Professional Documents
Culture Documents
William K. Black Associate Professor of Economics and Law University of Missouri Kansas City
Control Frauds
White-collar criminology theory
Person controlling seemingly legit. entity uses it as a weapon
Causes > direct $ losses than all other forms of property crime combined
Bubbles and market collapses
Some control frauds maim & kill
Exist in all three sectors
Non-regulation Decriminalizes
Decriminalizes accounting fraud
Effective regulators essential:
Make the criminal referrals
Train the FBI
Detailed to aid investigations
Serve as key witnesses
De-supervision = non-regulation
Compensation is Criminogenic
Perverse incentive: accounting fraud
Near perfect crime: prots convert rm assets to CEOs benet
Greshams dynamic suborns controls
Reduces whistleblowing
Lose your bonus
Peers lose their bonuses
Sanctity of contract: unholy mess
Reregulated Despite:
Reagan administrations hate for it
Majority of House plus Speaker Wright
Keating Five
Trade association, (#3) in U.S., plus prostitutes for key House member
2/3 of presidential appointees & staff
Entire economics profession
Media: Mr. Ed (talking horse)
Perfect Corruption
Accounting control fraud: perfect crime
Compensation as perfect bribe
For ofcers: allies & deniability
Professionals: allies & blessing
Fraud induced v. spontaneous order
Few rules, no real regulators & preemption: no bribes necessary
Greenspan, Gilleran & Dochow: backdate
War on Regulation
Preemption of state efforts to restrain predatory lending
Slashing the FDIC staff with early outs
MERIT (non) examination
Transferring 500 FBI white-collar specialists to national security
Industry = customer; MBA = partner
Mission Accomplished
Intellectual Roots
Ayn Rand: Greenspan: at the bottom of all regulation lies the gun
Democracy is illegitimate & corrupt
Homo economicus is a sociopath
Business schools as fraud factories
Hayek: spontaneous order assumes price signals are non-fraudulent
Reagan (& Gore): govt is the problem (except for heroes wearing uniforms)
Failed Paradigms
Efcient markets & contracts
Private market discipline: perverse
Agency cost: shareholders cant stop accounting control fraud
Corporate governance: One cant govern control frauds
Business ethics: assumes the tone at the top is honest
Do as I say, not as I do
By now every one of you must have 6.46 [EPS] branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breath and dream 6.46, you must be obsessed on 6.46. After all, thanks to Frank, we all have a lot of money riding on it. We must do this with a fiery determination, not on some days, not on most days but day in and day out, give it your best, not 50%, not 75%, not 100%, but 150%.
The anti-canary
Remember, Frank has given us an opportunity to earn not just our salaries, benefits, raises, ESPP, but substantially over and above if we make 6.46. So it is our moral obligation to give well above our 100% and if we do this, we would have made tangible contributions to Franks goals. (Mr. Rajappa, head of Fannies internal audit.)
Mass Destruction
Maximizes lenders loan losses
Bonuses produce Greshams dynamic among professionals & executives
Makes market discipline oxymoronic
Makes markets inefcient (perverse)
Hyperinates & extends bubbles
Erode trust and shut markets: frauds create/betray trust: Akerlof/lemons
Disconcerting Results
The result of the [Fitch loan file] analysis was disconcertingas there was the appearance of fraud or misrepresentation in almost every file. the files indicated that fraud was not only present, but, in most cases, could have been identified with adequate underwriting prior to the loan funding. [Fitch 11.07]
Failure is an Option
CEO can profit enormously despite firms failure The firms failure is not a fraud failure Minimal reputation injury Hyperinflated bubbles produce economic crises and provide a ready excuse for firm failure Bailouts & too big to fail immunity