Criminogenic environments like the City of London


On the Daily Politics and the Sunday Politics recently, Andrew Neil has referred to how journalists do not report on the financial sector.  That he feels this to be a lack was also suggested by his treating Max Keiser with much respect.  The online community is relatively familiar with the Keiser Report but amongst academics, Professor Bill Black is a rare creature…  a former financial regulator and now, Associate Professor of Law and Economics at the University of Missouri-Kansas City. This post presents some of his findings about the abundance of fraud in the financial sector, and a video clip of his recent speech in Davos.

What is a criminogenic environment?

Criminogenic environments produce such intense and perverse incentives that they generate epidemics of control fraud. (1) 

Large, individual accounting control frauds cause greater financial losses than all other forms of property crime – combined.  Accounting control frauds are weapons of mass financial destruction.  Epidemics of accounting control fraud drove the national crises that produced the Great Recession.  We have reliable information on this in the United States, the United Kingdom, Ireland, and Iceland…. These accounting control fraud epidemics drove crises that caused a loss of over $20 trillion in wealth and cost roughly 20 million workers their jobs. (1)

How do we know that the City of London is a criminogenic environment?

Most of the major financial and banking scandals have originated in London.  Incredibly, the belief amongst neoclassical economists and the World Economic Forum is that

‘Malfeasance and outright fraud [in finance] are extraordinarily damaging but also, fortunately, extremely rare.’(1)  

Without evidence, the markets are assumed to be ‘self-cleansing’ and therefore, ‘self-regulating’.. hence, it is argued that there is no need to have regulation and supervision.

However, Akerlof & Romer explain why deregulation encouraged control fraud:

“[M]any economists still seem not to understand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?” (Akerlof & Romer 1993: 4-5). (1)

In fact, the dishonest practices of some institutions, invited a ‘race to the bottom’.  It is very difficult to ‘honestly’ compete with a dishonest broker… so effectively a ‘market’ was set up as to who could be the most successfully ‘fraudulent’.  The inevitable corollary was the pressure to remove as much supervision and regulation as possible:

The “race to the weakest supervisor” did not occur only within the U.S.  Brooksley Born and a former senior SEC official have confirmed to me that UK regulators directly pitched U.S. financial firms to relocate operations to the City of London in order to obtain weaker supervision.  “Fed lite” supervision was a competitive response to the FSA’s “reg lite” system of deliberately weak supervision.  The City of London became the most criminogenic environment in the world for financial fraud, which is why so many UK banks and units of foreign banks located in the City have caused the major scandals in the UK and globally. (1)

I have quoted extensively from Professor William K Black’s articles on New Economic Perspectives because they are essentially the keynote speech that he gave at the ‘Public Eye’ shame award in Davos.  As he says in the video clip below, economists know nothing about fraud and law students very little.  Of course, anyone familiar with Max Keiser will also be familiar with the levels of ‘decriminalised’ fraud that Bill Black describes in the financial markets.  For example, 40% of the mortgages issued in the US in 2006 were ‘liar’s loans’ in which the lenders deliberately chose not to verify the borrower’s income.  90% of ‘liar’s loans’ have been shown to be fraudulent, but the incentives offered to the agents were huge.  In the UK, 45% of the mortgages at that time were also ‘liar’s loans’.

This year, the annual “Public Eye” “shame prize” was awarded to Goldman Sachs for its abuses.  Bill Black writes:

The shame prize award was made in Davos during the World Economic Forum as a counter-WEF event.  Shell also “won” a shame prize, but I spoke on Goldman Sachs, the role of epidemics of accounting control fraud, and the WEF’s anti-regulatory and pro-executive compensation policies.  I explained that the anti-regulatory policies were intended to fuel the destructive regulatory “race to the bottom” and why the executive and professional compensation policies maximized the incentives to defraud.  I also explained that WEF was a fraud denier.  Collectively, these three WEF policies contributed to creating the intensely criminogenic environments that produce the epidemics of accounting control fraud driving our worst financial crises.


William K. Black’s speech at the Public Eye Awards 2013 World Economics Forum

Published on Jan 25, 2013  greenpeaceCHgreenpeaceCH·167 videos

In  New Economic Perspectives Bill Black writes:

The central point that I want to stress as a white-collar criminologist and effective financial regulator is that Goldman Sachs is not a singular “rotten apple” in a healthy bushel of banks.  Goldman Sachs is the norm for systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks).  Impunity from the laws, crony capitalism that degrades democracy, and massive national subsidies produce exceptionally criminogenic environments.  Those environments are so perverse that they produce epidemics of “control fraud.”  Control fraud occurs when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud.  In finance, accounting is the “weapon of choice.”  It is important to remember, however, that other forms of control fraud maim and kill thousands.



The Tory/LD Coalition Ministers and MPs never miss an opportunity to blame the last New Labour government for the ‘mess’ that they say they inherited.  However, they blame Gordon Brown for overspending on public services, when his real fault was to leave the City of London to become ‘the most criminogenic environment in the world for financial fraud’.  Needless to say, David Cameron and George Osborne have not taken the actions against financial institutions which would be necessary to protect the UK and the rest of the world from another financial crash .. Max Keiser predicts that it will occur this spring, perhaps April.

