William Black

1. William K. Black - The Best Way to Rob an Icelandic
Bank Was to Own One
mixa.blog.is 4.5.2010 | 13:27
William K. Black has specialized in fraud for most of his professional life and is the author of
the book The Best Way to Rob a Bank is to Own One. Black held a lecture almost exactly a
year ago in Iceland during a period when the immense growth and corruption of banking in
the past years was dawning upon the Icelandic public. Main points of that lecture can be seen
here (in Icelandic) - http://mixa.blog.is/admin/blog/?entry_id=875606.
Today Black held a lecture titled Never "Fuzzy" & no "Boundaries": The Best Way to Rob an
Icelandic Bank Was to Own One, an obvious reference to the title of his book. This
summarization is written in English, since the lecture is in that language and the subject
matter is of international interest.
Intro: Black appeared on Silfur Egils the previous Sunday in which Egill Helgason interview
focused on his views on fraud, not least the public's perception regarding the possibilities of
such matters. Black's opinion is that fraud and looting was rampant on a wide scale within the
Icelandic financial system where CEOs made sure that they and their cronies would become
rich while their firms would eventually become bankrupt. The Icelandic Financial Report is
discussed; Black considers it being well done but lacking a definite conclusion that fraud
occurred. Black says that the report demonstrates that a text book case in accounting control
fraud occurred, listing the 4 elements (weapon of choice within financial firms) needed in a
recipe to create the possibility of fraudulent behavior. Those elements are:
1. Growing like crazy
2. Bad loans - high yields (here, the emphasis is probably high yields providing
temporary profits, regardless though of inherent risks)
3. Extraordinary leverage
4. No meaningful loss reserves
This is mathematically guaranteed to produce incredible gains for a short period of time as
long as all the above elements are followed. With a bonus system intact, such a system will
generate huge bonuses but also ensure that the company will eventually become bankrupt.
Black thus maintains that the highest ranking banking officials should be prosecuted as
criminals.
Black added that all the above where elements in the Savings & Loans debacle in the 80s and
early 90s in the US. Icelanders added to the recipe, however, self-funding in buying stocks
and thus creating a market illusion of the worth of the banking stocks (it may be added here
that the stability of the stock prices was remarkable compared to their counterparts in Europe
in 2008, until of course the crash). The Report labels this as weak funding, Black labels it as
fictional funding stating that this was simple market manipulation of equity (and keeping
stock prices up).
Enablers - Egill asks whether politicians and regulators helped in enabling such practices to
exist. Black agrees saying they were cheerleaders who made fun of those who questioned the
soundness of the extraordinary growth of banks. He turns the attention to auditors and credit

2. agencies and the role of those agencies since their 'opinions' where often used as a basis in
justifying the expansion. Finally, Black criticizes the Report, stating that its conclusion that
banks where trying to salvage themselves in the last months, stating that banks where first and
foremost trying to salvage the directors and main owners.
The lecture:
As last year, the room is packed, clearly the venue is way too small. Black reckons that the
attendance shows that many people do want accountability - people who destroyed the
Icelandic banking system. He pondered what could have happened had the growth been
allowed to continue, Icelanders would have been unable financing the losses with the main
export being Icelanders themselves. "Dick Fuld at Lehman's saved you".
Historical retrospective:
Fraud is a sure thing. Black points at the 4 control fraud elements stated above. The recipe to
bake this cake is to grow like crazy, make high yield loans, extreme leverage and trivial loan
loss reserves. This fakes record profits and real catastrophic losses. Hence, same thing that
produces profits also produces losses. This causes executives to produce high (fake) earnings
that leads to high bonuses. Needed is auditors and credit agencies to bless such practices. An
example is loan officers gaining bonuses from volume of lending, not the quality (this was
similar in Scandinavia during the real estate boom in the late 80s).
Fraud - leads to deceit that eventually erodes trust. Confidence in institutions vanishes, they
fail.
Akerlof & Romer (1993) - Looting: Bankruptcy for Profit. A carefully chosen title, failure of
firm is not a failure of fraud scheme. People creating the crater walk away with far more
profits than the losses of stock options, which were all the while worthless. "Iceland was
never a wealthy country, this was a fraud". Empirical support of this exist since the early 80s,
"time to learn from those lessons".
Examples of other frauds - Chinese infant formula, asbestos, building inspectors, toxic waste,
fake certificates. "There are people in the world who are willing to kill your children for
money".
Fraud in the S&L debacle - The typical large failure grew rapidly with owners often the main
culprits in gaining personal gains. Enron era - accounting fraud. Current crisis - Hindsight
should be 20/20 but Black is surprised how little is learned from past frauds and are quickly to
forget. Who were on the front pages, talk shows etc.? CEOs is the answer. This happened
despite the FBI in 2004 predicting a major crisis due to fraud in front of congress. Yet, no
referrals of criminal activity were reported from the regulatory authorities (Black was unclear
on this matter).
Black listed a few institutions were massive fraud was committed. Names include
Washington Mutual, Citigroup, Lehman, Goldman, Rating agencies and Fannie & Freddie.
Liar loans, i.e. unverified loans, were an unbelievable percentage of loans made during the
last years, 60-70%.
Iceland

