by William K. Black
Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle
Marty Robins’ December 15, 2010, column “Blow the Whistle on Pointless Whistleblowing” in The Huffington Post opposed the SEC implementing the Dodd-Franks Act’s provision that the SEC should develop a system of financial incentives for whistleblowers. Mr. Robins is a former corporate counsel with strongly conservative, anti-regulatory views. His purpose in writing was to enlist support for businesses lobbying the SEC to adopt a weak rule undercutting the Dodd-Frank’s whistleblowing provision. I’m interested in the SEC rule on its merits and as a serial whistleblower, but Mr. Robins’ primary arguments as to why this provision of the law was “pointless” is that fraud is trivial and played no material role in the crisis. As a white-collar criminologist and former senior financial regulator I find his claim as dangerous as it is astounding.
Mr. Robins does not evince any expertise in investigating sophisticated financial frauds, but he has strong views on such frauds.
In the first instance, this effort [to increase whistleblowing] is totally unrelated to financial stability. While the 2008 crisis and Great Recession were undoubtedly the result of terrible decisions on Wall Street, by mortgage originators and by borrowers on Main Street, in lending and borrowing beyond ability to pay, virtually none of this activity was even arguably illegal. As indicated by the absence of criminal prosecutions, there is nothing illegal about doing things that are really dumb. These new provisions in the law will do nothing to deter abject stupidity on the part of private actors that imperils the broader economy. As noted, doing the latter requires significant reform of corporate governance law. There is no credible evidence that illegality had anything to do with the financial meltdown.
Mr. Robins feels no need to cite any experts or data to support his assertions that fraud played no role in the crisis. He believes his case is demonstrated conclusively “by the absence of criminal prosecutions.”
Mr. Robins timing on his column is embarrassing to his thesis, for it is contemporaneous with mea culpas and data refuting his thesis and excoriating the Justice Department for its lack of prosecutions. Joseph Stiglitz, Alan Greenspan, and Andrew Ross Sorkin have recently emphasized the prominent role of fraud in the crisis and decried the fact that elite bankers looted with impunity. These are remarkable advances. Until very recently Dr. Stiglitz refused to use the “f” word. Chairman Greenspan infamously refused to use the Fed’s unique statutory authority (under HOEPA) to regulate the unregulated lenders that made the bulk of the fraudulent loans. Greenspan refused to regulate on the grounds that the securities markets automatically excluded material fraud. The securities and contract markets must exclude fraud or they would not be “efficient” — and because all of “modern finance” and much of modern microeconomics was based on the efficient market and contracts hypotheses, it followed that fraud must not exist. Sorkin, the New York Times’ leading columnist on financial elites, had never been willing to contemplate fraudulent elites. This made his epiphany all the more striking.
Many experts, of course, have been warning about the role of fraud in the crisis for a very long time. The FBI began using the word “epidemic” to describe mortgage fraud in September 2004 and predicting that it would cause an economic crisis if it were not contained. It was not contained. Instead the epidemic grew rapidly. The FBI warning was more than six years ago. Greenspan, Bernanke, and Geithner all ignored it — and produced a disaster of proportions not seen in 75 years. Criminologists that specialize in the study of white-collar crime, and economists that have expanded the canon to consider the findings of criminologists, have written, spoken, and testified about the driving role that control fraud played in the crisis and provided the data and analysis supporting their findings. Mr. Robins appears to be unaware of all of this, as he certainly attempts no refutation of the facts or analysis.