Simon Johnson Confirms William K. Black's Explanation of Fraud, Boom and Bust → Washingtons Blog
Simon Johnson Confirms William K. Black's Explanation of Fraud, Boom and Bust - Washingtons Blog

Sunday, October 11, 2009

Simon Johnson Confirms William K. Black's Explanation of Fraud, Boom and Bust

In a new interview with Bill Moyers, Simon Johnson confirmed what William K. Black has said about fraud by the financial sector, booms and busts.

As I previously wrote:

Black explained that fraud by a financial company usually involves the company:

1) Growing like crazy
2) Making loans to people who are uncreditworthy, because they’ll agree they’ll pay you more, and that’s how you grow rapidly. You can grow really fast if you loan to people who can’t you pay you back
3) The use of extreme leverage.
This combination guarantees stratospheric initial profits during the expansion phase of the bubble.

But it guarantees a catastrophic subsequent failure when the bubble loses steam.

And collectively - if a lot of companies are playing this game - it produces extraordinary losses (more than all other forms of property crime combined), and a crash.

In other words, the companies intentionally make loans to people who will not be able to repay them, because - during an expanding bubble phase - they'll make huge sums of money. The top executives of these companies will make massive salaries and bonuses during the bubble (enough to live like kings even even if the companies go belly up after the bubble phase).

Johnson confirmed that a high housing default rate was part of the banks' models. The financial giants knew they would make huge sums during the boom, and then transfer their losses to the American people during the bust.

Johnson and Moyers also pointed out that the American people are still paying off the S&L bailouts. Specifically, the last payment of the $140 billion dollar bailout will be made in 2013.

And Johnson provided interesting information regarding Goldman Sachs. As everyone knows, Goldman switched to a bank holding company in September, to have access to funds from the Fed at essentially zero percent interest.

But Johnson noted that in August of 2009, Goldman switched again - to a "financial holding company".

What's the difference?

Johnson says that being a financial holding company means that Goldman can borrow money from the Fed at essentially no cost, and then invest it in any thing it wants. For example, Johnson says that Goldman has bought a large share of the stock of a Chinese automaker. If the investment succeeds, Goldman will reap the profits. If it fails, the taxpayers are on the hook.


  1. Hello. Despite being Canadian I must admit that I'm quite interested in the economical situation in the US which is, in my opinion, alarming. I think that the primary problem is the housing "bubble" itself. We should be really more careful before we decide to take another loan because these loans in particular lead us to debts. So should be even the US government which is spending enourmous amounds of money on bills such as the first time homebuyer credit.
    All the best,

  2. Johnson is blowing smoke. If goldman went broke the fed would bite the bullet. The problem I have with Goldman is the extent of what they are making going to the management. It will be the shareholders and the government that will be holding the bag if they go broke. A company earning that amount of distributable fees is not only engaged in something marginally legal, but highly risky. I could buy a vesting bonus that vests over 5 years, but the idea management is taking this much out of a company that has a high degree of likelihood to go broke doesn't sit well with me and shouldn't with those that own stock in GS as well. The repurchase of stock by many of these outfits so their managment would have demand to sell into. Citi, BAC and many others ended up wiping out shareholders when they had to make bad deals to replace the money they so easily threw out in the streets. Their profits and cash flow were illusions. American management makes such poor decisions in their favor that I am shocked anyone would consider stocks being an investment in anything other than a lotto ticket.

  3. Julie,the problem in the US is the same as the rest of the world, a debt bubble. US housing floated the rest of the world out of near depression in the 1990's. You might check out the recent FHA report by Pinto, which has reports concerning defaults of the 1990's and into the early 2000's. It has dawned on me we have been deflating for awhile as debt has been above depression triggers for some time. The big problem to recent date has been Japan was deflating, but Japan was too big to inflate along with the rest of the world and the US/Japan trade was already inflating Japan to near maximum potential. Plus, Japan already had used up its home equity in a bubble.

    The US was able to bring down interest rates and use the decline in house payments to launch a consumer spending spree along with its own housing bubble. What transpired in Japan before the peak of its housing bubble was a 100 year mortgage, most likely at a very low interest rate. If you understand amortization then you understand that the lower the interest rate, the more concerned the payment is with the principal and the less of the payment is interest. Thus a 4% mortgage for 100 years is not a lot less than the Principal divided by 300 plus the principal divided by the number of payments. At 10% the payment is the interest.

    Don't kid yourself, this is worldwide and the ability of the US to manufacture debt floated the world economy. The lack of capacity will show up in increasing force as we go forward.


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