Bill Black on Bank Fraud: The Wall Street Journal’s Choleric Rant about Cholera and Bank Fraud Epidemics

By Bill Black, 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. Originally published at New Economic Perspectives

I wrote this column in Bogota, Colombia where I was presenting five talks at the Universidad Central’s economics conference, so I was struck by the title of a choleric rant by the Wall Street Journal entitled “Banking in a Time of Cholera.”

The WSJ’s title is a play on words on the title of a novel, “Love in the Time of Cholera,” by Colombia’s greatest writer, Gabriel García Márquez (“Gabo”). The novel is set in a city that appears to be based on Cartagena, the city famous for being looted repeatedly by pirates. In this first of several columns responding to the WSJ rant I discuss its failed literary allusions and tie these failures to some of the WSJ’s analytical and factual errors that render their rant risible.

The WSJ’s Illiterate Literary Allusion to Gabo’s Novel

Among its lesser oddities, the WSJ rant never mentions Gabo’s novel or its themes or setting and instead refers to the movie “King Kong.” The anonymous WSJ writer was unable to find any parallels between the subject of the rant, the Obama administration’s purported perfidy in settling charges against Bank of America (BoA), and a novel about the nature of love that would support the writer’s rant.

Given the anonymous writer’s inability to draw any parallels to Gabo’s novel I suggest a rewrite using Albert Camus’ “The Plague.” The parallels to be drawn between Camus’ themes and the mortgage fraud epidemics that caused the financial crisis are striking.

The WSJ Eschews the Merger/Marriage Metaphor

The WSJ writer could have drawn on Gabo’s novel by arguing that BoA’s merger with Countrywide resembled the marriage of Fermina Daza (BofA) and Dr. Juvenal Urbino (Countrywide) and that BoA’s subsequent merger with Merrill Lynch somehow resembles Fermina’s relationship with Florentino Ariza before her marriage to Urbino and after his death. Urbino (Countrywide) appears to be the perfect mate, but he cheats on Fermina (BoA). Florentino (Merrill Lynch), Fermina’s more passionate lover, is repeatedly unfaithful to her. In Gabo’s novel, however, Fermina’s father (the U.S. government) despises Florentino (Merrill Lynch) and forces her (BoA) to break up with him. Her father then urges Fermina to marry Urbino. She is initially hostile to the idea, but she eventually decides to marry Urbino (Countrywide). Sadly for the WSJ’s rant, each of these possible parallels to Gabo’s novel contradicts the WSJ’s rant against the government. That is why the rant appropriates the title of Gabo’s novel but ignores the (double) meaning of his title and the book’s contents.

The proverbial bottom line is that the WSJ chose a title in which “cholera” is the most prominent word but refused to explore how the three mortgage fraud epidemics that drove the crisis were analogous to an epidemic of cholera. Cholera (and its financial analog) is excluded from consideration by the author of the WSJ rant.

Cholera is a Useful Metaphor for the Financial Fraud Epidemics that Drove the Crisis

The other obvious metaphor to Gabo’s novel that the WSJ could have explored was cholera as a metaphor for the financial crisis. As criminologists we stress that epidemics of crime occur when a “criminogenic environment” is created. Cholera epidemics are produced by “pathogenic environments” that encourage the creation of large amounts of pathogens that become epidemic in human population when they are transmitted broadly through “vectors.” Contaminated sewage and water systems are the leading vectors for cholera.

In this metaphorical possibility, Urbino would be Attorney General Eric Holder. Dr. Urbino became famous by dedicating his life to using “drastic methods” to save his city from the epidemics of cholera that killed one-quarter of his province’s urban population in less than three months, including his father. The WSJ rant does (hilariously) portray Holder as the zealous scourge of elite bank fraud. Unlike Holder, who is still batting .000 against the elite banksters who led the three mortgage fraud epidemics that caused the financial crisis, Urbino succeeds in defeating the cholera epidemic. The lesson is that emergency governmental action, based on policy advice from the scientists whose expertise is in pathogens, is essential to stop an epidemic from spreading and that the action must target the vectors that are producing a pathogenic environment. Gabo understood this. He described what Dr. Urbino did to prevent epidemics of cholera.

“He organized the construction of the first aqueduct, the first sewer system, and the covered public market that permitted filth to be cleaned out of Las Animas Bay.”

It’s what we all teach in developmental economics – start by ensuring effective water and sewage systems. The WSJ, of course, will never advance that metaphor when discussing epidemics of fraud in which the vectors are bank controlled by elite banksters. The metaphor would call for the regulators to base their policies on the basis of scientific guidance from those with expertise in spotting and countering criminogenic governments – white-collar criminologists. The WSJ will never propose that metaphor unless Murdoch has a “Road to Damascus” transformation.

