FDL Contributor Bill Black scorched everyone with his testimony on the failure of Lehman Brothers before the House Financial Services Committee today. His prepared remarks can be found here (PDF).
CHAIRMAN KANJORSKI: And now we’ll hear from Mr. William K. Black, Associate Professor of Economics and Law, the University of Missouri, Kansas City School of Law. Mr. Black.
BILL BLACK: Members of the Committee, thank you.
You asked earlier for a stern regulator, you have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.
We stopped a nonprime crisis before it became a crisis in 1991 by supervisory actions.
We did it so effectively that people forgot that it even existed, even though it caused several hundred million dollars of losses — but none to the taxpayer. We did it by preemptive litigation, and by supervision. We broke a raging epidemic of accounting control fraud without new legislation in the period of 1984 through 1986.
Legislation would’ve been helpful, we sought legislation, but we didn’t get it. And we were able to stop that because we didn’t simply consider business as usual.
Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and liars’ loan operations.
Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.
Financial institution leaders are not engaged in risk when they engage in liars’ loans — liars’ loans will cause a failure. They lose money. The only way to make money is to deceive others by selling bad paper, and that will eventually lead to liability and failure as well.
When people cheat you cannot as a regulator continue business as usual. They go into a different category and you must act completely differently as a regulator. What we’ve gotten instead are sad excuses.
The SEC: we’re told they’re only 24 people in their comprehensive program. Who decided how many people there would be in their comprehensive program? Who decided the staffing? The SEC did. To say that we only had 24 people is not to create an excuse — it’s to give an admission of criminal negligence. Except it’s not criminal, because you’re a federal employee.
In the context of the FDIC, Secretary Geithner testified today that this pushed the financial system to the brink of collapse But Chairman Bernanke testified we sent two people to be on site at Lehman. We sent fifty credit people to the largest savings and loan in America. It had 30 billion in assets. We had a whole lot less staff than the Fed does.
We forced out the CEO. We replaced the CEO. We did that not through regulation but because of our leverage as creditors. Now I ask you, who had more leverage as creditors in 2008? The Fed, as compared to the Federal Home Loan Bank of San Francisco, 19 years earlier? Incomprehensible greater leverage in the Fed, and it simply was not used.
Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions.
And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads — there was an interagency effort — killed it. They came out with something pathetic in 2006, and stalled its implication until 2007, but it ‘s meaningless.
We have known for decades that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure
because of the leadership in this era.
We have the Fed, the Federal Reserve Bank of New York, finding that this is three card monty. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?
That’s what was done. Oh they met a lot — they say “we only had a nuclear stick.” Sounds like a pretty good stick to use, if you’re on the brink of collapse of the system. But that’s not what the Fed has to do. The Fed is a central bank. Central banks for centuries have gotten rid of the heads of financial institutions. The Bank of England does it with a luncheon. The board of directors are invited. They don’t say “no.” They are sat down.
The head of the Bank of England says “we have lost confidence in the head of your enterprise. We believe Mr. Jones would be an effective replacement. And by 4 o’clock that day, Mr. Jones is running the place. And he has a mandate to clean up all the problems.
Instead, every day that Lehman remained under its leadership, the exposure of the American people to loss grew by hundreds of millions of dollars on average. Auroroa was pumping out up to 30 billion dollars a month in liars’ loans. Losses on those are running roughly 50% to 85 cents on the dollar. It is critical not to do business as usual, to change.
We’ve also heard from Secretary Geithner and Chairman Bernanke — we couldn’t deal with these lenders because we had no authority over them. The Fed had unique authority since 1994 under HOEPA to regulate all mortgage lenders. It finally used it in 2008.
They could’ve stopped Aurora. They could’ve stopped the subprime unit of Lehman that was really a liar’s loan place as well as time went by.
(Kanjorski bangs the gavel)
Thank you very much.




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I wish I had been there to see that. The pathetic truth is that it shouldn’t even take Congressional testimony by an honest academic to raise these facts. The media — the corporate media — are complicit in the whole scheme, whether it’s newspapers, television, radio, or whatever. This subprime-derivative disaster would never have been allowed to happen before media consolidation. Why? Because the media watchdogs would have told the American people to stop it.
Bill Black for Secretary of the Treasury!
Thanks Jane!
Some ears are now hearing. I have no faith that those with the ability and responsibility will heed his call to action.
Seconded!
All in favor say “aye”…
I don’t blame Bernanke – he’s just a wolf in professorial clothing.
Because we should look forward, not backward,
I blame the man who nominated Bernanke to his second term.
After millions of peoples lives have been destroyed, we are finally hearing the truth.
This is going to get ugly but we desperately need some bright sunshine all over this mess and a huge helping of accountability.
AYEVoteClosedMotionCarriesThankYouVeryMuch
Shit and all of this COULD have been avoided “Only IF”!!
