Too Big to Jail

Smog from construction frames the front of The New York Stock Exchange on Wall Street in downtown Manhattan, New York, NY 7/2/2009 Benjamin Norman/Redux

When fraudulent banking nearly sank the global economy in 2008, one former government official knew exactly how to nail the crooks. And he'd already swooped in to clean up a similar mess.

More than two decades ago, during the savings and loan crisis, Bill Black exposed the Keating Five, senators who took big campaign contributions from the most infamous of the savings and loan executives and then tried to hide their crimes by stopping bank examiners from doing their job. The scandal ended the careers of three of those senators. One of them—John McCain—went on to run for president.

Black also helped prosecutors convict more than 3,000 crooked bankers, a third of them high-level executives. He also trained bank examiners and FBI agents in what to look for and showed prosecutors how to frame charges and present complicated evidence to juries in a compelling manner.

After that, Black, a lawyer, got a doctorate in criminology and developed a theory he calls "control fraud" to describe how corrupt bankers turn legitimate institutions into criminal enterprises. He devised techniques to help bank regulators quickly spot crooked banking practices, and rolled all this into a book, The Best Way to Rob a Bank Is to Own One.

With a track record like that, you might think Black would have been the first person President Barack Obama called when he took office five years ago as the economy was being gutted because of reckless and rapacious banking practices that plundered profits through subprime mortgages and devilish derivatives. A second Great Depression was stalking America, as the stock market was tanking and businesses small and large were hemorrhaging jobs.

The economy is still recovering from those cynical depredations, and many people are still wondering why no one has gone to jail for pushing us all to the brink of ruin.

But to this, day no one in the White House or the Justice Department, no one in the banking regulatory agencies, will return Black's calls. In 2012 he did get invited to brief Capitol Hill staffers on fraud by banks. He bought plane tickets to D.C. from Kansas City, Mo., where he teaches law and economics at the University of Missouri's law school there. But before the plane took off his phone rang. "I was told not to come," Black recalls. "The staff said they were afraid I would engage in too much bank bashing."

Federal officials say they have no need of Black's expertise because the FBI is diligently investigating crooked banks. They say that without providing any evidence that they have successfully completed any significant cases. Or are even doing much of anything.

In December 2011, after being buffeted by complaints that no one had gone to jail for nearly bankrupting the country, President Obama said on 60 Minutes, "Some of the most damaging behavior on Wall Street—in some cases some of the least ethical behavior on Wall Street—wasn't illegal." Black called me then, asking how the declaration, which he regarded as at best woefully uninformed, could get past the serious journalists who work on that show.

When Obama's explanation didn't quell the protests, the White House decided to pretend to flex its muscle. Attorney General Eric Holder announced in October 2012 that an interagency task force had generated 530 criminal charges for bank crimes involving more than $1 billion.... And then publicists at the Justice Department stonewalled reporters who asked for details, names and case numbers.

Black said then that Holder's boast was hooey—and said it again when the attorney general repeated the claim last year.

And now the Justice Department's inspector general has issued a report that proves Black was right, that Holder and the Obama administration did nothing to prosecute those who raked in billions through illicit banking practices.

When the inspector general asked to see those 530 cases Holder claims to be so proud of, he saw "numerous significant errors and inaccuracies." The inspector general reported last month that "despite being aware of the serious flaws in these statistics," Holder and the Justice Department continued to cite them.

The report also notes that in 2009 Congress gave the FBI an additional $196 million to investigate mortgage fraud. However, the inspector general says, "the number of FBI agents investigating mortgage fraud as well as the number of pending investigations decreased" over the next two years.

Mortgage fraud became "a low priority, or not listed as a priority, for the FBI field offices we visited, including Baltimore, Los Angeles, Miami and New York," the report says. The extra money allotted to bust the perpetrators of the subprime meltdown was diverted elsewhere.

The Justice Department now admits it has brought only 107 criminal cases, not 530, and those misdeeds involved a paltry $95 million. Not one case involved any of the so-called "too big to fail" banks.

After a contrite Holder admitted while testifying before the Senate last year that he feared prosecuting the big banks would damage the economy further by impeding the recovery, some took to calling them the "too big to jail" banks. Black concurs.

