Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Interview with Bill Black on MoyersRegular readers of this blog know that William K. Black, author of The Best Way to Rob a Bank Is to Own One, a history of the S&L crisis, wrote a prescient history of the U.S. banking industry for us a couple of years ago. (A shorter version of the piece was the cover story in our Nov/Dec 2007 issue; a longer version appeared in our anthology Real World Banking and Finance, which was published in January of 2008.) Bill Black was one of the regulators whom the "Keating Five" tried to deceive, and he has been in the media quite a bit over the past year or so, first during the presidential election commenting on John McCain's unfitness to even be a senator (McCain was one of the Keating Five), and more recently to comment on the role of "control fraud" in the current financial meltdown. He did a terrific interview with Bill Moyers last week. Hat-tip to LF.BILL MOYERS: For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, [William K. Black] wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s. Labels: Bill Moyers, control fraud, financial crisis, savings and loan crisis, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Bit More on Madoff and WieselIn my earlier post expanding on Joe Nocera's column on Madoff's victims, I'd meant to include an excerpt from this article from a while back in the New Yorker. The article was compelling for going at least some of the way toward answering a question that many of us have asked ourselves, but maybe never expected to get an answer: Who falls for those Nigerian scam emails? I mean, if they keep sending them, the scammers must be finding victims. But who? The article profiles an ordained minister and Christian psychotherapist from the suburbs of Boston who got drawn in, and was victimized, by some Nigerian email scammers in a check fraud scheme—and was prosecuted for his role in the scheme. Part of the burden of the article—besides answering that question we thought no one ever would—is to assess the victim's culpability. He was victimized, but he did also participate in fraud. There's a paragraph early in the article that struck me, and that I've been thinking about in recent weeks as the Madoff victims have their say (including especially Elie Wiesel's public expressions of scorn and retributive sentiment for Madoff):Robert B. Reich, the former Labor Secretary, who has studied the psychology of market behavior, says, "American culture is uniquely prone to the 'too good to miss' fallacy. 'Opportunity' is our favorite word. What may seem reckless and feckless and hapless to people in many parts of the world seems a justifiable risk to Americans." But appetite for risk is only part of it. A mark must be willing to pursue a fortune of questionable origin. The mind-set was best explained by the linguist David W. Maurer in his classic 1940 book, "The Big Con": "As the lust for large and easy profits is fanned into a hot flame, the mark puts all his scruples behind him. He closes out his bank account, liquidates his property, borrows from his friends, embezzles from his employer or his clients. In the mad frenzy of cheating someone else, he is unaware of the fact that he is the real victim, carefully selected and fatted for the kill. Thus arises the trite but none the less sage maxim: 'You can't cheat an honest man.'" The whole article is definitely worth a read. Labels: Bernard Madoff, control fraud, Elie Wiesel, Greed, Nigerian Scam, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lessons from Global Corporate FraudsAn interesting article by Jayati Ghosh that discusses "control fraud" in a global context, including work by former banking regulator William K. Black, who has written for D&S on the topic (here). Hat-tip to Lynn F. This is from the website of IDEAs (the International Development Economics Association).By Jayati Ghosh As global capitalism lurches around in crisis, it seems that there is no end to the worms crawling out of the woodwork. The financial crash and economic downswings have been accompanied by more than just cyclical bad news from companies that have been engaged in bona fide business. The adverse market conditions are making it harder to disguise corporate frauds that could flourish in the earlier boom, and so more and more details of unsavoury business operations are emerging among a wide range of firms all over the world. In India the Satyam scam may be grabbing the headlines, but corporate frauds are likely to be uncovered in many countries. In the leading capitalist economy, the United States, such corporate frauds have been rising sharply in recent years, according to data from the official investigating agency, as the accompanying chart shows. Between 2001 and 2007, the number of corporate fraud cases that were opened by the FBI (covering both corporate fraud per se and securities and commodities fraud) increased by 43.7 per cent, even though convictions barely increased. And in 2008, the number of scandals that has come to light, and the sheer extent and audacity of several of them, almost defy description. This ought to surprise us, because after the huge corporate accounting scandals of the early part of the decade, exemplified by the Enron scandal and the subsequent exposure of significant firms like WorldCom, Adelphia, Peregrine Systems and others, the US government took steps to enact legislation that would regulate corporate markets specifically to prevent such frauds. The Sarbanes-Oxley Act that was passed by the US Congress in 2002 (officially known as the Public Company Accounting Reform and Investor Protection Act of 2002) was meant to strengthen and tighten corporate accounting procedures. It established a new quasi-public agency to oversee, regulate, inspect and discipline accounting firms in their roles as auditors of public companies. It also specified tighter rules for corporate governance, including internal control assessments and enhanced financial disclosure.  [Source: Report of the Corporate Fraud Task Force, 2008, US Government, Page 1.19] All this, it could be supposed, would operate to prevent any future Enron-type scandals from occurring at all. Indeed, those who opposed the act argued that it created a complex over-regulated environment for US companies, which reduced their competitive edge over foreign firms. (However, a number of other countries—Japan, Germany, France, Italy, Canada, as well as developing countries like South Africa—have passed similar legislation.) Sarbanes-Oxley, or indeed any attempts to control and regulate corporate behaviour especially in the financial realm, have been much criticised by representatives of large firms and by many market-friendly economists as well. Consider this typical academic justification for not regulating markets: "While corporate fraud can impose significant costs of the economy when left unchecked, the evidence shows that market mechanisms discipline much bad behaviour while the criminalisation of corporate behaviour, coupled with bringing highly complex cases before juries that can neither understand the issues nor their instructions, imposes significant costs on the economy by deterring socially efficient risk-taking behaviour by corporations and their executives... The result is harm to the general public, whose members depend on a dynamic, competitive economy for their welfare." (Howard H. Chang and David S. Evans, "Has the pendulum swung too far?" Regulation, Vol. 30, No. 4, Winter 2007-2008). Yet it now turns out that, far from being too restrictive, if anything the Sarbanes-Oxley Act was not effective enough. After the spate of corporate financial scandals that actually resulted in the collapse of several companies in the early part of the decade, corporate fraud has apparently continued almost unabated even in the US. One reason for this may have been in the design and implementation of the legislation, which did not take in to account the crucial features of such scams, and the structure of incentives that both allowed and encouraged such malpractices to occur. A quick look at some of the more famous of these corporate frauds may illustrate this point. Consider first Enron, the gigantic scam that has unfortunately set the bar for all the other scandals that have followed since 2001. This was a financial scandal that could occur because energy sector liberalisation and financial deregulation in the US allowed for trading in electricity and natural gas futures, partly because of intense lobbying by Enron and similar firms. While the resulting energy price volatility adversely affected consumers, it delivered high speculative profits to what was originally a power generation firm but rapidly became dominantly an energy trading firm. Enron then created as number of offshore subsidiaries, which provided ownership and management with full freedom of currency movement. This also allowed any losses in such trading to be kept off the balance sheets. Read the rest of the article. Labels: banking regulation, control fraud, Corporate Fraud, credit crisis, Enron, financial crisis, fraud, Sarbanes-Oxley, Satyam, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
