The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the...

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry, by William K. Black. Austin, Texas: University of Texas Press. 2005. Cloth, ISBN 0292706383, $24.95. 286 pages.

William K. Black served in several capacities as a senior regulator

during and after the meltdown of the savings and loan (S&L) industry during the 1980s. A lawyer and litigator, he then earned a Ph.D. in criminology before taking up a position teaching public policy at the University of Texas. In short, Black is an exceptionally well-informed insider with a strong academic background-the perfect authority on the subject. The consequence is a book that is both unique and highly informative.

An important element of Black's book is its summary, at times highly detailed, of his experiences as a senior regulator and litigator trying to reign in an enormous wave of fraudulent S&Ls. Beyond fascinating details of bureaucratic and political infighting, he also presents several broad lessons concerning the complexity of the regulatory process. Specifically he makes us consider the extent to which this process is shaped by the ideologies and personal agendas of the m?lange of persons, some qualified and others less so, that make up the senior staff of an important regulatory agency (a lesson, tragically, that we were unable to absorb prior to the recent New Orleans hurricane). Black names names as he recounts some of die critical bureaucratic debates and struggles that occurred around critical decisions taken, or not taken, as the crisis unfolded. He makes it clear that several, at times flatly indefensible, decisions were taken that greatly facilitated the ends of institutions and individuals who were, and were known to be, fraudulent. Sadly, these decisions enabled many S&Ls, including that of the notorious Charles Keating, to remain open long after it was obvious that they were frauds, hopelessly insolvent, and continuing to hemorrhage the money of the government and private investors.

The history and experiences presented in this book are, on their own, most worthy of reading and contemplation. Just to give a single example, Black reminds the reader that from the beginning to the end of this episode not a single outside auditor reported fraudulent banking practices to the authorities. Many prominent assessors, accountants, and lawyers were participants, accessories, or facilitators of fraud. It follows that many individuals were, at a minimum, in gross violation of their duties as fiduciaries, professionals, or members of the bar. During the 1980s many firms and professionals learned that assisting in the conduct of financial fraud not only pays but pays well. The failure, beyond a few exceptional cases, to punish their behavior would haunt the nation during the rampant financial fraud of the 1990s.

Black's own experiences as a regulator serve as a springboard with which to present a provocative and compelling academic commentary on the economics of fraud. As the director of the Institute for Fraud Studies at the University of Texas, he argues for bringing the category of fraud closer to the mainstream of teaching and research in economics, accounting, and other fields. In discussing the economics of fraud he makes several observations, and draws several important conclusions, of which two most stand out for comment.

The first of these is that what he terms "control fraud" is distinct from, and therefore more complex than, a routine "principal-agent" problem. The reason is that "[clontrol frauds do not simply defeat internal and external controls such as outside auditors." Rather, "(t]hey pervert intended controls into allies" (p. 250). Black argues that control frauds, as distinct from "agents" more generally, are able to monitor, modify, and thereby influence the environment within which they conduct their activities. By implication simply tightening corporate governance procedures, or passing better laws, may be an inadequate check on individuals with the economic and political power to undermine or otherwise compromise the rules.

The second of Black's more momentous conclusions is that deposit insurance was not essential to the S&.L debacle. To make this argument he observes that during the S&.L crisis private insurers were also defrauded and that fraudulent thrifts were able to sell hundreds of millions of dollars of uninsured junk bonds into the markets-often to "sophisticated" investors. Moreover, many of the most important frauds were owned by outside shareholders. Black reminds those who continue to believe that a free market is effective in controlling fraud that "[i]n no case did sub(ordinated) debt holders exercise effective discipline over an S&.L. Indeed, I do not recall any case in which they even attempted to impose discipline" (p. 255). This conclusion is both forceful and remarkable. Its importance is compounded by his observation that "[tjhere are virtually no cases in which an S&L board of directors caused any known difficulty for a control fraud" (p. 266).

Sadly, Black's controversial contentions have been affirmed by the rampant fraud of the 1990s. Managers of mutual funds, pension funds, college endowments, and many other sophisticated investors bought and held uninsured assets issued by Enron, Worldcom, HealthSouth, and many other dubious and fraudulent enterprises. These events affirm Black's argument that fraud is an economic activity worthy of sustained research by economists. Persons interested in the economics of fraud, the S&L debacle, the problems of financial regulation, and microeconomics more broadly will find this book to be very important. It is a marvelous combination of insider experiences, well-grounded generalizations, and the foundations of a broader research agenda. It merits a wide readership and, one hopes, sustained reflection on its arguments and conclusions.