William K. Black is a professor of Economics and Law, criminologist, serial whistleblower and a former financial services regulator. He was a Litigation Director for the Federal Home Loan Bank Board and author of the book ‘The Best Way to Rob a Bank is to Own One’. He was once interviewed by Jim Puplava, a radio-show host in relation to a banking sector crisis – the “Savings & Loans debacle” that occurred in the USA around the 1980s and 1990s.
Extract from his exposé
Interviewer: You played a critical role during the Savings & Loans crisis. What was behind this in your opinion?
William Black: The S & L crisis was a tragedy in two parts. The first part was not fraud, it was interest rate risk. But the second phase, which was vastly more expensive, was to defraud – and the National Commission that investigated the causes of the crisis said the typical large failure fraud was invariably present. Another way to look at it is: how much fraud is there? And we know the following: there are no official statistics on sub-prime and similar categories because there are no official definitions.
So, this is a little wishy-washy but the best numbers we have are that by 2006 half of all the loans called sub-prime were also liars’ loans. Liars’ loans mean that there was no prudent underwriting of the loan…and here I am going to quote from the Mortgage Bankers Association. That is the trade association of the perps and this is their Anti-Fraud Specialist Unit, and they reported this to every member of the Mortgage Bankers Association in 2006.
So, nobody can claim they did not know. They found three critical things: first, they said this kind of loan where you do not do underwriting is, and I am quoting again, “an open invitation to fraudsters”. Second, they said “the best study of this found a 90% fraud incident”. In other words, if you look at 100 liars’ loans, 90 of them are fraudulent. And third, they said therefore these loans, where the euphemism is stated income are Alt-A loans, deserve the title that the industry calls them behind closed doors – and that is liars’ loans.
Interviewer: Prof., I guess one question I would have is did the guys at the top of the banks not know that this was going on? I mean, I would find it hard to believe that if I am the CEO of a financial organisation I don’t know our loan standards, that we went to liar loans and that we were not documenting or verifying.
William Black: You mean you think liars’ loans might be a hint?
Interviewer: Yeah, maybe just a little sarcasm.
William Black: Yeah, we have known for centuries that if you don’t underwrite loans, or if you don’t underwrite insurance, you’ll get something called ‘adverse selection’. And that means you get the worse possible borrowers or people being insured, and the expected value of lending to somebody in conditions of serious adverse selection is negative.
Or to put that in English, it means “if you lend this way, you lose money”. And we have known this for centuries…. So yeah, the CEO’s knew all about this. Why did they do it? And the answer is, here is the recipe it’s got four ingredients for creating what the Nobel Prize Winner in Economics, George Akerlof and his colleague Paul Romer said in 1993 was “a sure thing”. And that “sure thing” is what in criminology we call accounting control fraud.
So, control fraud is when the person who controls a seemingly legitimate entity, uses it as a weapon to commit fraud. In the financial sphere, the weapon of choice is accounting. So, here are the four ingredients of the recipe that produces a “sure thing” of record accounting income: (1) Grow like crazy; (2) make preposterously bad loans but at a premium yield; (3) have extreme leverage. That means you have a ton of debt; and (4) put aside trivial loss reserves (under-provisioning).
When you do those four things, you are mathematically guaranteed to report – albeit fictional – profits in the short-term. You are also guaranteed – with modern executive compensation – to make the Senior Executives wealthy; and you are guaranteed because after all, if you think about those four ingredients, they are the perfect recipe for also maximising real losses.
Interviewer: You know, we just talked about these liar loans being made while the top executives knew that this was going on. But it was driving the record profits that they were reporting, their stock prices were going up. They were getting paid bonuses and you know their option values were worth fortunes; you know, some of those compensation packages were just unreal. But here’s the thing, I guess some of these people did know – as we mentioned, the top executives – but some knew how to make a profit from them.