He also says that it would have been easy to nail many of the "too big" players. He insists he could have landed big fish by the thousands instead of the few minnows the Obama administration so halfheartedly pursued.

What's Morality Got to Do With It?

The richly and luridly detailed report of the Financial Crisis Inquiry Commission, which Congress created and whose report it tossed unread into the round file, shows that fraud was open, deliberate and endemic in the financial world prior to the 2008 crisis.

The big questions: Why did Justice ignore those big fish? And did Obama and Holder lie to the American people, or were the misinformed?

A disturbing answer begins with an FBI announcement in 2004, years before the crisis. The nation's premier law enforcement agency said it had uncovered a growing problem with fraudulent mortgages and had taken on a partner to combat these crimes. That partner was the Mortgage Bankers Association, the trade association for banks that make such loans.

In announcing this partnership, the FBI said that—with help from its new partners—it would pursue two types of crimes. One fraud they would be chasing was borrowing money for a property the buyer could not afford in the hopes of quickly selling it at a higher price. The other was to living in a nicer house than the borrower could afford until foreclosure, which can take months or sometimes years.

Note that both of those types of fraud are directed at individuals, and there is no mention of fraud by banks. "The FBI accepted the mortgage bankers' view," Black says, "and explicitly rejected the fact that some banks were committing frauds against their customers and investors who bought fraudulent mortgages."

At the time the FBI partnered with the bankers to "investigate" mortgage fraud, the chief White House economic adviser was Gregory Mankiw, a Harvard economist on leave. At a 1993 conference on such frauds at the Brookings Institution, Mankiw had already declared that of course bankers steal from institutions when conditions are right. "Given the incentives that regulators set up, it would be irrational for operators of the savings and loans not to loot," he said.

Black calls that "Mankiw morality," and points out that high-level government officials have their own incentives to look the other way.

The Revolving Door Reward

Black now commutes to Kansas City from suburban Minneapolis, where his wife of 33 years, June Carbone, an authority on family issues, holds an endowed chair at the University of Minnesota law school.

He says the FBI and regulators can easily spot control frauds by scrutinizing disclosure statements sent to bank regulators and investors. The indicators: Extremely rapid growth of loans issued at above-average interest rates to borrowers with little or no equity and shrinking reserves for loans that go sour.

The control fraud must eventually come to an end because bad loans will start souring. As insiders see the horizon race toward them, they press workers to issue loans faster and faster, with fewer and fewer limits so they can pocket as many fees, stock gains and bonuses as possible before the enterprise collapses.

Another of Black's indicators of control fraud is inflated appraisals, which justify loaning more than a property is worth, sometimes several times more. Black notes that in the early 2000s more than 11,000 real estate appraisers signed petitions to federal bank regulators complaining that appraisers who gave honest estimates were blacklisted by big banks in favor of appraisers who overstated values.

"How much more obvious an alarm did bank examiners and the FBI need?" Black asks, breaking into a smile. "But did anybody do anything? Nooooooo."

Black says the FBI had witnesses galore eager to testify against fraudulent practices by the big banks, and this was confirmed in a January 2013 Frontline documentary called "The Untouchables". Correspondent Martin Smith asked Lanny Breuer, then Holder's chief of criminal prosecutions, why PBS was able to find many people who knew of bank crimes and were eager to testify, but Justice had not prosecuted a single high-level insider.

Breuer replies that although he found Wall Street riven with "abominable greed," he lacked the proof beyond a reasonable doubt that "makes a criminal case."

A parody of Breuer's response is posted at a website maintained by Black's colleagues at the University of Missouri-Kansas City law school. In it, Breuer says, "If I contact people who have firsthand knowledge of fraud, I am going to have to follow up!

"Look at my suit," the parody voice continues, "if I prosecute the most powerful people in the world, what will be left of my career? Nothing. Nada.... I have a stellar career ahead of me if I use the revolving door in Washington properly. If I go after bankers, I'm going to end up like Bill Black, marginalized, an assistant professor at some small university somewhere.... "

Black, a ruddy-faced man of 62, chuckled when I ask him about the parody video. It is true, he says, that he hasn't managed his career as shrewdly as he might have were he only looking to get rich. "I've created all sorts of obstacles to getting anyone to hire me or even listen to me," he says, smiling. "That's what happens in America these days when you just tell the truth and point out the obvious."