Bill Black: Unless we Fix the Perverse Incentives in our Economy, We are Rolling the Dice Every Day


Elites have not been prosecuted for the fraud they committed: None of the financial elites, who drove the crisis through massive fraud, has been pursued criminally. It was accounting fraud, which mathematically guarantees wealth to executives, and drives the companies into the ground (or to bailouts, in our case), that led us to crisis.

Bank Living Wills are useless: Bank Living Wills are absolutely useless and everybody knows they are useless. Nobody can predict how the next crisis will evolve and what markets will be like in those circumstances. The idea that we would be able to use these living wills is ridiculous.

Bank Living Wills do nothing to address Too Big To Fail banks: Bank Living Wills are being sold as a response to TBTF, which is even more ridiculous. We made the largest entities bigger even though they were already too big to jail and too big to manage. The obvious response to having systemically dangerous institutions is to shrink the TBTF banks.
One necessary response to TBTF is to shrink the banks: If we were to shrink the banks we would experience a win, win, win, by:

1. Dramatically reducing systemic risk.

2. Making the banks much more efficient.

3. Taking a step toward fighting crony capitalism and restoring free markets and functioning democracy.

Not only did we not ensure that systemically dangerous institutions were cut down to size, we actually allowed some of them to get bigger, to get more systemically dangerous, to become more TBTF.

TBTF has a massive implicit government subsidy: The TBTF banks have an enormous implicit subsidy. We know that in a crisis the creditors of systemically dangerous institutions will be paid in full. That means that those banks can borrow at a lower rate than everyone else. That is an implicit subsidy, which is unfair to everyone else in the marketplace.

Recurrent, intensifying crises will continue unless we address perverse incentives in our economy: We have recurrent, intensifying financial crises. They are becoming bigger by an order of magnitude each time.  The next collapse, unless we take steps to prevent it, will be larger and more destructive. We have optimized the world for these crises with:

1. Deregulation.
2. De-supervision.
3. De facto decriminalization.

We are reinforcing this fraud-friendly environment by reappointing the most failed regulators in the world: We still have a small army of failed regulators in charge of regulation: Mary Shapiro, Tim Geithner, and Ben Bernanke. Mary Shapiro, who was an abject failure as a regulator running FINRA from 2006 to 2009, was appointed to run the SEC by Barack Obama. Tim Geithner, who was an abject failure as President of the New York Federal Reserve Bank from 2003 to 2009, was appointed Treasury Secretary by Barack Obama. Ben Bernanke was also a disaster as a regulator with the Federal Reserve prior to the crisis; he alone had the authority to stop the fraud leading up to the crisis under the Home Ownership and Equity Protection Act of 1994. He refused to take any action notwithstanding plenty of warnings. Obama decided to keep him on.

Crony capitalism is behind this: Both parties are enthralled by private money. It is crony capitalism that is leading to these terrible decisions.

Our failure to take reasonable steps to address the core issues leaves us vulnerable to any shock: Once you have a house built on a slope that is subject to collapse, you cannot tell what the trigger will be. It could fall because of an earthquake, it could fall because of a rainstorm, it could fall because of a fire… We don’t know what the trigger will be, but we can’t live on a hillside where it is just a matter of time until the whole thing comes crashing down. Unless we take on the perverse incentive systems that produce the fraud, we are rolling the dice every day.


Bill Black is an associate professor of economics and law. He was the executive director of the Institute for Fraud Prevention from 2005-2007. He previously taught at the LBJ School of Public Affairs at theUniversity of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Professor Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

His book, The Best Way to Rob a Bank is to Own One (University of Texas Press 2005), has been called “a classic.” Professor Black recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management.

He teaches white-collar crime, public finance, antitrust, law and economics, and Latin American development.