The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash → Washingtons Blog
The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash - Washingtons Blog

Thursday, October 15, 2009

The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency.

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a "systematic risk regulator" to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:
"Instead of striving to uncover the truth, [Congress] may seek to conceal it" and tell banksters they're free to steal again.
Economist Thomas Palley says that Wall Street also has a vested interest in covering up how bad things are:

That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.
The media has largely parroted what the White House and Wall Street were saying. As a Pew Research Center study on the coverage of the crisis found:

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and big business, and reflected the voices and ideas of people in institutions more than those of everyday Americans…

Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.

A PEJ content analysis of media coverage of the economy during the first half of 2009 also found that the mainstream press focused on a relatively small number of major story lines, mostly generating from two cities, the country’s political and financial capitals.

A companion analysis of a broader array of media using new “meme tracker” technology developed at Cornell University finds that phrases and ideas that reverberated most in the coverage came early on, mostly from government, particularly from the president and the chairman of the Federal Reserve...

  • Three storylines have dominated: efforts to help revive the banking sector, the battle over the stimulus package and the struggles of the U.S. auto industry. Together they accounted for nearly 40% of the economic coverage from February 1 through August 31. Other topics related to the crisis have been covered much less. As an example, all the reporting of retail sales, food prices, the impact of the crisis on Social Security and Medicare, its effect on education and the implications for health care combined accounted for just over 2% of all the economic coverage.
  • Actions by government officials and business leaders drove much of the coverage. The White House and federal agencies alone initiated nearly a third (32%) of economic stories studied through July 3. Business triggered another 21%. About a quarter of the stories (23%) was initiated by the press itself and did not rely on an external news trigger. Ordinary citizens and union workers combined to act as the catalyst for only 2% of the stories about the economy.
  • Fully 76% of the datelines on economic stories studied during the first five months of the Obama presidency were New York (44%) or metro Washington D.C. (32%). Only about one-fifth (21%) of the stories originated in any other city in the U.S., and about a quarter of those emanated from two other major media centers: Atlanta and Los Angeles.
As I have previously reported, concentration in the mainstream media (along with a number of other dynamics) has severely undermined the credibility of the media.

Why Should We Care?

Why should we care if there has been a cover up?

Well, initially, if there has been activity which is harmful to the economy and may lead to another financial crisis, wouldn't we want to know about it, so that we prevent it from happening again?

The answer is obviously yes.

But if the government, Wall Street, and the media are all in cover-up mode, then independent auditors, financial analysts and economists cannot shine a light into financial practices to find out what really went wrong.

In addition, if we don't know what's really going on, we can't gauge whether the government's economic policies are working. For example, Time Magazine called Tim Geithner a "con man" and the stress tests a "confidence game" because those tests were so inaccurate.

William Black said:
How do you think we did the stress tests? Like doing a stress test on an airplane wing, but you don’t actually have airplane wing. And don’t know what airplane wing is made out of. It’s a farce.
I agree.

Without accurate information, we will not know if we're heading in the right or the wrong direction.


One of the foremost experts on structured finance and derivatives - Janet Tavakoli - says that rampant fraud and Ponzi schemes caused the financial crisis.

University of Texas economics professor James K. Galbraith agrees:

You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.
Congress woman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this).

According to economist Max Wolff:

The securitization process worked by "packag(ing), sell(ing), repack(aging) and resell(ing) mortages making what was a small housing bubble, a gigantic (one) and making what became an American financial problem very much a global" one by selling mortgage bundles worldwide "without full disclosure of the lack of underlying assets or risks."

Buyers accepted them on good faith, failed in their due diligence, and rating agencies were negligent, even criminal, in overvaluing and endorsing junk assets that they knew were high-risk or toxic. "The whole process was corrupt at its core."

Elizabeth Warren suspects fraud as the cause of the crisis.

William Black says that massive fraud by is what caused the economic crisis. Specifically, he says that companies, auditors, rating agencies and regulators all committed fraud which helped blow the bubble and sowed the seeds of the inevitable crash. And see this.

Indeed, as I have previously noted, the giant ratings agencies have a culture of covering up improper ratings (and they essentially took bribes for giving higher ratings).

Black also notes:

  • Everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors
  • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an "epidemic" of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this
  • "Accounting is the weapon of choice in the financial sphere", with the top executives involved in these fraudulent schemes vacuuming out huge profits for themselves and select insiders, and having auditors rubber stamp what's being done
  • In November 2007, one rating agency - Fitch's - dared to take a look at some loan files. Fitch concluded that there was the appearance of fraud in nearly every file reviewed
Black and economist Simon Johnson also state that the banks committed fraud by making loans to people that they knew would default, to make huge profits during the boom, knowing that the taxpayers would bail them out when things went bust.

