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William Black

TEDx Talks ... How to rob a bank | William Black | TEDxUMKC ... 2014


Peter Burgess

How to rob a bank | William Black | TEDxUMKC

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Published on Mar 3, 2014

William Black is an associate professor of economics and law at UMKC. He has held many prestigious positions, including executive director for Fraud Prevention. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management. He is a criminologist and former financial regulator.

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In the spirit of ideas worth spreading, TEDx is a program of local, self-organized events that bring people together to share a TED-like experience. At a TEDx event, TEDTalks video and live speakers combine to spark deep discussion and connection in a small group. These local, self-organized events are branded TEDx, where x = independently organized TED event. The TED Conference provides general guidance for the TEDx program, but individual TEDx events are self-organized.* (*Subject to certain rules and regulations) Category Nonprofits & Activism License Standard YouTube License Transcript English (Automatic Captions) 0:00Oh 0:14so today's top chef class is in how to rob a bank and it's clear that the 0:22general public needs guidance because the average bank robbery nets only seven 0:28thousand five hundred dollars 0:30rank amateurs who know nothing about how to cook the books the folks who know or 0:36course run our largest banks and in the last go-round 0:40they cost us over 11 trillion dollars that's what 11 trillion looks like 0:47that's um how many zeros and cost is over 10 million . the jobs as well 0:52so our task is to educate ourselves so that we can understand why we have these 0:57recurrent intensifying financial crises and how we can prevent them in the 1:03future 1:04and the answer to that is that we have to stop epidemics of control fraud 1:10control fraud is what happens when the people who control 1:15typically a CEO a seemingly legitimate entity use it as a weapon to defraud and 1:22these are the weapons of mass destruction in the financial world 1:27they also follow in finance a particular strategy because the weapon of choice in 1:36finance is accounting and there is a recipe for accounting control fraud and 1:43how it occurs and we discovered this recipe in quite an odd way that i'll 1:47come back to in a moment 1:49first ingredient in the recipe grow like crazy 1:53second by making or buying really crappy loans but loans that are made at a very 2:01high interest rate or yield three while employing extreme leverage that just 2:06means a lot of debt compared to your equity and for while providing only 2:11trivial loss reserves against the inevitable losses if you follow those 2:16four simple steps in any bank can follow them then you are mathematically 2:22guaranteed to have three things occur 2:25the first thing is you will report record profit bank profits not just high 2:31record to the CEO will immediately be made incredibly wealthy by modern 2:39executive compensation and three farther down the road 2:44the bank will suffer catastrophic losses and will fail unless it has bailed out 2:49and that's how that a hint as to how we discovered this recipe because we 2:56discovered it through an autopsy process during the Savings and Loan debacle in 3:021984 3:04we looked at every single failure and we look for common characteristics and we 3:10discovered this recipe was common to each of these frauds in other words a 3:17corner could find these things because this is a fatal recipe that will destroy 3:23the banks as well as the economy and it also turns out to be precisely what 3:29could have stopped this crisis the one that cost us 11 trillion dollars just in 3:34the household sector 3:35the cost is 10 million jobs was the easiest financial crisis by far to have 3:42avoided completely if we had simply learn the lessons of epidemics of 3:47control fraud particularly using this recipe so let's go to this crisis and 3:53the two huge epidemics of a loan origination fraud that drove the crisis 3:58appraisal fraud and liar's loans and what we're going to see in looking at 4:03both of these is we got warnings that were incredibly early about these frauds 4:10we got warnings that we could have taken advantage of 4:14easily because back in the Savings and Loan debacle we had figured out how to 4:19respond and prevent these crises and three the warnings were unambiguous they 4:25were obvious that what was going on was an epidemic of accounting control fraud 4:31building up 4:32let's take appraisal fraud first this is simply where you inflate the value of 4:37the home 4:38home that is being pledged as security for the loan in two thousand the year 4:452000 that is over a year before 4:48Enron fails by the way the honest appraisers got together a formal 4:54petition 4:55begging the federal government to act and the industry to act to stop this 5:02epidemic of appraisal fraud and the appraisers explained how it was 5:06occurring that banks were demanding that appraisers inflate the appraisal and 5:13that if the appraisers refused to do so they would say the banks would black 5:19list honest appraisers and refused to use them 5:25now we've seen this before in the Savings and Loan debacle and we know 5:29that this kind of fraud can only originated from the lenders and that no 5:34honest lender would ever inflate the appraisal 5:38because it's