[Welcome, Naked Capitalist readers!* If any of you have tips for this series, please feel free to mail me at lambert_strether DOT corrente AT yahoo DOT com. --lambert]

To see why I'm asking this question (after a lapse of a few days) see the posts at Day 1 and Day 2, and here. Now (after reading Krugman today) read James Galbraith:

As a result of the administration's determination to save the big banks, we will emerge from this slump with an unreformed financial sector in the hands of the same people who produced the disaster in the first place. While some bad assets will recover value, many will not, and losses will either go unrecognized or they will be transferred, via the public-private partnerships, first off the balance sheets of the banks and then to the taxpayer, when the mortgages default, via the non-recourse feature of the FDIC's loans. We could assess the likelihood of this happening, if we chose, by the simple step of auditing the loan tapes underlying a fair sample of sub-prime securities, to determine the prevalence of missing documentation, misrepresentation and prima facie fraud. [Fraud that I believe, with Bill Black, amounts to accounting control fraud.] Such a study would constitute minimum due diligence and that fact that one is not underway is a very bad sign.

Doing due diligence before we throw another few trillions at the banks after the stress test kabuki has been performed would seem to be the baseline for any responsible policy maker.

So why isn't Krugman calling for it?

Bloomberg:

Regulators conducting the stress tests are increasingly focusing on the quality of loans banks made after finding wide variations in underwriting standards, a regulatory official said on April 20. They concluded that banks’ lending practices need to be given as much weight as macroeconomic scenarios in determining the health of each bank, the person said.

You mean, "lending practices" like fraud?

The Shrill One's absence from the fray was "partly medical."

From Krugman's home page at the Times:

Just sayin.

The story is "out there" (I'll get to the newest Barron's shortly), and so far, Krugman's been silent. Neither agreement, nor debunking.

It's definitely night time for the economy, so why isn't the dog barking? Curious!

(For William Black, see Corrente on 2009-02-17; he's the S&L enforcer who took down Charles Keating, back in the day when we had a regulatory structure). Here's the Bill Moyer's transcript; trying to excerpt from it is like trying to excerpt a nuclear explosion, so read it all:

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. [See Corrente, 2008-09-28, on ratings agencies.] Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. ... What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined." ...

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. [See 2008-09-25] All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste. ....

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved? [2009-03-30]

WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. [Buiter's "cognitive regulatory capture"] In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, "contracts, sacred." But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.