The timing of the cholera metaphor also doesn’t work, because the WSJ is attempting to blame Holder, who Obama appointed as his Attorney General in 2009. This was after the fraud epidemics that drove the financial crisis had burned out because they destroyed the global economy in 2008. In 2008, the folks in charge were President Bush, Attorney General Michael Mukasey, and Treasury Secretary Hank Paulson. Mukasey makes Holder look almost competent against mortgage fraud. Mukasey infamously rejected the FBI’s urgent pleas to create a national task force against mortgage fraud that would prioritize the elite frauds for prosecution. Mukasey’s “logic” was that the mortgage frauds that AUSAs were prosecuting as late as June 2008 were the equivalent of “white-collar street crimes.”

Mukasey was correct, of course, but he neglected to factor into his “logic” the fact that he had created a system that ignored elite financial fraud, made meaningful case prioritization impossible, and led FBI agents to investigate exclusively the fraud “mice” while the “lions roamed the campsite” and feasted on our Nation with impunity.

The WSJ wants to blame Obama for the high crime of coming too close to enforcing the criminal laws against the elite banksters. One can see again why the WSJ rant ignores the contents of Gabo’s book.

Camus’ “The Plague” Makes the Best Literary Metaphor for Bank Fraud Epidemics

The most applicable literary medical metaphor would have been to Camus’ work entitled “The Plague.” Unlike the governmental officials who, on an emergency basis, implemented Dr. Urbino’s expert policy advice to remove the pathogenic environment that created the vectors that made cholera epidemic in the city, the feckless French administrators Camus describes did not take the emergency actions necessary to deal with the vectors spreading the plague. Similarly, the Clinton and Bush administrations’ anti-regulators refused to regulate, supervise, and prosecute – or even declare an emergency – until after the three fraud epidemics became a global pandemic that crushed the global financial system and burnt out.

Mad, Blind or a Coward to Resign Yourself to the Plague

Camus uses the setting of the plague to cause the reader to consider the nature of what it means to display moral courage. His primary character, Dr. Rieux is one of the leaders in the effort to get the city’s government to contain the plague. He explains that “when you see the suffering it brings you have to be mad, blind or a coward to resign yourself to the plague.” The WSJ managed to hit and maintain that trifecta of moral cowardice not only in the expansion phase of the crisis but six years after the its most acute phase as it actively, if ineptly, shills for the banksters. The WSJ opposed even the feeble efforts by the Bush administration to warn the banks that their underwriting and lending practices could cause large losses to the banks.

Camus speaks to the reader through Tarrou: “All I say is that on this earth there are pestilences and there are victims — and as far as possible one must refuse to be on the side of the pestilence.” The fully Murdoched WSJ is a fraud vector that is proud to pander to and propagate plutocratic pestilence. The rant’s apology for elite banksters is literally “on the side of the pestilence.”

Practical Advice for Regulators from a Novelist

Camus offers practical insights into two vital aspects of what it takes to stop an incipient plague. Dr. Rieux remarks: “Perhaps we should make up our minds to call this disease by its proper name.” (I have long stressed that economists have a primitive tribal taboo against uttering the “f” word – fraud.) Tarrou later concludes “that all the misfortunes of mankind came from not stating things in clear terms.”

Dr. Rieux later urges that because the disease organism kills so quickly and is so infectious it is essential that they stop following business as usual and “rush” to contain the disease before it becomes epidemic. He warns that 100,000 lives hang in the balance.

As with the WSJ’s austerity nostrums and ads for gold, Camus wrote with disdain of the “Courier of the Epidemic” that promised objectivity but instead engaged almost exclusively in “publishing advertisements for new products which were infallible in protecting against plague.”

“Temporary Victories” among “Endless Defeat”

Camus also made the point that criminologists and competent regulators often seek to make. War metaphors typically lead to grave error in our fields. Fraud cannot be defeated in a decisive battle – preventing fraud epidemics requires avoiding criminogenic environments and that requires continuous vigilance. Camus made this point in discussing the plague.

“[Rieux] knew that… the plague bacillus never dies or vanishes entirely … it can remain dormant for dozens of years in furniture or clothing … it waits patiently in bedrooms, cellars, trunks, handkerchiefs and old papers, and… perhaps the day will come when, for the instruction or misfortune of mankind, the plague will rouse its rats and send them to die in some well-contented city.”

Camus provides an extended discussion of the hopelessness of the struggle against pestilence – and the need to continue that struggle and inhumanity of those who seek to justify the suffering caused by the plague as, to adopt Schumpeter’s phrase, “creative destruction.” The setting for the discussion is a dialogue between Rieux and Tarrou about Father Paneloux’s, the scholarly priest’s, sermons claiming that the plague is a necessary act of God. Dr. Rieux’s explanation to Tarrou of Paneloux’s reasoning is as applicable to theoclassical economists as it was to a learned priest. Rieux stresses the need not to rely on faith-based dogmas like those of Paneloux that no one who cares for the victims of pestilence would ever utter.