Thanks Shrub and IT’S Administration regulation was thrown out if favor self-regulation.. Are you Fucking Kidding me… This should be another charge against BUSHCO…
aye!! or maybe Elizabeth Warren….
Aye!
Thanks for the video! I saw it live, and the Prof. really laid it out there.
Gee, having the regulators act like regulators taught the masters of the universe one thing very quickly. You have own them body and soul before trying it again.
Aye
W00T!!– William K. Black & FDL!
(Kanjorski bangs the gavel)
Am I understanding here that Kanjorski cut him off? If so, that was (at the very least) an egregious insult. If it was a “time limit” thing, then I say F*%k the time limits. The committee needs to recalibrate. For starters.
On a slightly unrelated note, who here thinks that Goldman et.al. is going to skate because Geithner and Bernanke might want a job after this administration is over?
All you need to know as to why Geithner, Bernanke, Greenspan and all the other “servants” of Wall Street did nothing is contained in their personal net worth statements. I do not think it is a wild-ass-guess that if you observed the growth of the personal wealth of those three malfactors via their net worth statements, the truth would shout at you!
I remember talking with Bill on the phone for the first time last year. It was shortly before we had him on FDL for a chat, Moyers saw his work and he “broke out” so to speak.
It was a Friday night, and he had me on the phone for 3 hours. He makes things so plain and simple and understandable you have to face the horror of what happened. There’s no other choice.
When I hung up the phone, well…I don’t drink. But I needed one.
Opening Statements. Time Limits on them.
Yeah, what he said!
Mz. Hamsher, WHAT A CATCH!!!!!
Incredible viewing.
Can I assume Black was gaveled out due to some time limit criteria?
What exceptional video and commentary!
Thanks Mz. Hamsher and FDL.
Ah, thanks.
What an opening statement, huh!!!
*G*
I remember Bill Black sitting in on a Book Solon here a while back. I was incredibly impressed. Not only in his knowledge but his integrity, his experience during the Savings and Loan mess.
There are those willing to lay it on the line!
http://firedoglake.com/2009/03/23/talking-economic-accountability-with-william-black/
and
http://firedoglake.com/2010/04/04/fdl-book-salon-welcomes-simon-johnson-13-bankers-the-wall-street-takeover-and-the-next-financial-meltdown/
Obama needs this guy in his office ASAFP.
As Soon As Fucking Possible.
Wow, a real regulator advocating old-fashioned regulation with real teeth, not the toothless gumming that passes for reform today.
How refreshing is that?!
One of the things that struck me were his comments that he didn’t need no stinking regulations, just the guts and willingness to go after the thieves.
(that the arguments of the current SEC and FED make are simply cover, excuses)
Better: Chairman of the Securities and Exchange Commission.
Jane, am SUPER appreciative of this video/transcript. What an incredible patriot in the truest sense of the word. Honest, direct, sincere, and most passionate about turning things around in this country.
(And yes, having him serve in some kind of formal position within the gov’t would be awesome, along with Elizabeth and Brooksley.)
Bill Black is one of the greats. The fact that he once again, as he did in the 1990s, laid the issues out clearly in front of a Congress that seems to always hope that they won’t have to listen to how to fix the problems of the day shows how little was learned from the previous fiasco. We had Black and his motivated regulators to save the day and now all we have are the useless husks like Geithner. Geithner who famously bragged before getting his current gig that he didn’t see his job at the NYFRB as that of a regulator. We needed and continue to require firm and ethical regulators but we are instead stuck with cheerleaders that tell us that they really wish they hadn’t had to waste all of that money to prop up their friends at the TBTF financial leeches.
Congress will almost certainly, as they did before, sit on their hands when all is said and done. Only this time we don’t have someone like Black to save the day in spite of the DC establishment.
I’ve been reading a lot of history lately, and what’s striking is how half-assed our politicians are compared to our leaders who won World War II and who sent a man to the moon (and in only one of those endeavors did we have Nazi scientists on our team). Of course, the worst part is that not all of our politicians are half-assed, some of them are just sellouts. Its nice to read about one guy who’s neither.
If Bush had enough sense to drop Rumsfeld for Gates, we can only hope that Obama will have the sense to trade out Geithner for someone like Black (I’d throw in Warren Mosler for Larry Summers in the trade as well, but I fear the shock would kill old man Peterson).
This makes me pissed. Looks like we have first class f#ck-ups in charge. Maybe Bill Black should be put in charge?
Aye.
Looks like we have first class f#ck-ups in charge, which is distressing – or first class crooks, which makes my skin crawl. And Obama renominated Bernanke, and installed Geithner and Summers – sickening.
Eli is upstairs!
