The Ben Franklin Report: Fraud around Every Corner

When it comes to expertise in winding down failing financial institutions, there are few more expert than William K. Black, who in a previous position, served as a regulator on the front lines of the S&L Crisis. Sitting down with Bill Moyers, Black makes a very strong case that the entire housing bubble was the result of fraud and inherently fradulent practices, whereby information was not disclosed by the borrower, or in many cases was not even so much as required for the loan. The full half hour interview is probably one of the most consise descriptions of the various problems of the financial industry. Among the most serious allegations in the interview, is that the Prompt Corrective Action Law, a product of the S&L crisis, has been completely ignored. The law sets forth the various categories of capital, ranging from Well Capitalized to Critically Undercapitzlied. If, for instance, a bank were undercapitalized under the provisions of this bit of law, it would be required to submit a Capital Restoration Plan that "is based on realistic assumptions, and is likely to succed in restoring the institution's capital". Even if the plan is accepted by the relevant federal banking agency, the undercapitalized bank is not allowed to acquire any interest in any company or insured depository institution. Thus, if this law were enforced, the banks that have been the recipients of bailouts would not be allowed to gobble up their former competition, at the going market rate or the weekend shotgun wedding rate. If the re-capitalization plan is not acceptable for whatever reason or has been improperly implemented, the executives and directors could potentially be dismissed if they have been employed for longer than 180 days. However, even if they survive management improvements, they will take a hit to the pocket, as the bank is required to seek FDIC approval of any bonus, which have so famously come to be a sticking point in the public debate.

Sean Oleander writes a piece which neatly serves as a continuation of Prof. Frank's points, pointing out the roles current administration officials played in the blissful years during which this crisis-to-be was allowed to metastisize.

One need look no farther than the treatment of the Civil Rights Division of the Department of Justice to see that the rule of law was tattered beyond recognition during the Bush Administration. While some may see a certain continuitiy in the financial community to be an asset in such interesting times, but perhaps a better description would be collusion. How much is a bailout worth in campaign donations? Like the War in Iraq, the current financial bailout was planned with very little trancparency by industry insiders, and, again analogous, the cost to the Treasury, even within the first 12 months of operations, have gone far beyond projections.

The problem is all the more immediate with the Social Security Trust Fund failing almost a decade earlier than scheduled. Having served as a piggy bank since the Reagan Administration, the fund is going to start depleting itself, forcing President Obama and Secretary Geithner to borrow more money in the form of treasuries than they might be forced to otherwise. How much more money will be poured into deep, dark holes before the information asymmetry and fraud that is at the heart of the ongoing crisis is resolved? With the establish protecting its mighty Samson from a haircut, the federal government will probably just spend itself out of existence before admitting the problem.