Bill Black: The Banks Are Still Insolvent, And Obama Is Not Only Covering It Up, He's Taking Credit!
Sep 25, 2011 at 8:35 PM
Dr. Pitchfork in Bank Bailouts, FASB, FASB, William K. Black, bank fraud, banks, banks, bill black, extend and pretend, obama, obama, william k. black

Bill Black says you're doin' a heck of a job, Mr. President.

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A look back at a Bill Black op-ed from last Fall.  Nothing has changed.

As part of their TARP propaganda tour, Obama officials from Tim Geithner to the president himself keep repeating the same lie statistic -- that solving the financial crisis will cost far less than the 2.5% of GDP it took to clean up after the S&L crisis.  In this piece, Bill Black gives withering criticism of Obama for playing extend and pretend with the TBTF banks -- the very same game the S&L regulators played during the 1980's.  It didn't end well back then, and it won't end well this time. 

Regardless, says Black in a new op-ed, the results, are clear:

For reasons that only Summers, Geithner, and Obama can know, they chose to adopt Pratt's disastrous and dishonest anti-regulatory strategy and parrot his dishonest claims of brilliance and success.  Congress passed the Prompt Corrective Action (PCA) law in 1991 for the express purpose of outlawing any repeat of Pratt's refusal to close insolvent banks.  Congress, at the behest of the Chamber of Commerce, the American Bankers Association (ABA), and Chairman Bernanke, successfully (and shamefully) extorted the Financial Accounting Standards Board to change the accounting rules so that banks no longer had to recognize losses on their toxic mortgage paper appropriately until they sold the assets.

Covering up the losses had three real (carefully unstated) purposes: (1) permitting evasions of the PCA [Prompt Corrective Action law], (2) allowing the banks to remove themselves from the strictures of the TARP program even if they are, in reality, insolvent, and (3) allowing insolvent and impaired banks to pay their senior executives huge bonuses on the basis of the (fictional) income that results when a bank does not recognize its losses.

The Bush and Obama administrations have consistently refused to apply any of the successful lessons learned in responding to the S&L debacle - even though the response has been praised by experts in public administration and Treasury Secretaries from both parties for decades. Both administrations refused to even discuss the current crisis with the senior S&L regulators that contained that crisis before it caused a recession. Obama thinks his response to the crisis was brilliant because it did not follow the S&L regulators' much more expensive strategy. Obama cited the comparison to the S&L debacle as the most telling demonstration he could make of why his administration deserves praise.

It's a Miracle!

What Obama does not understand is that his "cover up" strategy and his claims of brilliant success are direct steals from Dick Pratt's playbook. Dick Pratt was the top S&L regulator in 1981-83. When he left (to join Merrill Lynch) he claimed that he had contained the crisis through innovative resolution strategies that slashed the average historic costs (from over 20% to less than 5% of the S&L's assets). Pratt's "resolutions" were accounting scams that did not resolve anything. They did, however, transmute real insolvencies into fake assets and create guaranteed (fictional) accounting income. The scam was so crazy that the more insolvent the S&L acquired, the greater the fictional income that the deal created. Pratt did so many of these scam resolutions that they created so much fictional income and capital that the industry reported it had suddenly returned to profitability.

The reality was quite different. There was no miracle, only the cumulative results of multiple accounting scams. Pratt's resolutions did not resolve failed S&Ls.  They were still insolvent.

Continue reading...

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A summary of Black's op-ed from last week:

Background:

 

Bonus Video:  Ratigan with Black and Inside Job Director Charles Ferguson

Click here for Ratigan's complete interview with Charles Ferguson.

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