Simon Johnson Confirms William K. Black’s Explanation of Fraud, Boom and Bust

In a new interview with Bill Moyers, Simon Johnson confirmed what William K. Black has said about fraud by the financial sector, booms and busts.

As I previously wrote:

Black explained that fraud by a financial company usually involves the company:

1) Growing like crazy

2) Making loans to people who are uncreditworthy, because they’ll agree they’ll pay you more, and that’s how you grow rapidly. You can grow really fast if you loan to people who can’t you pay you back

and

3) The use of extreme leverage.

This combination guarantees stratospheric initial profits during the expansion phase of the bubble.

But it guarantees a catastrophic subsequent failure when the bubble loses steam.

And collectively – if a lot of companies are playing this game – it produces extraordinary losses (more than all other forms of property crime combined), and a crash.

In other words, the companies intentionally make loans to people who will not be able to repay them, because – during an expanding bubble phase – they’ll make huge sums of money. The top executives of these companies will make massive salaries and bonuses during the bubble (enough to live like kings even even if the companies go belly up after the bubble phase).

Johnson confirmed that a high housing default rate was part of the banks’ models. The financial giants knew they would make huge sums during the boom, and then transfer their losses to the American people during the bust.

Johnson and Moyers also pointed out that the American people are still paying off the S&L bailouts. Specifically, the last payment of the $140 billion dollar bailout will be made in 2013.

And Johnson provided interesting information regarding Goldman Sachs. As everyone knows, Goldman switched to a bank holding company in September, to have access to funds from the Fed at essentially zero percent interest.

But Johnson noted that in August of 2009, Goldman switched again – to a “financial holding company”.

What’s the difference?

Johnson says that being a financial holding company means that Goldman can borrow money from the Fed at essentially no cost, and then invest it in any thing it wants. For example, Johnson says that Goldman has bought a large share of the stock of a Chinese automaker. If the investment succeeds, Goldman will reap the profits. If it fails, the taxpayers are on the hook.

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