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Battered Obama took part in a 'cover up', says ex-regulator

Wednesday 3 November 2010 - by Will Henley

 Following the Democratic Party’s drubbing in mid-term elections, outspoken former regulator Bill Black takes aim at Barack Obama’s “disastrous” response to the financial crisis

In a last campaign pitch to voters, US President Barack Obama justified his response to the Great Recession by contrasting it to "S&L", a 1980s and early 1990s crisis which saw nearly 800 savings and loans institutions go bust amid a commercial real estate bubble.
 
Yet for Bill Black - a former Federal Home Loan Bank Board litigation director who as deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement contributed to a major 1993 report on S&L - it's an analogy which sticks in the throat.
 
"It's a terrible comparison," says Black.

In his reasoning, Obama noted that while George Bush Senior's efforts to stabilise the financial system cost two and a half per cent of gross domestic product (or $125m), his own administration's actions have cost as little as one per cent.

"In the savings and loans crisis, for 2.5 per cent of GDP we actually resolved the problem," Black guffaws. "In this case, they have resolved none of the problems."


 
In 1991, Congress passed a Prompt Corrective Action law ensuring that insolvent institutions would be wound up, Black explains. Regulators forced bankrupt organisations into orderly receivership, accounting standards were improved, and those suspected of fraud were pursued. In total, more than 1,600 institutions insured by the Federal Deposit Insurance Corporation were closed by the authorities or received government support.
 
"In the savings and loans crisis, we got rid of the phoney accounting that our predecessors had put in place to hide the losses," he attests. "In every case we wiped out the risk capital - both equity and subordinated debt. We went to honest accounting rules and closed the problem institutions."

Conversely, claims Black, the President has singly failed to heed the previous experience. Not only have authorities chosen to leave suspected fraudsters in place, but they have protected insolvent institutions by changing Financial Accounting Standards Board rules so that toxic asset losses do not need to be recognised.


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READERS' COMMENTS
2010-11-07 12:49:18 | Rodger Malcolm Mitchell
You said, " . . . those reaping the benefits of the taxpayers' largesse, . . "
.
This is a common myth, but in fact, taxpayers do not pay for federal spending in a monetarily sovereign nation. See: http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/
.
Rodger Malcolm Mitchell
2010-11-05 19:14:44 | Anonymous
Mr. Black is right about the fraud, but there are several layers of fraud within the bank lending system that require investigation, including the huge role and ability to game the system that foreclosure attorneys have, particularly in the commercial and construction loan markets. The ability of these attorneys to act "at will" without proof of cause, to force borrowers into default and into bankruptcy without legal recourse, the horror stories that have destroyed layer upon layer of businesses and hundreds of jobs, that have ruined smaller banks, are legion. There are examples in Mr. Black's own state that exemplify the robbery, not only of the banks, but of thousands of innocent bystanders along the way.
2010-11-05 15:12:28 | Tom Nacey
Missing a big point here. During the S&L problem, the big banks wanted to clear the streets of the bad S&L's (bank competitors). Think drug dealers. When your competition gets arrested, hang the SOB. When you get arrested, plead for "rehabilitation". Since the bankers are in charge of both parties, this is exactly what, and only what we are going to get. It is called corruption and it can bring down a nation.
2010-11-05 13:33:03 | Anonymous
Mr. Black is far too kind. Barack is nothing more than a bend the knee servant of bankers. America would not have ceased to exist (nor would it cease to exist) if banks (all 7800 plus of them) were forced to mark their assets to market value and face capitalism. In fairness, the other party will be more than happy to bend the knee to the bankers. They will disguise their servitude of the bankers as "getting government out" of things like student loans so that the bankers can go back to receiving billions in the administrative fees that were taken away from them when the Obama administration took the administrative duties for student loans away from the bankers.
2010-11-05 04:08:40 | Karen
I like Mr. Black's style.

Now all we need is a third-party candidate (sort of like Ross Perot) in 2012...
2010-11-05 02:34:14 | Ignim Brites
"It could, he says, unleash a 'crisis of democracy'." We have already a crisis of democracy but not in the 1930's sense of a mass movement in support of a strong man. No, our crisis of democracy is more fundamental. The question is "Who are the demos." Are New Yorkers and Californians and Texans really the same people? Do New Yorkers think of Texans as their fellow Americans? Does anyone think of Californians as being Americans?
2010-11-04 17:43:37 | FrancoisT
"Would a purge of the financial industry have done anything to improve economic growth?"

The answer is: Of course!
No country can expect a vibrant economy in a climate that encourage obfuscation, fraud and phony accounting. Moreover, contrary to the confabulations of the so-called free-marketers and libertarians, no economy can prosper is there isn't a referee in charge.

And Yes! Everybody is aware the referee isn't perfect, just like in sports. But try to get the game going smoothly and fairly without a referee.
2010-11-04 15:19:34 | Anonymous
Justice, the rule of law, and a healthy economy go hand-in-hand. Dr. Black is stressing that unless you fix the problem (a fraud-ridden financial industry) the economy will not recover. We are already seeing excuse-making by politicos who pretend that the new rate of unemployment is structural and that nothing can be done about it. This is patently false.
2010-11-04 14:31:12 | Anonymous
It seems many are more interested in justice than the economy--a laudable sentiment, but I can see why Obama would take a different path as both a national leader and a politician. Would a purge of the financial industry have done anything to improve economic growth? Would costly litigation, which would have stoked public anger but probably not put anyone behind bars, been a better alternative? Perhaps the problem with Obama's approach of stabilizing the economy and then relying on Congress to make changes to the bank regulatory system is Congress?
2010-11-04 14:09:19 | Anonymous
You lost me at "Democrat Party".
2010-11-04 13:58:32 | Jim
Forget Bush and leave that rear-view mirror alone. Everyone know Obama was a rookie, everyone was afraid the guy was way over his head and anyone with any economic knowledge or sophistication knew his presidency was over before he was even inaugurated, given the individuals chosen in Dec 2008 to make economic policy. And now look what he's doing, letting Bernanke finish us off.
2010-11-04 13:51:40 | Don
@Kim - did you read the article? Obama is not at fault for creating the fraud but he is complicit in the cover-up. He had a Golden opportunity to come in with guns a-blazing to clear out the thieves, swindlers and con men who drove the large banks over the edge. Instead he chose to let you and I enrich the culprits. Where are the indictments, where are the impassioned investigations, where is the Justice?
2010-11-04 12:39:28 | Kim
Seems awful telling us that he seems to BLAME the current adminstration to the point of labelling it a cover-up when much of the growth of that bubble happened during the Bush years. Like the S&L was under, well, YOU know. Mr Black seems to be a corporate shill looking to blame those who had a very small part while allowing his (probable) corporate and political handlers to make off scott free.

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