White House Announces New Regulatory Agency To Regulate Regulatory Agencies
Black is one of the good guys. The truth is that neither the Fed nor Treasury were constrained in what they could do. They did and did not do exactly what they wanted to. When they wanted to push the envelope as with AIG or Citi, they didn’t hesitate an instant. They and the SEC had all the power they needed in hand to squelch and/or prosecute fraud, and as Bill Black says, they simply refused to pull the trigger. The housing bubble and the meltdown were both foreseeable and foreseen. Both were avoidable, but the very people who locked in the disastrous courses of actions that caused them are exactly the people who continue to call the shots on economic and regulatory policy.
Gee, the PBS News Hour must have been to another hearing entirely. From THEIR hearing, the one they covered on the NewsHour tonight, they excerpted footage of Geithner and Blankfein (the latter of whom is seen in the excerpt accepting “full responsibility” but claiming to have acted in good faith and saying he didn’t know nuttin, see nuttin, or hear nuttin ’bout no fraud.)
I kind of wish the News Hour had gone to the other hearing (the one with Bill Black testifying) because I’m SURE they would have run excerpts of Black.
I don’t know if Bill Black will be reading this or anyone else after the fact, but I just want to say to him “Thank you for your service.” It was people like him that kept crisis’ from happening. I wish that he could have been in place before this last crisis, but the problem with America is often we have to have the “event” until we act.
The saddest part of this is that we still haven’t acted correctly after the event!
Thank you again Mr. Black.
Live Long and Prosper,
Spocko
Audit the Fed
That is a cromulent suggestion.
Any Idea what has happened to their integrity?
It seems that the Desire and a clear idea of the outcomes you want are necessary if government regulations will work. More rules are needed if government regulators want to do something but the courts stop them.
Government agencies need a mission and consequences for failure.
You can make *all* the regulations and pass all the #$%^%$ laws you want. It means absolutely nothing if the regulations and laws are ignored. It means nothing if there are *exceptions* for those corporations, politicians, or oligarchs who are “above the law.”
This is not about regulations and laws as Prof. Black clearly demonstrates. It is about
AmericanRandian exceptionalism.When we cannot “go after” the Goldman Sachs, the Madoffs, and the Cheneys (no matter what damage, destruction, and death they create) but we don’t really care much if we execute innocent men and women who aren’t wealthy or “influential,” we are in a desperate situation.
Indeed, it’s like a breath of fresh air. Mr. Black and Markopolos are true patriots, and my hat goes off to them both.
Aye.
Sister Jane thanks for the transcript. Mr. Black thanks for the testimony and service to the nation.
We’re getting there.
I watched the re-run this evening and I found the Q&A with the former head of Lehman Bros. to be rather amazing. The questioning was pretty good, especially from Mary Jo Kilroy (D-somewhere). The time limit for each questioner was frustrating, but the answers were incredible.
Fulks basically said that Friday they were fine and Sunday the government told them they were bankrupt and the Fed window to borrow short-term money was closed.
If that’s true then it means the Federal government set off the crisis by closing them unnecessarily.
Of course, the mortgage issue was hitting everyone, so who knows what would’ve happened even if they had stayed open another week or whatever.
Somebody shut off the music and Lehman had no chair.
Amazing stuff.
Oops, sorry, I meant Fuld, not Fulks.
Thank you for the video and transcript. Most of us who worked for Lehman, I suspect,knew the quarterly reports were bogus. For some reason, all the big tunas kept saying that “no one” could have anticipated the downturn. If house prices would have kept going up forever, they would have been geniuses, instead of just greedy bastards.
BOOM! An opening appears in the dark clouds of confusion hanging over Washington DC. The steady hum of K Street’s fog machines can be heard round the clock but to no avail. Bright rays of light are shining down on our capital, melting away the illusions of shadows.
Thank you Professor Black!
Yeah, I think a lot of us would like to force both the Senate and House to sit down and listen to a full day lecture from William Black.
But, in these hearings there’s good reason to limit the speakers. If there weren’t limits, men such as Geithner would drivel on for hours, preventing others from getting time in.
Professor Black delivered his message. In the context of these hearings I think his time was sufficient.
I saw the testimony by Mr Black it clear to me that some people need to be fired or go to jail given what they have done to our economy and in particuliar to the american people. Again JANE what are you prepared to do to get the needed financial regulations that is needed to get our financial house in order. I hope OBAMA does not blow this opportunity like he did with healthcare. I think everyone needs to listen to MR. BLACK and he needs to be the Sec of Treasury period.
He says Aurora was pumping out up to 3 billion dollars a month in liars’ loans not 30 billion as it says in the transcript.
Aye, Yes.
Famous quotes: “One small step for man; one giant leap for mankind.” …Neil Armstrong, July 20, 1969 (Upon landing on the Moon)
“You asked earlier for a stern regulator; you have one now in front of you.” …William Black, April 20, 2010 (Upon invitation to testify before House Financial Services Committee)
William K Black (Feb. 18th, 2010) lecture on failure of regulators to regulate the mortgage loan industry. ___ 69 minutes but worth it
https://webdisk.lclark.edu/econ/steinhardt2010/steinhardt2010.html”