Springtime for Banksters and Wall Street

Should the next update to Mel Brook's "The Producers" cast the two hucksters in the roles of Wall Street Bankers instead of Broadway Producers?

It’s not often you see a professor of economics use a Broadway and Hollywood metaphor for what’s going on in the financial markets, but Thorvaldur Gylfason did and it’s a blast to read. Basically, Gylfason casts the Wall Street Banksters in the same light as huckster Max Bialystock.

Not all the CEOs running the fraudulent savings and loans (S&Ls) in California and Texas in the 1980s and 1990s saw The Producers, but all of them could have played Max’s role convincingly. They shared Mr. Brooks’ insight into why the massive frauds use accounting as their “weapon of choice”, structure their efforts to fail, and recruit an accountant as their most valuable fraud ally. The fraudulent CEOs and their accounting allies were the real-life Bialystocks and Blooms. They bankrupted the S&Ls, enriching themselves and their friends along the way, at the expense of stockholders, creditors, and taxpayers.

Fraudulent lenders maximise their (fictional) income by making exceptionally bad loans and growing very rapidly. Borrowers that will frequently be unable to repay their loans are numerous (allowing the lender to grow rapidly) and will pay a higher interest rate (yield). The combination of rapid growth and high interest rates produced guaranteed, record income in the near term during the S&L debacle and the current subprime lending crisis.

During the ongoing subprime mortgage loan crisis, the rating agencies and the top tier audit firms played the real life role equivalent to the critic that Max pretended to try to bribe to make sure that Springtime for Hitler received a terrible review. Unlike the critics, who Max realised he could not succeed in bribing, the rating agencies and the top tier audit firms gave rave reviews to toxic subprime mortgage paper. The rating agencies claimed the toxic waste was pristine “AAA” – the safest of the safe. The elites that we count on to advise us on quality in the real world are more corruptible than the elites in the fictional world that Max and Leo inhabited.

I worked for one big S&L in the 80s and I can tell you, the senior management there was just a clueless bunch of entrenched nitwits from a Jesuit boys Prep School and later, the college of the same name (Creighton). They had no idea they were losing so much money with their gobble up every little guy in sight behavior until I–a little girl in a banker blue suit–actually put their income and balance sheet in a way where they couldn’t ignore it. First thing they did? Run to the market with an IPO for fresh suckers to fund their ‘failure’. In that much, I see Max all over the place. Only, thing was that I didn’t play. I wouldn’t take any of their stock for love or money.

Here are some characteristics of fraudulent banks cited in a book called “The Best Way to Rob a Bank is to Own One” by lawyer William Black. Something to keep in mind in the happy days are here again momentum blazing up there near the NYSE building.

• They grow very rapidly;
• They make really bad loans at high yields (because only borrowers who have no intention of paying back will borrow at exorbitant interest);
• They pile up huge debts; and
• They set aside pitifully small loss reserves.

That was the same as it ever was from the crashes of the 1920s, 1980s, and those in the 2000s.

What I’d like to know is when are these versions of Bialystock and Bloom headed for jail? Or at least some form of Club Fed?

(you can treat this is an open thread … it’s a slow day other than the visiting drive by hate hits!)