In Past Financial Crises, Fewer Pursued In Courts

News of the investigation of Standard and Poor's is remarkable because the financial mess of 2008 has resulted in so few prosecutions or civil suits compared to past financial disasters. To explain what was different this time, Robert Siegel speaks with William Black, a professor at the University of Missouri - Kansas City. Black was litigation director of the Federal Home Loan Bank Board.

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ROBERT SIEGEL, host: The news that the federal government is investigating Standard & Poor's is remarkable given the very small number of cases of prosecutions or even federal civil suits arising from the collapse of mortgage-backed securities. In past financial crises, when millions were lost, there were trials and convictions that aimed to punish those responsible for fraud and deter others from committing similar fraud in the future. So what's the difference this time?

William Black was litigation director of the Federal Home Loan Bank Board, the board that oversaw the savings and loans, and he became executive director of the Institute For Fraud Prevention and he's now associate professor of economics and law at the University of Missouri, Kansas City. And first, Professor Black, in terms of the volume of cases, are you struck by how few people or firms have been pursued in the courts this time?

WILLIAM BLACK: Yes. The contrast is obscene. There were over a thousand felony convictions in cases designated as major in the savings and loans crisis. There are 10 convictions in this crisis and this crisis is roughly 40 times as bad as the savings and loan crisis.

SIEGEL: In a nutshell, why? Why so few cases this time?

BLACK: The most direct reason is the regulatory agencies became controlled by anti-regulators and they ceased making criminal referrals. In the savings and loan debacle, our agency made well over 10,000 criminal referrals. In this crisis, the office of thrift supervision that was supposed to regulate Washington Mutual, IndyMac, Countrywide, made zero criminal referrals.

SIEGEL: Do they have as many lawyers, investigators, are there as many FBI agents available who could make those cases if they wanted to?

BLACK: No. As a result of the 9/11 attacks, 500 white collar FBI specialists were transferred out of doing white collar cases to doing national security, quite understandable. But what's not understandable is the administration refused to allow the FBI to replace those folks.

SIEGEL: Your field is prosecuting white collar crime. That's what your work has been about. You know, finding a terror cell that might be hiding somewhere in the U.S. is, I can only imagine, extremely labor-intensive work. I assume that investigating mortgage securities fraud is also very labor-intensive work.

BLACK: If you investigate where you should. If you only have 120 agents and you divide them up, which is what actually happened, all you can investigate is trivial cases. To give you an idea of scope, to investigate Enron took 100 FBI agents, which is to say, yes, there are public reports that there's an investigation of Standard & Poor's, but there isn't really because we know what their numbers are and we know that they don't have remotely enough people to conduct even one serious investigation. And we know that the FBI agents are actually being deployed investigating relatively small cases.

SIEGEL: You've cited two big differences between, say, the S&L days and the mortgage-backed security days of recent years. One is the - just the number of staff who are there and the other is the anti-regulators who are running the regulatory bodies. Which was it more, the lack of resources to pursue people or the lack of will to pursue people?

BLACK: It's the lack of will and you always have too few resources as a regulator or as a prosecutor, period. So you have to target the Achilles heels of wherever the frauds were. In the savings and loan crisis, we realized we were dealing with Ponzi schemes, so we restricted growth. If you restrict growth, Ponzi schemes die. In the current crisis, there were about 10 ultra-large, too big to fail banks. You could've investigated two of those, put them out of business and scared the bejezzus out of the others and you could've prevented the problem.

Or you could've looked at just what they're finally supposedly looking at now, and that is Standard & Poor's. There were only three rating agencies. Even with a very limited staff, if they had targeted the three rating agencies for intense investigations, they could've prevented this entire crisis.

SIEGEL: Professor Black, thanks a lot for talking with us.

BLACK: Thank you.

SIEGEL: William Black is associate professor of economics and law at the University of Missouri, Kansas City.

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