Why Financial Regulatory “Reform” Helped the Unprincipled Blow-Up the Global Economy

A Workshop on Global Policy Professor William Black University of Missouri -Kansas City speaking on Why Financial Regulatory “Reform” Helped the Unprincipled Blow-Up the Global Economy 12:45 - 2:00 pm Tuesday, January 27, 2015 The Stassen Room (Room 170) Humphrey School, West Bank Campus How did we go from a situation in 1993 in which financial regulators were lauded for having defeated a raging epidemic of fraud at hundreds of savings and loans despite intense political resistance, to a situation in which the financial regulators became fraud enablers and deniers? How did this happen when finance and law and economics scholars assured us that financial markets were so efficient and honest that it wasn’t even necessary to have a rule against fraud? Bill Black contends that the “Achilles’ heel” of these theories was the implicit assumption that fraud by the people who control seemingly respectable banks (“control fraud”) could not occur. When the CEO is the crook, he can create a “Gresham’s” dynamic (bad ethics drives good ethics) that can make fraud common in an industry or profession. A series of public and private changes made the financial environment so criminogenic that it produced the three most destructive epidemics of financial fraud in history (appraisal fraud, liar’s loans, and secondary market frauds), hyper-inflated the residential real estate bubble, and drove the financial crisis. Professor Black will be testifying in Dublin on February 5 concerning these issues before the Irish Parliamentary inquiry into their banking crisis.