Sunday, June 06, 2010

How To Convert Company Assets Into Personal Wealth

"A control fraud is a company run by a criminal who uses it as a weapon and shield to defraud others and makes it difficult to detect and punish the fraud." This concept and quote came from the book by William K. Black entitled The Best Way To Rob A Bank Is To Own One, How Corporate Executives and Politicians Looted the S&L Industry published by University of Texas Press in 2005.

Mr. Black worked as a bank regulator for the Federal Home Loan Bank during the period of the Savings and Loan Crisis during the 1980's and 1990's. He helped root out the crimes of S&L executives of which Charles Keating was most notorious. Throughout the book he describes how white-collar crime works at the executive level in banks and companies. Unscrupulous or greedy company executives with the help of politicians loot companies by converting company assets into personal wealth. They do this through stock options, political donations, and numerous perks for executives. Politicians help set the rules and weaken government oversight to allow looting to take place. Jim Wright, U.S. Congressman of Texas was one of the most difficult politicians to roadblock government action against control fraud in savings and loans banks in Texas.

Here is an example of how government regulators became weak. Ronald Reagan ran for the presidency on the platform that government was "too big" and "the problem". When elected, President Reagan appointed department heads that managed as if their departments were "the problem" not the businesses they regulated. Staffs were slashed and bank audits made infrequent. When audits turned up questionable practices, politicians stepped in to fight the auditors. Black said, "It is a self-fulfilling prophecy that government will be ineffective if one designs it to be ineffective. The systems-capacity problems of the SEC and the Bank Board are parallel. Both were forbidden to pay salaries competitive with those offered by the banking regulatory agencies (much less private firms). Both experienced rapid turnover and had to staff key operations with inexperienced personnel."

Mr. Black pointed out, "that for many years no public accounting audit firm exposed any S&L control fraud." In other words, there was a crisis in the industry and no public accounting firm gave any signs or warnings.

Black wrote, "One advantage that white-collar criminals have over blue-collar criminals is the ability to use top lawyers, not only at trial but also before criminal investigations begin. Control frauds maximize this advantage by paying for the lawyers who help the controlling insider loot the firm." Of course the lawyers are paid with company funds.

In addition to reading his book, I watched Mr. Black's interview with Bill Moyers on Bill Moyers' Journal. You can see the interview here. Not much has changed with regulations to prevent fraud since the S&L Crisis.

Black is currently Associate Professor of Economics and Law at the University of Missouri-Kansas City School of Law.

Have a good Week!



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