Gordon Brown Did Not Spend All the Money. The Banks Did.

“Fraud by false representation” is defined by Section 2 of the Act as a case where a person makes “any representation as to fact or law … express or implied” which they know to be untrue or misleading.

“Fraud by failing to disclose information” is defined by Section 3 of the Act as a case where a person fails to disclose any information to a third party when they are under a legal duty to disclose such information.

“Fraud by abuse of position” is defined by Section 4 of the Act as a case where a person occupies a position where they are expected to safeguard the financial interests of another person, and abuses that position; this includes cases where the abuse consisted of an omission rather than an overt act. 



Max Keiser interviews Steve Keen


Debt deflation-On the Edge with Max Keiser-07-08-2011

In this edition of On the Edge, Max Keiser interviews Steve Keen, economist and author of the book Debunking Economics.

He says that debts have spiraled out of control and the reason is shadow banking system. The program touches on the correlation between the US-EU debt crisis and the worsening Greek economy.

Michael Hudson: “Debts that can’t be paid, won’t be paid.”

Related Post:

A Modern Jubilee: How to End the Recession.

Barclays and banker greed.



These accounts of our banking system were left on a Guardian comments thread in response to the revelations about Barclays, and other banks, ‘fixing’ the Libor interest rates for their own profit interests.  They deserve wider coverage.  To paraphrase a tweet from one-time-Cameron-favourite Philip Blond .. the banks’ actions evidence the mythology of a ‘free-market’.  The four excellent and informed pieces are all written by the same author, Payguy2 .. with my emphasis in bold.

We watched as the banks greed caused the deepest World recession since the 1930’s. We see a quarter of our youth on the unemployment scrap heap.

We watch as the banks receive a trillion pound public investment from us the tax payers.

We watch as the opportunity cost of this investment is played out as the deepest cuts to our public infra structure since WW2/the Great Depression. Millions will be made unemployed. Hundreds of thousands will lose their homes. University fees triple to £9,000 a year.

We watch as this artificially maintained recession drives down wage demands and keeps us, the public, subservient with declining living standards whilst the global elite make out like bandits.

We watch as the banksters trouser billions of pounds in bonuses and pay rises whilst we, the public, endure years of stagflationairy reductions in living standards.

We watch as banks trouser further billions from quantitative easing and use it to speculate on oil and food, driving up the prices we have to pay to live.

We watch as the banks have enough money left over from the taxpayers gifts, after their bonuses of course, to fund over half of the Tory parties election budget.

We watch as the Tories reward the banksters with changes to the tax laws that allow no tax to be paid on overseas profits. A policy that no other country in the world has except Switzerland. In addition the Tories remove the bankers bonus tax and reduce corporation tax,

We watch as the banks reward the global elite by maintaining a shadowy network of trusts, quasi banks and other tax avoidance vehicles based in Jersey, Sark, Guernsey, Hong Kong, the Cayman Islands etc.

The level of avoidance is gargantuan with for example the authoritative US periodical TaxAnalysts estimating that conservatively in 2007 that the Crown Dependencies hosted about US$1trillion of potentially tax evading assets. This equates to about $30billion a year in avoided income tax alone and only measures the scale of avoidance in three tax havens.

We watch as the banks rip us off by borrowing from each other using insane FRB techniques and the absurdly low Bank of England rate (0.5%) yet charge us, the public, interest at 10 times this level on our loans and mortgages. We watch as the banks and their shadow arms and hedge funds short all the crippled European sovereign bond markets precipitating huge interest rate costs to taxpayers and threatening another economic collapse.

We watch as the banks borrow at 0.5% and then force our governments to pay them 3-4% interest on the bonds needed to pay for the taxpayers bailout of the banks. This is in itself insane and costs the government £20-30billion a year. The banks bought 97% of the government debt issued over the last 6 months (£36 billion worth) and trousered a tidy 3.8% interest, you and I have to pay them for the privilege.

We the public should demand not just ring fencing but separate ownership of casino and retail banks.

We should demand a Robin Hood or Tobin financial transaction tax.

We should demand the return of the bonus tax.

We should demand an increase in contingent capital ratios to the levels seen in the 1970s and the level adopted now by Switzerland (e.g. 20%).

We should demand an end to Over-the-counter derivative trading and insist on these monstrous immoral bets be traded only in registered stock exchanges.

We should demand an end to tax avoidance by transfer pricing and the use of shadowy secrecy tax havens such as Jersey, the Cayman Island and Gibraltar. Places where the banks shelter the money of every gangster, terrorist, third world dictator and mafia boss on the planet.

It’s not likely though with the banks providing over 50% of Tory party funding and a third of Tory MPs having worked or are still working in the City. These people would rather lie and put the blame on previous government or public sector workers.