William Black: So, to just close the loop on what I was saying; if a bunch of folks follow the same strategy at the same time, they hyper-inflate a financial bubble. And when you have huge financial bubbles and they collapse, that’s when you get a great recession. So, your question is so why – since this is the greatest financial crime in the history of the world – no one, senior, at any of the major places that drove the crisis has gone to jail? In fact, no one has been indicted…. What has happened? And the answer, the first answer is: it all must start with the regulators.
So, are there any contextual similarities between William Black’s extract and Governor Addison’s recent exposé?
The Birth of Consolidated Bank
The Consolidated Bank was established from the league of five liquidated banks – Beige, Construction, Royal, Sovereign and the uniBank. Receiving sovereign blessings from the central bank and government with GH¢450million as its minimum capital, the Consolidated Bank is ready to underwrite big-ticket transactions. Fortunately, it doesn’t need to rely on the Construction Bank to finance construction of its head office because it has already found the plush Manet Tower C, Airport City. Looking at CBG’s colours, one might ask: is the Beige Bank’s ghost lurking in the shadows? The royal ride in a palanquin to a durbar to officially launch the bank is on the backburner. Will the CBG learn from mistakes of the erstwhile banks? Indeed, the Governor, Dr. Ernest Addison, gave the reasons which informed the central bank’s decision to issue the new licence.
Alarm Bells Ring – The details
Concerning the Royal Bank, it came to light that “the bank suffered severe capital impairment due to under-provisioning for loans, overestimation of investments with other financial institutions, and overstatement of capital on account of fixed assets”. Under-provisioning and overestimation were like replays of William Black’s voice-clip.
The bank I used to love gave itself away. Has it ignored William Shakespeare’s soothsayer’s warnings in “the Ides of March have come but not yet gone”? How did it fail the CAMELS test- even when KPMG was appointed as the official administrator in March 2018?
“uniBank had given out amounts totalling GH¢1.6billion to shareholders and related parties in the form of loans and advances without due process and in breach of relevant provisions of Act 930. In addition, these shareholders and related parties had also been given amounts totalling GH¢3.7billion which were neither granted through the normal credit delivery process nor reported as part of the bank’s loan portfolio.
“They were also not secured with collateral and attracted no interest income for uniBank. Altogether, shareholders and related parties of uniBank had taken out an amount of GH¢5.3billion, constituting 75 percent of the bank’s total assets. Out of total customer deposits of GH¢4.3billion, GH¢2.3billion was not disclosed to the Bank of Ghana. Loans and advances to customers were also overstated by GH¢1.3billion in prudential returns to the Bank of Ghana.”
Oooops! The alarm bells ring! Credit underwriting processes breached? Non-disclosure and overstatement? Governor Addison released William Black’s voice-clip again – cooking the books! Regarding three banks – Beige, Construction and the Sovereign – their offences include obtaining licences under false pretences by using suspicious and non-existent capital.
That means they were dead on arrival. In passing his judgement on them, the Governor appeared to have hit his bench with the gavel as the retired Justice William Atuguba would have done with a high-pitched voice. Bam! “You can’t put something on nothing and expect it to stand. You have fallen. Your licences are therefore revoked.” Have the chickens come home to roost?
To note, the 14- page damning judgement was titled ‘Press Release-Grand Final August 2018’. Is it an indication that the dust has finally settled? “When your neighbour’s beard is on fire, water your own”. Bankers! The realities of the wrongs have exposed us to the core, and we cannot afford to bury our heads in the sand like ostriches. We must face the facts and do deeper self-introspection. It is very painful to accept the fact that five local banks had their licences revoked in addition to UT/Capital banks. We shed tears, but the question is: na who cause am? Hmmm! William Black: “The best way to rob a bank is to own one”. Eiiii! No be me talk am ooo! Alarm bells are ringing!
Governor Addison, how many times have I called you? One! Two! Three! Four! Five!
Bam! Ogidi gidi, shégé! Dear readers, God Bless You!