Law Commons^™

Testimony Before The Financial Crisis Inquiry Commission, Miami, Florida September 21, 2010, William K. Black

Faculty Works

"Control frauds" are seemingly legitimate entities controlled by persons that use them as a fraud "weapon." (The person that controls the firm is typically the CEO, so that term is used in this testimony.) A single control fraud can cause greater losses than all other forms of property crime combined. Neo-classical economic theory, methodology, and praxis combine to optimize criminogenic environments that hyper-inflate financial bubbles and produce recurrent, intensifying financial crises. A criminogenic environment is one that creates such perverse incentives that it leads to widespread crime. Financial control frauds’ "weapon of choice" is accounting. Neoclassical theory, which dominates law …

A Tale Of Two Crises, William K. Black

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The savings and loan debacle of the 1980s was the worst financial scandal in U.S. history. The estimated present value cost to the taxpayers was $150-175 billion ($1993). The debacle was a major contributor to a sharp recession in real estate values in the Southwest. However, it had only a negligible effect on the general economy.

The Japanese economy, the second largest in the world, also experienced a crisis in the 1980s. Twin “bubbles” in its stock and real estate markets hyper inflated for most of the decade of the 1980s. In general, the bigger the bubble, the worse the …

Successful Financial Regulators Think Like Public Health Experts: Why Regulators Must Fight 'Control Fraud' Like Public Health Specialists, William K. Black

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“Control fraud” is the leading cause of bank failures and financial crises. In “control fraud” the persons controlling a seemingly legitimate entity use it as a weapon to defraud. This essay analyzes the role of regulators in two epidemics of control fraud: the savings & loan debacle of the 1980s and the ongoing financial crises that first became acute in the nonprime mortgage sector.

Effective regulation is essential to prevent and contain such epidemics. An epidemic is the natural outcome of a “pathogenic environment” which requires a reservoir of hosts for the pathogens to infect, and “vectors” to spread the …

How Trust Is Abused In Free Markets: Enron’S 'Crooked 'E’', William K. Black

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A market can have a lemon's problem when one party to the transaction has far superior information to the other and defects are not obvious. The classic bad car, the "lemon" led to the name for this theory. A lemon's market is inefficient. Both consumers and reputable sellers of high quality goods are harmed by the consumer's inability to distinguish superior goods. Frauds, who sell poor quality goods by misrepresenting quality are the only winners. Markets beset by lemon's problems may be improved by government intervention, which can aid both consumers and honest sellers.

In his article "How Trust is …

Echo Epidemics: Control Frauds Generate White-Collar Street Crime Waves, William K. Black

Faculty Works

“Control fraud” drove the crisis. Control fraud occurs when those that control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” Regulators, criminologists, and criminologists have documented the pervasive role of control fraud in causing the second phase of the S&L debacle. That crisis was followed by the accounting control frauds of Enron and its ilk.

Top economists, criminologists, and the S&L regulators agreed that lenders engaged in accounting control fraud optimize through a four-part recipe that is a “sure thing” – it produces guaranteed, record (fictional) near-term profits and …