Senior S&L Prosecutor: Bank of America Pulling A Decades-Old Scam

Bank of America Is Pulling the Scam Which Banks Have Pulled for Decades

Professor of economics and law – and the senior S&L prosecutor who put more than 1,000 top executives in jail for fraud (Bill Black) writes today:

Lewis and his successor, Brian Moynihan, have destroyed nearly one-half trillion dollars in BAC shareholder value [through control fraud]. (See my prior post on the “Divine Right of Bank Profits…”) BAC continues to deteriorate and the credit rating agencies have been downgrading it because of its bad assets, particularly its derivatives. BAC’s answer is to “transfer” the bad derivatives to the insured bank – transforming (ala Ireland) a private debt into a public debt.
Banking regulators have known for well over a century about the acute dangers of conflicts of interest. Two related conflicts have generated special rules designed to protect the bank and the insurance fund. One restricts transactions with senior insiders and the other restricts transactions with affiliates. The scam is always the same when it comes to abusive deals with affiliates – they transfer bad (or overpriced) assets or liabilities to the insured institution. As S&L regulators, we recurrently faced this problem. For example, Ford Motor Company attempted to structure an affiliate transaction that was harmful to the insured S&L (First Nationwide). The bank, because of federal deposit insurance, typically has a higher credit rating than its affiliate corporations.
BAC’s request to transfer the problem derivatives to B of A was a no brainer – unfortunately, it was apparently addressed to officials at the Fed who meet that description. Any competent regulator would have said: “No, Hell NO!” Indeed, any competent regulator would have developed two related, acute concerns immediately upon receiving the request. First, the holding company’s controlling managers are a severe problem because they are seeking to exploit the insured institution. Second, the senior managers of B of A acceded to the transfer, apparently without protest, even though the transfer poses a severe threat to B of A’s survival. Their failure to act to prevent the transfer contravenes both their fiduciary duties of loyalty and care and should lead to their resignations.
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I would bet large amounts of money that I do not have that neither B of A’s CEO nor the Fed even thought about whether the transfer was consistent with the CEO’s fiduciary duties to B of A (v. BAC). We took depositions during the S&L debacle in which senior officials of Lincoln Savings and its affiliates were shocked when we asked “whose interests were you representing – the S&L or the affiliate?” They had obviously never even considered their fiduciary duties or identified their actual client.

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