the great protection against loss 5:41so this was incredibly early warning 2000 it was something we've seen before 5:46and it was completely unambiguous this was an epidemic of accounting control 5:52fraud led by the banks 5:54what about liar's loans well that earning warning actually comes earlier 5:59the Savings and Loan debacle is basically the early nineteen eighties 6:03through 1993 and in the midst of fighting that wave of a accounting 6:09control fraud in 1990 6:13we found that a second front of fraud was being started and like all good 6:18financial frauds in America 6:19it began in orange county california and we happen to be the regional regulators 6:25for it and our examiner said they're making loans without even checking what 6:32the borrower's income is this is insane 6:35it has to lead to massive losses and it only makes sense for entities engaged in 6:42these accounting control frauds and we said yeah you're absolutely right and we 6:47drove those liars loan 6:50out of the industry in 1990 1991 6:54but we could only deal with the industry we had jurisdiction over which was 6:59savings and loans and so the biggest and the baddest of the frauds Long Beach 7:04savings voluntarily gave up its Federal Savings and Loan charter gave up Federal 7:10Deposit Insurance converted to become a mortgage bank for the sole purpose of 7:15escaping our jurisdiction and changed its name to america west and became the 7:20most notorious of the liar's loans frauds early on and to add to that they 7:27deliberately predated upon minorities right so we knew again about this crisis 7:36we've seen it before we stopped it before we had incredibly early warnings 7:41of it and it was absolutely unambiguous that no honest lender would make loans 7:47in this fashion 7:48so let's take a look at the reaction of the industry and the regulators and the 7:54prosecutors to these clear early warnings that could have prevented the 7:59crisis start with the industry the industry responded 8:06between 2003 and 2006 by increasing liar's loans by over five hundred 8:14percent 8:16these were the loans that hyper-inflated the bubble and produced the economic 8:23crisis by 2006 half of all the loans called subprime were also liar's loans 8:31they're not mutually exclusive 8:33it's just that together they're the most toxic cum combination you can possibly 8:38imagine 8:39by two thousand six forty percent of all the loans made that year all the home 8:44loans made that year or liar's loans forty percent and this is despite a 8:52warning from the industry's own anti-fraud experts that said that these 8:57loans were an open invitation to fraudsters and that they had a fraud 9:03incident 9:03it's of ninety percent 90 in response to that the industry first started calling 9:13these loans liar's loans which lacks a certain subtlety and second massively 9:21increase them and no government regulator ever required or encouraged 9:28any lender to make a liar's loan or anyone to purchase a liar's loan and 9:34that explicitly includes Fannie and Freddie 9:37this came from the lenders because of the fraud recipe right what happened to 9:43appraisal fraud yet expanded remarkably as well by 2007 when a survey of 9:51appraisers it was done 9:52ninety percent of appraisers reported that they've been subject to coercion 9:57from the lenders trying to get them to inflate an appraisal in other words both 10:03forms of fraud became absolutely endemic and normal and this is what drove the 10:10bubble 10:11what happened in the governmental sector well the government as i told you when 10:16we were the savings and loan regulators we could only deal with our industry and 10:21if people gave up their federal deposit insurance we couldn't do anything to 10:24them 10:25Congress may strike you as impossible but actually did something intelligent 10:31in 1994 and passed the home ownership equity Protection Act that gave the Fed 10:37and only the federal reserve the explicit statutory authority to ban 10:41liar's loans by every lender whether or not they had federal deposit insurance 10:48so what did Ben Bernanke and alan greenspan is chairs of the Fed do when 10:54they got these warnings that these were massively fraudulent loans and that they 10:59were being sold to the secondary market 11:01remember there's no fraud exorcist once it starts out of fraudulent loan 11:06it can only be sold to the secondary market through more frauds of lying 11:10about the reps and warranties and then those people are going to produce 11:13mortgage-backed securities and exotic derivatives 11:16which are also going to be supposedly back by those fraudulent loans so the 11:22fraud is going to progress through the entire system hyper inflate the bubble 11:26produce a disaster 11:28and remember we had experience with this we had seen significant losses and we 11:34had experience of competent regulators and stopping it 11:38Greenspan and Bernanke refused to use the authority under the statute to stop 11:44liar's loans and this was a matter first of dogma 11:49they're just you know horrific Lee opposed to anything regulatory but it is 11:53also the international competition and laxity the race to the bottom between 12:00the United States and the United Kingdom the city of london in particular and the 12:05City of London won that race to the bottom but it meant that all regulation 12:10in the West was completely degraded in this stupid competition to be 12:16who could have the weakest regulation so that was the regulatory response 