William K. Black

Control Frauds as Financial Super-Predators: How 'Pathogens' Make Financial Markets Inefficient

White-collar criminology scholarship shows that “accounting control frauds�? (frauds led by the CEO) use accounting fraud to deceive (or suborn) sophisticated financial market participants. Large control frauds cause greater financial losses than all other forms of property crimes combined. Weak regulation, supervision and ethics produce epidemics of control fraud that cause systemic economic damage. As with the natural world, these financial super predators act like pathogens that take over a firm and act as a “vector�? to cause even greater damage. Control fraud theory poses a major challenge to the efficient markets hypothesis and the resulting praxis that devalues financial regulation.

A MULTIVARIATE GRAPHIC DISPLAY FOR REGIONAL ANALYSIS

Publisher Summary As the mass of data generated to understand urban and regional problems increases both in terms of variety and complexity, better methods are needed to display, communicate, and analyze such information. The use of graphic displays represents an important and underutilized medium of transmitting information and for exploratory data analysis. Such displays may evoke impressions of underlying relationships that might not easily be detected be mathematical techniques. Therefore, graphic displays serve as methodological aids to hypothesis discovery. The use of computer graphics makes it possible to transform data into a number of different types of geometrical forms. This chapter presents a method of converting multivariate data into faces. The method was originally developed by Chernoff and consists of representing a point in k-dimensional space as a cartoon of a face.

Spain Rains on the Austerity Victory Parade

Leaders in Spain and Britain, among others, have tried to claim that their austerity programs are a success. It is nonsense, says the author. The sudden jump in unemployment in Spain at the end of 2013 should silence the spin masters. Austerity is a tragic failure.

Why Regulators Must Fight 'Control Fraud' Like Public Health Specialists

“Control fraud” is the leading cause of bank failures and financial crises. In “control fraud” the persons controlling a seemingly legitimate entity use it as a weapon to defraud. This essay analyzes the role of regulators in two epidemics of control fraud: the savings & loan debacle of the 1980s and the ongoing financial crises that first became acute in the nonprime mortgage sector. Effective regulation is essential to prevent and contain such epidemics. An epidemic is the natural outcome of a “pathogenic environment” which requires a reservoir of hosts for the pathogens to infect, and “vectors” to spread the pathogen. The anopheles mosquito is a vector for malaria. The financial world incurs epidemics of fraud when there is a “criminogenic environment.” Factors that make an environment criminogenic include non-regulation, assets that lack verifiable values, and compensation systems that create perverse incentives. The vectors of such epidemics include rating agencies, accounting firms, and appraisers. The symptoms include financial bubbles. They aid accounting fraud by creating fictional income to hide real losses. This feature of bubbles is analogous to infectious disease. Symptoms (coughing, sneezing) both spread disease and weaken the host, making him more susceptible to other infections.Effective regulation is essential to prevent epidemics of accounting fraud. Economists who determine regulatory policy have operated like faith healers instead of public health specialists. Their policies create, rather than prevent, criminogenic environments. They did so in the S&L debacle, the Enron/WorldCom scandals, Russian privatization, and “The Washington Consensus.” Economists’ failures are particularly tragic because there was a brief period (1983-1987) when regulators did act like public health officials. Those actions are largely unknown, as are the regulatory and Justice Department actions in 1990-92 that produced the largest number of convictions of white-collar criminals in U.S. history and prevented a subprime lending crisis.The Clinton and Bush administrations seemed unaware of these regulatory successes. Their deregulatory policies produced a criminogenic environment. Ending effective financial regulation was a key step in producing that environment and delaying the diagnosis of the resulting epidemic of mortgage fraud and other forms of accounting control fraud.

Echo Epidemics: Control Fraud Epidemics Generate 'White-Collar Street Crime' Epidemics - Comment on: Mortgage Origination Fraud and the Global Economic Crisis: A Criminological Analysis

“Control fraud” drove the crisis. Control fraud occurs when those that control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” Regulators, criminologists, and criminologists have documented the pervasive role of control fraud in causing the second phase of the S&L debacle. That crisis was followed by the accounting control frauds of Enron and its ilk. Top economists, criminologists, and the S&L regulators agreed that lenders engaged in accounting control fraud optimize through a four-part recipe that is a “sure thing” – it produces guaranteed, record (fictional) near-term profits and catastrophic losses in the longer-term. •Extremely rapid growth •Lending at high (nominal) yield to borrowers that will frequently be able to repay •Extreme leverage •Providing grossly inadequate reserves against the losses inherent in making bad loans. Epidemics of accounting control fraud can cause bubbles to hyper-inflate – producing severe crises. Fraud can also cause markets to fail, rather than “clear.”

The Cartel Behind the California Energy Crisis

In 2000-2001 the California energy crisis cost billions of dollars and the blackouts endangered lives. The causes of the crisis were contested along partisan lines. Republicans (and neo-classical economists) argued that “a perfect storm” of increased demand and reduced supply triggered the crisis and that the root causes were inadequate deregulation, environmentalism, and bungling by the Governor Davis. Their solution was greater deregulation and reduced environmental restrictions. They predicted that price caps would lead to constant blackouts. Democrats blamed bungled deregulation under the (Republican) Governor Wilson and a cartel. They favored price caps. The Clinton administration supported Governor Davis. Ken Lay, Enron’s head, guided the Bush administration’s response to the crisis. It opposed price caps. Under Bush, the Federal Energy Regulator Commission (FERC) opposed price caps and barred state officials from access to tapes proving that there was a cartel. The facts never supported the “perfect storm” theory. The theory that best fit the facts was that a cartel caused the crisis. Neo-classical economists rejected the possibility of a cartel because they presume that cartels are unable to maintain the discipline necessary to restrict supply. The three basic assumptions of rationality, utility maximization, and self-interested behavior should cause cartels to self-destruct. It is rational to cheat on a cartel because cheaters prosper. Cartel members know this, so the universal incentive is to cheat first. Criminological research has falsified this prediction. Cartel discipline is an issue. As a result, successful cartels build cohesion by increasing trust and employing a mixture of positive and negative reinforcement. Some major cartels, e.g., many dango in Japan, maintain discipline more than 50 years after they were created. Moreover, even cartels with imperfect discipline, e.g., OPEC, can cause massive damage.