3. Irony how good the report is because the facts are correct but findings are short on fraud. All
4 elements of recipe mentioned above are in place, grossly. The finding that this was Bad
Luck, a perfect storm, is something Black strongly disagrees with. Black points to a gambling
metaphor, principle owners bought large amounts of shares using money lent to them with the
shares as capital (this is of course well established in Iceland). Why did banks inflate their
share price? Banks were loaning on the basis of share prices, the survival of the firm
depended on it while the 'owners' were looting. Black is sure that the owners knew long ago
that that would be the end result.
Decisions were not made by banks, but CEOs and their cronies. They were not making bets,
using funds to buy shares while an illiquidity crisis was in full force. They were not betting
on life but death, they didn't care and kept the bank going using a Ponzi scheme. Black says:
"They had spectacularly good luck" keeping this going for as long as it did.
Q&A
Eirikur Tomasson points out that The Report may have been more of a fact finding mission
since authorities were concerned that it may damage investigations into criminal activities.
Yours truly asked whether Accounting Fraud similarities are to be found today as before
during historical financial crises. Black pointed out that the crises in Thailand was of a
similar sort, but then the authorities lied about their reserves, creating an illusion of stability.
Similar things happened in Indonesia where the ruling family basically drew lots of resources
from the economy and yet keeping appearances of, again, stability. The dot.com era produced
also fraud, e.g. showing earnings on deals done the day before report periods, which were
later cancelled. Ergo, nothing new occured in Iceland.
Black shows that bad loans need not be stated in a way that they are bad. Simply say, "you
receive bonuses on the amount of loans you generate, quality does not matter". Giving loan
officers a green light in lending regardless of quality is an indirect way of fraudulent lending,
everything looks fine on the surface but it won't last.
How do we regulate the regulators? Hire people with a record of integrity. Black further
stated that Fraud begin immediately after privatization.
Auditors, were they to blame because they knew no better or ....? Weak capital was really
fictional, as with other practices, the art is not defeating controls but to subordinate them.
Hence, auditors were according to Black subordinated.
Are Iceland's political parties criminals? Having survived Keating, Black is ready to commit
'suicide' by answering that loan sizes are astonishingly large. Highest return on assets (ROA)
is political contributions.
In the US, 3 dollars are spent to save every $. The rule against fraud is not important, more
attitudes. The attitude is changing a great deal in the US, the F word being more common.
It is suggested that foreign bankers took part of this 'game' and should hence not receive a
krona back. Black's view is that private market discipline became an oxymoron. That, in the
US, may lead to added responsibilities to lenders, example is Enron where banks' claims were
denied since they aided in the fraud.

4. Glass Steagall re-enacted (the question I would have asked if possible) - YES, every nation
should have one, Chinese Walls never work in practice. (For Icelandic readers, see
Aðskilnadur fjarmalathjonustu articles on the left side of this page).
How can new banks have social responsibilities operate? Basically, banks that make money
the old fashioned way. Concentrate first on fixing the banks. Black maintains that Iceland
would have possibly cease as a nation had things gone further out of hand.
Conclusion of Eirikur Tomasson - Icelandic judicial system will in the next 4-6 tackle the
issues regarding financial fraud, and is more optimistic than most in the system's effort in
bringing justice to fraudulent activity. More resources are, however, needed, plus added
independence. He hopes that the political attitude changes in the coming years, providing
necessary resources. "People who committed a crime must be judged and punished".
Additional notes:
My regular readers are probably fed up with this but, sorry, this has all happened before.
Iceland during the 2002-2008 period showed remarkable similarities to the Roaring 1920s in
the US, see here - http://www.slideshare.net/marmixa/once-in-khaki-suits-lokautgafa
Silfur Egils TV interview regarding the subject is here (last interview on the show):
http://www.rokkland.ruv.is/upptokur/silfrid-1nov and radio interview (Spegillinn) is here:
http://dagskra.ruv.is/spegillinn/thattafaerslur/spegillinn453/
For Icelanders, related books of interest of this subject are for example:
Den of Thieves - http://www.slideshare.net/marmixa/20020829-den-of-thieves - During the
take over frenzy of 2007 I began to wonder whether such a storm was brewing again, with the
atmosphere uncomfortably similar to the one described in the book. Sadly, it was.
Enron: The Smartest Guys in the Room - http://www.slideshare.net/marmixa/20041202-the-
smartest-guys-in-the-room-enron - I had a talk with a senior business editor regarding this
book when I turned in the book report. The editor was shocked seeing similarities to the
descriptions in the review and how the Icelandic banks were growing (this was late 2004).
We both agreed that the growth was too much at that point but time proved that it was only
the beginning.
Other material worth while reading regarding makings of financial bubbles is -
http://www.slideshare.net/marmixa/20040506-tulipomania-extraordinary-popular-delusions -
http://www.slideshare.net/marmixa/20040122-bubbles-human-judgement-and-expert-opinion
- http://www.slideshare.net/marmixa/20011108-manias-panics-and-crashes - and last but not
least - http://www.slideshare.net/marmixa/20020718-only-yesterday
William K. Black - Holding Abusive and Fraudulent Elites
and Enablers Accountable
mixa.blog.is 5.5.2010 | 13:25
Part of recovery is deterrence of future mistakes.

