no meaningful reforms in any of the three areas that I've talked about other than Banning liar loans which is good but that's just one form of ammunition for this fraud weapon there are many forms of ammunition they can use that's why we need to learn what the bankers have learned the recipe for the best way to rob a bank so that we can stop that recipe because our legislators who are dependent on political contributions will not do it on their own thank you very [Applause] much

Channel: TEDx Talks

Views: 143,471

Keywords: tedx talks, Crime, ted talk, William Black, tedx talk, Economics, ted x, tedx, TEDxUMKC, Kansas City, English, USA, ted, Law, ted talks, Business, KC, Anti-Corruption, TEDx, Education, Professor, Fraud, UMKC

Id: -JBYPcgtnGE

Length: 19min 1sec (1141 seconds)

Published: Mon Mar 03 2014