Moyers Journal: Madoff Was A Piker -- America's Big Banks Are a Far Larger Fraudulent Ponzi Scheme

By Bill Moyers, Bill Moyers Journal. Posted April 6, 2009.

Moyers: You think they really said that to borrowers?

Black: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

Moyers: Ninja?

Black: Yeah, because no income verification, no job verification, no asset verification.

Moyers: You're talking about significant American companies.

Black: Huge! One company produced as many losses as the entire Savings and Loan debacle.

Moyers: Which company?

Black: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.

Moyers: And was this happening exclusively in this sub-prime mortgage business?

Black: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

Moyers: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

Black: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

Moyers: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

Black: Right, and the investment banker that -- we call it pooling -- puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

Moyers: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.

Black: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme…

Moyers: But you're saying our system became a Ponzi scheme.

Black: Our system…

Moyers: Our financial system…

Black: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."

Moyers: Is there a law against liars' loans?

Black: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.

Moyers: Because…

Black: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

Moyers: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?

Black: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic…

Moyers: Who did?

Black: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

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Bill Moyers is president of the Schumann Center for Media and Democracy.

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