Echo Epidemics: Control Fraud Epidemics Generate 'White-Collar Street Crime' Epidemics - Comment on: Mortgage Origination Fraud and the Global Economic Crisis: A Criminological Analysis

17 Pages Posted: 16 May 2010

See all articles by William K. Black

William K. Black

University of Missouri at Kansas City - School of Law

Date Written: May 13, 2010

Abstract

“Control fraud” drove the crisis. Control fraud occurs when those that control a seemingly legitimate entity use it as a “weapon” to defraud. In finance, accounting is the “weapon of choice.” Regulators, criminologists, and criminologists have documented the pervasive role of control fraud in causing the second phase of the S&L debacle. That crisis was followed by the accounting control frauds of Enron and its ilk.

Top economists, criminologists, and the S&L regulators agreed that lenders engaged in accounting control fraud optimize through a four-part recipe that is a “sure thing” – it produces guaranteed, record (fictional) near-term profits and catastrophic losses in the longer-term. •Extremely rapid growth •Lending at high (nominal) yield to borrowers that will frequently be able to repay •Extreme leverage •Providing grossly inadequate reserves against the losses inherent in making bad loans.

Epidemics of accounting control fraud can cause bubbles to hyper-inflate – producing severe crises. Fraud can also cause markets to fail, rather than “clear.”

Keywords: Regulation, banking, fraud, corruption, criminology, white collar crime, mortgage fraud, officer and director liability

JEL Classification: G21, G23, G24, G28, K14, K23, K42

Suggested Citation

Black, William K., Echo Epidemics: Control Fraud Epidemics Generate 'White-Collar Street Crime' Epidemics - Comment on: Mortgage Origination Fraud and the Global Economic Crisis: A Criminological Analysis (May 13, 2010). Available at SSRN: https://ssrn.com/abstract=1607040 or http://dx.doi.org/10.2139/ssrn.1607040

William K. Black (Contact Author)

University of Missouri at Kansas City - School of Law ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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