We are not all in this together. We are living in a kleptocracy. The bankers should pay for the mess they caused. They should be taxed, not ordinary citizens or public sector workers.

When will somebody do something about these people?

My morgage has cost thousands of pounds more than it should have because of this fraud. Will Barclays traders, management and shareholders (who are reposnbile for holding the company responsible) be prosecuted? Will I be able to sue Barclays for their fraud?

Banks are the real cause of the deficit, not public spending. The Government pays banks usurious interest on future borrowing for no readily apparent reason. Ban fractional serve banking and regulate the banks properly. The following is just one example of how our banking system causes recessions, inflation and public sector debt.
The Mint is the only bit of Government that can create money. The notes and coins it makes comprise only 3% of the “money” in circulation.

The other 97% is created by spivs/banksters who take money they’ve either robbed from the real economy with usurious interest charges (e.g. ten times the rate they borrow at due to the UK governments guarantee) or been given for free from a bailout/QE operation (again taxpayer money).

For example, say SirGreedy of Chinless-Shonky Bank gets his greedy mits on £1,000,000 from the real economy. He then borrows £30,000,000 from his friend Piers Bigend at RSWipe bank using the £1,000,000 as collateral.

He is able to borrow the £30,000,000 at a ridiculously low rate of interest as the money he is holding is 100% guaranteed by the UK Government. So he is likely to only to have to pay 1% or less interest on the loan (LIBOR or Euromarket rates).

SirGreedy takes the £30,000,000 and he might choose to gamble the money by speculating on food futures or shorting a European currency if he can persuade enough friends to join in on the pillaging. The UN recently pinned the blame for rising World food costs on bank speculation and it is undoubtedly the cause behind the food riots we are seeing in Africa and the Middle East.

But if SirGreedy is feeling cautious or has no friends a good safe bet is to buy a UK bond. It is 100% guaranteed by the UK Government and will pay him a return of 4%. He keeps this for a year and then sells it back to Bigend.

Sir Greedy repays his loan to Bigend (who makes £300,000K “profit”) for his bank RSWipe.

Sir Greedy takes home the 3% profit (£900K) he has made. He books it as a 90% profit on the £1,000,000 initial capital he had.

It’s now bonus time and both traders point to the hundreds of thousands pounds of profit they have made and its trebles all round and fat bonuses for both of them.

Notice there was no risk in any of these transactions as they are all underpinned by cast iron guarantees from the UK Government.

The UK taxpayer has lost £900K and gained nothing from the transactions.

In terms of inflation and effect on the real economy. £1,000,000 has disappeared from savers/house buyers somewhere and has reappeared as Government debt to the banks (£400K).

The £1,000,000 has turned into £1,400,000 causing inflation eventually.

In all likelihood it is very unlikely that exchanges would be this one sided. Much more likely that BigEnd will lend Sir Greedy £30M to play the game and Sir Greedy will in turn lend £30M to Bigend. This is why commentators refers to this as “interbank lending” or “Euromarket”.

Essentially its spivs both writing IOU’s for £30M on a napkin, swapping the napkins and magically creating profit for themselves by pillaging the UK taxpayer who as underwritten the whole deal.

Doesn’t look socially useful to me. Doesn’t look too intellectually demanding.

Why are we letting these people pay themselves salaries of 100s of time average wage for things that damage the well being of everyone else?”

And you still blame labour? Bear in mind that over 50% of Conservative party funding comes form banks

Here are some quotes from George Osborne:

August 2007 — FREEING BRITAIN TO COMPETE:  Submission to the Shadow Cabinet, Economic Competitiveness Policy Group (Conservative Party):

“The last ten years in particular have been good years for the world economy as a whole. They have been characterised by two massively favourable trends. The first is an era of easy money. The main central banks worldwide have opted for low interest rates, the ready creation of credit, and tolerance of innovatory means of financing public and private sector activity through big increases in debt. It has been the era of public/private partnerships, specialised credit-based funds and funds of funds, collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system.”


A Conservative government would match Labour’s projected public spending totals for the next three years, shadow chancellor George Osborne has said. He pledged two years of 2% increases. The final year total would be reviewed […] Mr Osborne said government spending under the Conservatives would rise from £615bn next year to £674bn in 2010/11. He said, like Labour, the final year total would be reviewed in 2009. He said the move would create “headroom” for lower taxes because the economy is expected to grow faster than public spending.


“The scale of the crisis facing our economy should not be underestimated. In recent weeks the banks have all but stopped lending to each other and businesses and families are also suffering from the credit crunch. We made the key judgment over a week ago that it may be necessary to take significant steps to help save the banking industry. That’s why we back, in broad terms, what the Government has done. “We have taken a lead in defending the interests of taxpayers by demanding that taxpayers’ money must come with conditions. The banks that will be most reliant on that money are those that have taken the greatest risks and in some cases behaved irresponsibly. “That’s why I pressed the Prime Minister yesterday to guarantee that there will be no bonuses for senior executives of those banks this year. That is a justified requirement given the situation these banks find themselves in. There should be no rewards for failure.”