Review of Greedy Bastards by Dylan Ratigan

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EDITOR’S COMMENT: Dylan Ratigan has come out with a new book that I think grasps the essence of our economic tragedy — a culture of cheating. I recommend the book and this article reviewing the book, because it will give insight into the core of the moral dilemma facing homeowners who are thinking of walking away or fighting with the bank.

It turns out that the people who follow standards of morality are the homeowners and that the people who don’t and ever did are the Bankers. The only reason why millions of homeowners have not simply stopped paying is because they value their reputation as a credit worthy individuals. But their actions (paying the payments on a loan that has long since been extinguished) are taken as proof that there is some real foundation to the 8.9 million foreclosures completed thus far and a like number that will occur in the near future.

People who still pay on these defunct defective loans are doing so because they feel a moral responsibility to do so and because they believe the balance must be due from them because they are unaware or unsure of the revelations of the money trail between them and the inventors who funded their loan. They figure they must owe the money to someone, so they might as well pay the servicer what is demanded.

What they don’t realize is that they are giving a gift to the servicer and the other securitization players, because their particular loan has already been the subject of multiple payments and receipts based upon the borrower’s signature and the use of exotic instruments that masked the simple fact that the loan was sold multiple times.

What Ratigan has understood since he first gained national prominence is that the actions of the banks were fraudulent and that the pressure on homeowners is neither fair, legal or justified by any real accounting — if a full accounting was ever given. That accounting is a carefully guarded secret protected by stonewalling and settlements under confidentiality. So Ratigan exposes the system that gave rise the culture of cheating and how it worked. 

This is basic knowledge required for you to believe that you are actually right and that the bank is actually wrong. It is a basic paradigm shift that brings to the fore the realization that free houses are going to banks by the millions under the guise of preventing free houses going to the homeowners who purchased those homes.

Dylan Ratigan’s New Book on the Financial Crisis reviewed by William K Black

Dylan Ratigan, MSNBC’s financial expert, has written a book about how markets have become perverse.  It is an interesting example of how strange “competition” has become.  One oddity presented itself on the cover of the package in which the book arrived.  The cover proclaimed “Simon & Schuster: A CBS Company.”  The author works for NBC.  Only in America!

I was concerned by the title (“Greedy Bastards”).  I think that greed is unlikely to have changed greatly over the last quarter century in which the U.S. has suffered three recurrent, intensifying financial crises.  I don’t call people bastards, even the self-made ones, because my mother reacted poorly to Speaker Wright referring to me as the “red-headed SOB.”

Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, but perverse incentives.  When CEOs have incentives adverse to the public and their customers they tend to act on those incentives and harm the public and their customers.  This observation is one of those obvious but essential points so often overlooked.  A CEOs’ principal function is creating, monitoring, and adjusting the corporation’s incentive structures.  There is a massive business literature on this function and CEOs uniformly believe that incentive structures for officers and employees are critical in shaping their behavior.

There is only one (disingenuous) exception to this rule – when officers and employees act criminally because the CEO has created perverse incentive structures.  Suddenly, the CEO is shocked that his officers and employees acted criminally in response to the CEO’s incentive structures that encourage criminal conduct.  Ratigan focuses on precisely this exception.  Anyone that has had the misfortune to listen to compulsory business ethics training by his or her employer will have learned that the key is the “tone at the top” set by the CEO.  True, but that always ends the discussion.  No employee is going to be trained by his employer as to what to do when the tone at the top set by the CEO is pro-fraud.
As Ratigan demonstrates, our most elite financial CEOs typically created and maintained grotesquely perverse incentive structures that encouraged their officers and employees as well as “independent” professionals to act criminally in a manner that harmed customers, the public, and shareholders – but made the controlling officers wealthy.  Is there any CEO of a lender incapable of understanding that the loan officers and brokers’ compensation depends on volume and yield – not quality – the result will be catastrophic?  Is there any CEO of a lender incapable of understanding that if the loan brokers’ fees depend as well on the reported debt-to-income and loan-to-value ratios and the broker is permitted to make liar’s loans the result will be that the brokers will engage in endemic, severe inflation of the borrowers’ incomes and their homes’ appraised values?  Is there any reader that doubts that the CEOs intended to produce precisely what their perverse incentives were certain to produce?  A CEO cannot send a memo to 50,000 loan brokers instructing them to inflate appraisals and use liar’s loans to inflate the borrowers incomes’ but he can, and does, send the same message through his compensation system.  None of these perverse incentives produces an unexpected result.

Ratigan gets right two of the three essentials to understand why we suffer recurrent, intensifying financial crises.  First, cheating has become the dominant strategy in finance.  Second, cheating is dominant because finance CEOs create such intensely perverse incentives that fraud becomes endemic.  The Business Roundtable (the largest100 U.S. corporations), had to react to the Enron era frauds.  It chose as its spokesperson a CEO who embodied the best of American big business.  This was the response he gave to Business Week when their reporter asked why so many top corporations engaged in accounting control fraud:
“Don’t just say: “If you hit this revenue number, your bonus is going to be this.” It sets up an incentive that’s overwhelming. You wave enough money in front of people, and good people will do bad things.”
How did the CEO know about the “overwhelming” effect of creating incentives so perverse that they would routinely cause “good people [to] do bad things”?  He knew because he directed and administered such a perverse compensation system.  An SEC complaint would soon identify that compensation system as driving accounting control fraud at his firm.  His name was Franklin Raines, CEO of Fannie Mae.
Ratigan can add to the effectiveness of his explanation by adding a description of the third essential driving our perverse incentives.  Accounting control fraud, as criminologists, economists, and (competent) financial regulators recognize is a “sure thing”.  See George Akerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy for Profit” (1993).  It produces guaranteed, record (albeit fictional) short-term reported profits if one follows the fraud “recipe” for a lender, which produces guaranteed, extreme compensation for the controlling officers, and causes catastrophic losses.  It is trifecta of guaranteed results that causes CEOs to adopt the perverse incentives they know will cause their officers and employees to follow the fraud recipe.  It is the three “de’s” – deregulation, desupervision, and de facto decriminalization that allow the CEOs to put these perverse incentives in place with impunity and produce the criminogenic environments that drive our recurrent, intensifying financial crises.

~~~

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @WilliamKBlack

Tags: bankruptcy, borrower, countrywide, disclosure, Dylan ratigan, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, Greedy bastards, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
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