William K. Black on Bill Moyers: U.S. Financial System a 'de Facto Ponzi Scheme'

by: Markham Lee

William K. Black was one of the chief banking regulators during the S&L crisis, and in a recent interview with Bill Moyers on PBS he makes a very strong case that our financial system has become a de facto Ponzi scheme - a Ponzi scheme that was enabled by deregulation, and that is currently being propped up by the rescue efforts of the Bush and Obama administrations.

Needless to say he pulls no punches when it comes to his opinion on how the government is handling things.

While the interview is both disturbing and arguably inflammatory, it's hard to argue with the man's logic. My suggestion is to either read the transcript and/or watch the video and decide for yourself.

You can also read more about Mr. Black here.

As for my opinion? A long time ago I had an independent mortgage lender as a client, a company in the vein of companies like New Century or Accredited Home Lenders. About two weeks after starting with the client the CFO was walking me through how their business worked, in terms of originating mortgages, securitizing them to raise cash for more loans, etc. About five minutes into his presentation I realized that the company was running cash negative and was only profitable on paper, but those paper profits were largely hypothetical and may never be realized in a tangible sense. About ten minutes I remarked: "So wait, your business works like a Ponzi scheme?" [*Note: this was when I was very young and had a habit of saying exactly what I was thinking in business situations. It's really not a good idea to accuse your clients of running Ponzi schemes.]

The CFO's response? "Um, well, I wouldn't exactly characterize it like that, we're running a legitimate business here that provides real value to its customers."

Do I need to say anything more than that?

Kudos to my friend "Jest" for bringing this one to my attention.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.