Have you ever wondered how to rob a bank? William K. Black’s “Ted Talk” on How to rob a bank – from the inside has over 1.5 million views and highlights how “liar’s loans” defrauded the economy causing the last mortgage crisis. Bill recognizes how the lack of appraisal independence was instrumental in the ultimate downfall.
William K. Black, former bank regulator and expert on mortgage finance and regulation is speaking at Valuation Expo on our Appraisal Policy and Procedures panel. His focus will be on what NOT to do.
Buzz: “How to Rob a Bank from the Inside” really unveils many financial hot topics, how did you first recognize there was a problem?
Bill: I realized in 1984 that frauds led by savings and loan CEOs caused vastly greater losses than any other cause of failure. We “autopsied” every failure beginning in mid-1984 to look for patterns to what was driving the crisis. The autopsy identified that the problem was fraud, the CEOs led the frauds, and accounting was their “weapon of choice.” We also learned that suborning appraisers to overstate the value of the collateral was central to the fraud scheme and the many scams for hiding real losses. The CEOs were in a unique position to implement the fraud recipe, to create a Gresham’s dynamic in order to suborn purported controls, to suborn prominent politicians and to institute the scam cover-ups of bad assets.
Two related insights sprang from the autopsies. First being the key to making the fraud recipe work was making bad loans – and that required ruining underwriting. Second, that ruining the underwriting created “adverse selection” which means the lending portfolio would have a “negative expected value” (in plain English, the bank would lose money) – but the CEO would make out like a bandit due to modern executive compensation. The fraud recipe created a series of “tells” that would allow us to recognize the frauds while they were still reporting record profits.
Many of the S&Ls followed almost exactly the same operational pattern, and that was because it was the optimal fraud scheme. It was a “sure thing.” Through our discoveries, we learned that if a material number of S&Ls followed the same pattern in the same municipal area the result would be a bubble in commercial real estate (CRE). CRE (particularly acquisition, development, and construction) loans that drove the S&L debacle. It is much easier to drive a CRE bubble than a residential real estate bubble because the projects are so much larger and the lenders need to identify only a small number of bad developers to be their loan recipients. It is easier to keep a CRE bubble expanding because new loans to bad early borrowers can keep them running for many years.
Buzz: Any advice on what an appraiser should do if they feel their independence has been violated?
Bill: Document it. If you are a member of an effective association, inform them immediately. If you are not a member of an effective association that will back you – join one.
Buzz: Do you believe that revised Interagency Evaluation & Appraisal Guidelines or Dodd Frank has “fixed” appraisal problems?
Bill: No. Parts of it made problems worse by encouraging appraisal corporations with monopsony powers, severe conflicts of interest, and poor track records.
Buzz: I don’t want to give too much away, but why should Appraisers attend your session at Valuation Expo during Appraisal Policy and Procedures on March 21st?
Bill: I don’t pull punches. I’m not a new recruit to the cause.
Buzz: Thank you for taking the time to talk with us. We are excited to see you at Valuation Expo. For those who have not registered yet, there is still time! Register here and attend the conference of the year for valuation professionals.
William “Bill” Kurt Black is an American lawyer, academic, author, and a former bank regulator. Black’s expertise is in white-collar crime, public finance, regulation, and other topics in law and economics.
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