The Best Way To Rob A Bank Is To Own One
How Corporate Executives and Politicians Looted the S&L Industry
By William K. Black
"The best way to rob a bank is to own one." William Crawford, Commissioner of the California Department of Savings and Loans, said that in his 1988 testimony before the House Committee on Government Relations. William K. Black, former Director of Litigation for the Federal Home Loan Bank Board (FHLBB) and Deputy Director of the FSLIC, borrows the statement for his account of the Savings and Loan crisis from the perspective of a regulator.
Black is now famous as an anti-fraud crusader who coined the term "control fraud" to describe corporate fraud perpetrated by someone at the top levels of a company who can control the safety mechanisms intended to prevent and detect fraud and thereby get away with looting the company for personal profit.
Black takes us back to the 1980s, by which time most S&Ls in the US were insolvent on a market-value basis following the interest rate crisis of the 1970s. In recounting the behind-the-scenes dramas, dirty politics, and vicious battles for control of the Bank Board, Black explains why and how the Reagan administration and Congress covered up the depth of the S&Ls insolvency, why the conventional wisdom about the S&L crisis is fallacious and prevented people from learning lessons that might have prevented the current economic crisis, and he shows the reader why private market discipline does not prevent widespread fraud of this type. Black's account is dense and dry at times, but always revealing.
In spite of the complexity of the subject, it's a story with heroes and villains. The hero is Edwin Gray, Reagan appointee and deregulation advocate until he saw the consequences in the form of Ponzi schemes, real estate bubbles, and derelict construction projects. Black believes that Gray's reregulation agenda averted a national real estate bubble and saved the taxpayer an enormous amount of money.
The villain is Charles Keating, fraud, owner of the insolvent Lincoln Savings, five senators, and of House Speaker Jim Wright, who is also a villain. Credit is due Black, though, for expressing sympathy for people he doesn't like, often implying that they were well-intentioned and were simply cowed, as well as for not being afraid to say unflattering things about people he admires. Black takes us through Keating's efforts to control the Bank Board, Congressional hearings, intraagency civil war, and the fight for FSLIC recapitalization.
People are either going to think that William Black has important insight on waves of fraud that politicians like to cover up for their own reasons, or they are going to find him an overzealous regulator. But Black makes an important point that arguments over regulation often miss entirely: The purpose of regulation is not to protect people from themselves or to place limits on those who may be capable of making their own judgments.
In that case, one could argue how much or how little regulation is desirable ad infinitum. The purpose of regulation is to prevent or limit fraud. It is to avoid creating an environment that is conducive to fraud on a grand scale. Black points out that economists and financial professionals don't take fraud into account in their models, regulators have little training in fraud detection, and that a wave of fraud can bring down an entire economy.
In 2010 William K. Black gave an interview to The Real News Network, providing his perspective on the latest financial meltdown, which he sees as being eerily similar to previous collapses. He explains how it resulted from fraudulent schemes orchestrated by top people on Wall Street, with the simple aim of enriching themselves. Many walked away from the collapse fabulously wealthy while investors lost their jobs, homes, pensions and life savings.
As Black comments "failure of the Institution does not indicate failure of the fraud."