“‘Paneloux is a scholar. He has not seen enough people die and that is why he speaks in the name of eternal truths. But the least little country priest who administers to his parishioners and who has heard the breath of a dying man thinks as I do. He would treat suffering, not try to demonstrate what a fine thing it is.’

[S]ince the order of the world is governed by death, perhaps it is better for God that we should not believe in Him and struggle with all our strength against death, without raising our eyes to heaven and to His silence.’

‘Yes,’ Tarrou agreed, ‘I can understand. But your victories will always be temporary, that’s all.’

A cloud seemed to pass over Rieux’s face.

‘Always, I know that. But that is not a reason to give up the struggle.’

‘No, it’s not a reason. But in that case I can imagine what this plague must mean to you.’

‘Yes,’ said Rieux. ‘An endless defeat.’

Tarrou stared at the doctor for a moment, then got up and walked stiffly towards the door. Rieux followed. He was about to catch him up when Tarrou, who seemed to be staring at his feet, said:

‘Who taught you all that, doctor?’

The reply was instantaneous.

‘Suffering.’

‘Come now, Tarrou,’ he said. ‘What makes you want to get involved in all this?’

‘I don’t know. My sense of morality, perhaps?’

‘What morality?’

‘Understanding.’”

Camus Channels Churchill: Never Give In

Real regulators feel and understand the suffering of the victims. They refuse “to give up the struggle” even when a fraud epidemic is raging and each new day brings the latest in a succession of “endless defeat[s].”

Camus returns to this theme. Everyone who seeks to protect the public eventually learns this truth if they make that struggle their life’s work. Dr. Rieux explains.

“[T]his whole thing is not about heroism. It’s about decency. It may seem a ridiculous idea, but the only way to fight the plague is with decency.’

‘What is decency?’ Rambert asked, suddenly serious.

‘In general, I can’t say, but in my case I know that it consists in doing my job.’”

That’s what we did as competent regulators. Our approach is exemplified by the motto ascribed (probably incorrectly, according to historians) to the House of Orange in its seemingly endless and hopeless 100 year struggle for independence from Spain: “It is not necessary to hope in order to persevere.”

As competent financial regulators, we know that we face recurrent defeats, not because “government” or “regulation” inherently fails, but because stopping sophisticated, powerful frauds is inherently exceptionally difficult. There are so few of us trying to counter so many powerful elites and their political and media cronies and the financial plagues can grow so large that we soon come to understand the truth of these words by Tarrou to Dr. Rieux. It is a terrible thing when the general public trusts fraudulent and rigged “markets.” Their trust makes them “marks” ready to be fleeced by the fraudsters. For the general public to appropriately trust the financial “markets” it is essential that the regulators maintain a professional skepticism and not “trust” seemingly respectable firms and their elite CEOs.

“What is natural is the microbe. The rest — health, integrity, purity, if you like — are an effect of will and a will that must never relax. The decent man, the one who doesn’t infect anybody, is the one who concentrates most. And you need will-power and nervous tension not to let your mind wander! Yes indeed, Rieux, it is very tiring to be a plague victim. But it is still more tiring not to want to be one.”

Competent regulators are modest for the reasons that Tarrou explains in a passage I partially quoted above. Amidst all the complexity the truth is that we have a simple mission and if we remember and honor that mission we will serve our Nation well.

“But now I accept being what I am, I have learned modesty. All I say is that on this earth there are pestilences and there are victims — and as far as possible one must refuse to be on the side of the pestilence. This may seem rather simple to you, and I don’t know if it is simple, but I do know that it is true.”

Camus’ acute understanding of humans shows in Tarrou’s admonition to those who devote their lives to struggling against pestilence.

“Of course a man should fight for the victims. But if he ceases to love anything else, then what is the point in fighting?”

For me, that meant family (and soccer).

But these Regulatory Weaknesses Pale Compared to “Free Financial Markets”

The perverted financial markets (briefly) end particular forms of fraud when the markets fail catastrophically and must be saved by government. Regulators during the S&L era, excluding Danny Wall and his wrecking crew, had a vastly better record against the elite frauds than did “markets” that rewarded and funded those frauds.

The appointed financial regulatory leaders of the last three administrations have, with rare exceptions that can literally be counted with the fingers of one hand, redefined “doing my job” to mean “not doing my job” against elite frauds. Instead, they genuflect to Potemkin “markets” perverted by those frauds. Again, with a handful of exceptions, they were selected to emasculate effective regulation, supervision, and prosecution.

But here’s the kicker – Bush’s anti-regulators’ warnings proved far superior to the manipulated markets’ sycophantic touting of the fraudulent lenders and the feeding frenzy to knowingly purchase fraudulent mortgage loans. When even Bush’s wrecking crew greatly outperforms the market the conclusion isn’t that regulation has failed, but that we need a new foundational hypothesis for modern finance – the efficient control fraud hypothesis. Even when financial regulation was deliberately gutted and at its worst in 75 years it was far better than the financial “markets” that caused the collapse of the global economy until they were bailed out by the U.S. government.