See also this, this and this.

The Economy Won't Recover Until We Prosecute

So there was a little fraud, no big deal, right?

Wouldn't looking backwards at fraudulent conduct be distracting for the people, the government, and the economy? Shouldn't we look forward so we can recover?


Specifically, t
he Wharton School of Business has written an essay stating that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable.

The Wharton paper states:
The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again...
Economist James Galbraith agrees. For more on the importance of trust in the economy, see this.

The stakes are high. As Pam Martens, who worked on Wall Street for 21 years, writes:
The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...

It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.


  1. Great Post again, Washington

    I am not sure if it is a cover up or just stupid denial as they really think they are on top of the situation and can bring back the good times of cheap money.

    Your opinion?

  2. "In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy."

    Justice Louis Brandeis

  3. You know it is all well and good to remain so nice about this... But the bottom line is that a true "Boston tea party" would solve the dishonest arrogant behavior of the corrupt hierarchy we buy into (as a nation)! These people think we are foder for their fraudulent financial gains. It is time for heads on a line of posts!!!!!

  4. I guess you won't approve the truth... I guess ruining us all financially doesn't warrant action! F--- then all... All we do as americans is work our asses off so the egoed elite can profit... To hell with this selling out!

  5. Actually from everything I read, we were already in a bubble housing wise in the 90's. Historically speaking, we already had a pretty big bubble then. What happened during the Bush admin is just that we went from a housing bubble near records, to catastrophically greater than any housing bubble we've ever seen.

    It's the system that is broke. The weakest link was the housing market. This whole thing is just a SYMPTOM of a much larger problem called derivatives.

    1.4 quadrillion in derivatives (that's 1,400 trillion dollars)

    Guess what wall street and now the Obama want to do.....make more derivatives.

    How? Cap and Trade

    All cap and trade is, is ANOTHER derivative vehicle.

    We need to OUTLAW ALL DERIVATIVES, not destroy our industry for another derivative market.

    Again the problem is the SYSETEM iteslef. IT's getting destroyed by derivatives. Because of derivatives, the money was there to fill the housing bubble.

    WHere did the money come from? Derivatives.

    It's never been about the housing situation. (oh for regular people, yes it has)

    But the macro situation, is that the housing problem was caused by the derivatives mess, fed by too big to fail, who are at it again, and want to expand derivatives. Meanwhile to support the derivatives from busting (and then someone loses up to 1.4 quadrillion), we must sell everything off, close down whatever business or factory to keep the numbers going.

    That's what we're facing.

    We haven't gotten out of this thing, instead of having one foot in the grave, we have two, and we're digging the grave deeper.

    The problem is the "MONETARY SYSTEM" and derivatives.

    Everyone thought Obama was the next FDR, and I was hoping.

    What it really seems like is that he's Herbert Hoover.

    At this point, I'm 99 percent certain I'm voting for another democrat. Unless we do some very needed things, which at this point I'll leave for another discussion.

  6. What deserves mentioning in that context is the
    famous video with Peter Schiff and the other
    financial experts in 06 / 07, at the height of
    the media frenzy. It provides a really unique
    insight by simply looking back what was said.
    It is considered awesome with good reason. The
    viewer can instantly figure out how things worked out, including the often underestimated dominant role of the experts/ pundits and media.


  8. Opt out! I see people on TV complaining because the credit card company raised their rate to 30% but they don't cancel their card or close the account. I see others getting hit with this new debit card overdraft fee of $30+ dollars and hoo, but they don't change banks. Dump that bank and go to a local credit union. Vote with your wallet, drop the damn plastic, close that scam bank account, don't participate with one dollar if it's not the right thing to do, use alternatives. Stock market down? Great shut up and buy gold to protect yourself.

    Can't afford the car payments? Take the bus. House payment too expensive? Rent an apartment. Stop complaining...oh, oh the evil world and make changes on a personal level that get YOUR life under control. Opt out of the system that rips you off each day, don't participate, find alternatives. I hate banks, I use digital currency, I've stop complaining and made the change.

  9. Don't destroy the derivatives market.

    Regulate it and tax it.

    12.5% of 14 Quadrillion is a lot to play with to help fix the economy, not just of America, but the world.

  10. In hindsight, the Lehman frauds were well engineered for their purpose; the idea, apparently, never lost on attorneys, is that positioning is everything.

    If you can scam one person in that manner, why not the entire market, and force the bailout for really big payoffs?

    It is much like the interest upon interest scams that commercial lenders do so well; the fact that it drifts into mortgage housing or school loans is not surprising.

    The underlying error, if any, is the fact that regulators are willing to look the other way on scrutiny of security interests in order to anticipate the really big payoffs, ....the fox leading the hens to the henhouse until ready for slaughter, and sharing.


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