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Bill Black on accounting control fraud in Fortune

Successful S&L fraud prosecutor and criminologist Bill Black in Fortune:

Accounting is the CEO's "weapon of choice" that transforms the perverse incentive into what economists, regulators, and criminologists agree is a "sure thing" in crises (means). That's the classic recipe for disaster: motive, means, and opportunity. ...

The motive being (of course) greed, and the opportunity deregulation (more generally, the ideological and institutional effects of the Washington Consensus starting in the mid-70s).

The reform bill fails to address the role of accounting in providing the "sure thing" means for senior officers to exploit and profit personally from these perverse incentives. The financial industry used its lobbying power to induce Congress to extort FASB to change the accounting rules to hide mortgage losses. This is the (early) S&L and the Japanese strategy of the cover up. It leads to disaster (S&Ls) or lost decades (Japan). ...

Professional compensation is an endemic disaster, and no one who is honest denies it. Have a CDO backed by "liar's loans" that doesn't warrant even a single "C" rating? You could get any of the top rating agencies to give you an "AAA." Your lawyer would structure the CDO for you, and the internal and outside auditors would bless it. The underlying mortgages rested on multiple scams by professionals. The loan brokers and officers' bonuses led them to advise to file fraudulent applications and caused them to ensure that appraisers were picked that would inflate "market values." "Independent professionals" were suborned in this manner well over a million times. ...

Reform bill proponents cite the resolution authority as the key advantage of the bill, but that is disingenuous. The regulatory hole in resolution authority was filled over 18 months ago when investment banks became regulated as commercial banks. Presidents George W. Bush and Barack Obama had adequate authority to close the major insolvent banks, a statutory duty to do so (under the Prompt Corrective Action Law of 1991), and the factual basis (insolvency) for appointing receivers.

But the administrations lacked the will, political courage, and the integrity to close the major insolvent banks. They evaded the mandates of the Prompt Corrective Action Law by encouraging the largest banks not to recognize their massive losses on bad loans and CDOs.

And here we are!

The only thing that will reduce the swollen, bloated, and parasitical financial sector to its proper proportion so the country can get back to work is bankster CEOs in orange jump suits doing the perp walk. Black knows how to get that done. Pundits who want to avoid collapse, instead of enabling it, and pundits who think that elite impunity is a recipe for a Banana republic, would do well to heed his message.

NOTE Via Naked Capitalism. Since I have a response due to Professor Krugman for this post, I won't title this "Day 8 of the 'Why Won't #Krugman Post On Bill Black?" Watch,' but feel free to think that. See the transcript of Black's interview with the sadly departed Bill Moyers on April 3, 2009; it's not like this information isn't new. And so what if Black's in Kansas City? Everything's up to date there!

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Submitted by lambert on

Actually, that's a sharp analytical tool. So, you're welcome.