12:20what about the response of the prosecutors after the crisis after 11 12:26trillion dollars in losses after 10 million jobs lost a crisis in which the 12:33losses and the frauds were more than 70 times larger than the Savings and Loan 12:39debacle 12:40well the Savings and Loan debacle our agency that regulated savings and loans 12:45OTS made over 30,000 criminal referrals produced over a thousand felony 12:52convictions just in case is designated as major and that understates the degree 12:57of prioritization because we worked with the FBI to create the list of the top 13:03100 fraud schemes the absolute worst of the worst nationwide roughly 300 savings 13:10and loans involved roughly 600 senior officials and virtually all of them were 13:16prosecuted 13:17we had a ninety-percent conviction rate the greatest success against elite like 13:22white collar criminals ever 13:24it was because of this understanding of control fraud and the accounting control 13:29fraud 13:29mechanism flash forward to the current crisis the same agency office of Thrift 13:35Supervision which was supposed to regulate many of the largest makers of 13:39liar's loans in the country 13:41may has made even today no longer exists but as of a year ago it made zero 13:48criminal referrals the office to control the currency which is supposed to 13:54regulate the largest national banks has made zero criminal referrals the Fed 13:59appears to have made 0 criminal referrals the federal deposit insurance 14:03corporation is smart enough to refuse to answer the question 14:07we have out any guidance from the regulator's they 14:14there's no expertise in the FBI to investigate complex frauds 14:20it isn't simply that they've had to reinvent the wheel of how to do these 14:24prosecution's they forgotten that the wheel exists and therefore we have zero 14:32prosecution's and of course 0 convictions of any of the elite bank 14:39fraud 14:40The Wall Street types who drove this crisis with no expertise coming from the 14:46regulator's the FBI formed what it calls a partnership with the mortgage bankers 14:50association in 2007 the mortgage bankers association is the trade association of 14:57the perps and the Mortgage Bankers Association set out it had the audacity 15:03and the success to con the FBI 15:07it had created a supposed definition of mortgage fraud in which guess what 15:13its members are always the victim and never the perpetrators and the FBI has 15:19bought this hook line sinker rod reel and the boat they rode out and and so 15:26the FBI 15:28under the leadership of an attorney general who is african-american and a 15:33president united states who is african-american have adopted the Tea 15:37Party definition of the crisis in which it is the first virgin crisis and 15:42history conceived without sin in the executive ranks and it's those oh so 15:48clever hairdressers who were able to defraud the poor pitiful banks who lack 15:53any financial education 15:55it is the silliest story you can conceive of and so they go and they 16:00prosecute the hairdressers and they leave the banksters alone entirely 16:06so while lions are roaming the campsite the FBI is chasing mice 16:11what do we need to do what can we do in all of this 16:17we need to change the perverse incentive structures that produce these recurrent 16:23epidemics of accounting control fraud that are driving our crisis 16:26so we have to first get rid of the systemically dangerous institutions 16:32these are the so-called too big to fail institutions we need to shrink them to 16:37the point within the next five years that they no longer pose a systemic risk 16:42right now they are ticking time bombs that will cause a global crisis as soon 16:48as the next one fails not if when second thing we need to do is completely 16:54reformed modern executive and professional compensation which is what 16:59they use to suborn the appraisers remember they were pressuring the 17:03appraisers through the compensation system trying to produce what we call 17:07the Gresham's dynamic in which bad ethics drives good ethics out of the 17:11market place and they largely succeeded which is how the fraud became endemic 17:16and the third thing that we need to do is deal with what we call the 3ds 17:22deregulation 17:24d supervision and the de facto decriminalization because we can make 17:31all three of these changes and if we do so we can dramatically reduce how often 17:38we have a crisis and how severe those crises are that is not simply critical 17:45to our economy 17:46you can see what these crises due to inequality and what they do to our 17:51democracy they have produced crony capitalism 17:55american style in which the largest financial institutions are the leading 18:00financial donors of both parties and that's the reason why even after this 18:07crisis a hundred you know 70 times larger than the savings and loan crisis 18:14we have no meaningful reforms in any of the three areas that I've talked about 18:20other than banning liar's loans which is good but that's just one form of 18:25ammunition for this fraud weapon 18:27there are many forms of ammunition that can use 18:31that's why we need to learn what the bankers have learned the recipe for the 18:36best way to rob a bank so that we can stop that recipe because our legislators 18:43who are dependent on political contributions will not do it on their 18:47own 18:48thank you very much

William Black
Published on Mar 3, 2014
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