Publication Date

2010

Document Type

Article

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.”

Publication Title

Criminology and Public Policy

Volume

9

Issue

3

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