5. Main points of what went wrong:
 Same warning as before - There is no giant pot of gold at the end of the rainbow in the
recovery process. This does not mean that hard work in that regards should be done.
5%, a large number. More importantly, deterrence. "He is rich, marries well, shall we
allow that"?
 An administrative action - expert in handling a much bigger volume.
 Criminal justice authorities have chance of making agreements in which assets are
retrieved against more lenient measures. Tax authorities, tax evasion is the norm.
“They are good at buying toys” – football team. Free actions – “you must tell us all your
assets, you cannot move them but are on a budget”.
Set temporary restriction order. Such restrictions remain in place until trials are over. That
process may goon for many years. “Has the government of Iceland asked suspected criminals
to state their assets”? These things need to work in co-ordination.
Get a preliminary junction – interest in bringing case to close all of a sudden increases. Civil
suits – no perfect answers. “They will settle for 10 cents on the dollar”.
Make an important judgment. Question. Ex. Say you are offered a settlement of 10%
recovery? May sound awful but if they are not getting away wealthy, is it worth pursuing the
action further? If not, you may lose the action as a plaintiff.
Black warns that a deal could be cut that may seem tough for society but none the less being
the best deal.
To recover, you gotta win. Fraud requires additional elements of proof. Proving fraud,
greater rate of recovery.
Make complex issues understandable. Why did this happen? If case goes to court, one must
make sure to WIN. Needed are very solid people and fearless, good at detail and going
around it, what is the story about.
Go first to the people who burn money the fastest. A common trick is to complicate matters,
making insurance evaporating, but that often leads to hard decisions being made, leading to
maybe a 30% recovery.
Auditors in Iceland can, however, pay substantial money. Here Black is obviously suggesting
aiming at audit companies.
Cronies – holding them liable as enablers and aiders in fraud. They most likely have serious
amounts of assets but are good at destroying wealth. Question is, do you want companies
back that have negative net worth, who are in essence bankrupt entities. Do NOT trust their
financial statements.
Lawyers with business skills are needed to take on such cases.
Main targets – how badly do you want to prove that fraud has been committed? The easiest
route is to do nothing, the process is, however, never easy. Lawyers – auditors could be the

6. best witnesses. Auditors sometimes plead because they need to escape wrath due to their
“mistakes”, leading to more lenient judgments.
Administrative – is the most single successful way to retrieve money. 3 key administrative
powers are:
1. Removal and prohibition – take officer and employee in regulatory industry, you are fired,
cannot come back in 10 years.
2. Cease and desist order – you are doing something that you must stop doing, this kicks in before
any hearing. An example making loans without underwriting them, re-financing loans, etc.
3. Civil money penalties – a fine, in the US $1 million. Part of it is to order one to pay back due
to fraud, for example bonuses.
All 3 powers existed during the recent crisis, but were not used.
Top regulators must show restraint – system must be above the struggles within the political
arena. An effective specialized crime unit is needed. A cadre of people in economic crimes
need to work together, such people need to be specially trained and do not exist in Iceland. A
unit exists but must be trained properly.
Q&A
Black considers the 80s junk bond extravaganza similar to what happened recently in Iceland.
He pointed out that Michael Milken is very rich and “respectable” within many circles but yet
was hell bent on keeping the illusion that everything was OK for as long as he could.
Q. Does it take a thief to catch a thief? Joseph Kennedy was appointed after the crash, “he
knows where the bodies are buried”. One could infer that Black considers it “OK” to bend
the rules for the greater good.*
Is there any provision in the UK law that will permit the British Gov. to open books to tax
havens? UK can make such requests and release them.
Q. What shall be done to former ‘frauds’ that today are doing business in Iceland? Before
formally charged, “he is just misunderstood”, a similar story in the US, 5 CEOs pleaded guilty
of cooking the books. The main CEO still got of the hook, he donated a great deal and
swayed public opinion.
Black thinks it is remarkable that the Report has been written, despite being critical about
some of its assets. With the aid of Joly, a dynamic has been created between her team and
special unit crime team that Black has hopes may provide results. He, however, questions
where Icelanders get qualified people for the special crime unit.
*Addition - This is incorrect - please see comment section where Professor Black states his
views in a clear manner (see below)
First, thank you for providing these detailed blogs. Second, while your interpretation of what
I said was perfectly logical based on the joke FDR told about why he appointed Joseph

7. Kennedy to chair the SEC ("he knows where the bodies are burried") and while Joseph
Kennedy is generally considered to have been a reasonably effective SEC chairman, I would
not have appointed him. I also recommend hiring people with a track record of success,
competence, integrity and courage as regulators. I'm sorry my repetition of FDR's joke
without any further explanation misled you about my views.
Again, thank you for your blog.
Best,
Bill Black