MORTGAGE BACKED SECURITIES: LEGAL COUNTERFEITING

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EDITOR’S NOTE: If you want to get the FEEL of what just happened in our world of finance and the ensuing effects on our economy, you might be better off reading a book like “Moneymakers: The Wicked Lives and Surprising Adventures of Three Notorious Counterfeiters” (Penguin, $27.95), Ben Tarnoff. It might come as some surprise that proprietary issuance of currency was all the rage in this country and was used not only legally and illegally, but as an instrument of warfare. Ben Franklin and others saw the “moral hazard” of allowing for paper money because the paper had no intrinsic value — unlike the universal perception of gold or silver.

Eventually in 1862 the U.S. Government made government issued currency “legal tender” but there were so many loopholes that while it had an effect, it has yet to take hold 150 years later.

Banks issued their own Banknotes in early U.S. History and lately, for the past 20 years, they have returned to the same practice calling them derivatives, mortgages backed securities and other exotic names. The Bank Notes, as observed by many during that period had no value except that they supposedly DERIVED their value from the gold that the bank had on deposit. They were not the first “derivatives” but they were the most important up to that point in history.

In a 1996 article Alan Greenspan articulated the free market view that the value of those bank notes or proprietary currency would be resolved in a free market as people found out which banks were issuing more bank notes than they could support. In fact, he predicted that proprietary currency would take over as a the principal currency stock of the world — hardly a difficult prediction since it had already happened by the time he wrote that article.

Now for every monetary unit of value issued by any government in the world, the private sector has issued 12 units. In other words the proprietary currency volume is 12 times as big as the fiat currency — fueled largely by the use of derivatives that derived their value from credit instruments, most of which were loans that were supposedly backed by notes and mortgages and which now are like rare earths when it comes to producing one in the flesh.

In 1998, Congress passed and Clinton signed into law the death knell of the American economy. The law specifically excluded this proprietary currency from regulation of ANY sort from government. In short, they created a sovereign country out of the oligopoly that controlled Wall Street and hence the world of finance. Counterfeiters are usually put in jail. But certain types of counterfeiters have prospered as this article and the book it reviews shows clearly.

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Early America, Ripe for Counterfeiters

By NANCY F. KOEHN

NY Times

“THERE is properly no history; only biography,” Ralph Waldo Emerson wrote in 1841. In “Moneymakers: The Wicked Lives and Surprising Adventures of Three Notorious Counterfeiters” (Penguin, $27.95), Ben Tarnoff lends ample credence to that notion. He shows how three con men were able to thrive in America’s early days because of a weak central government, an often-chaotic banking system, a turbulent economy and an entrepreneurial populace.

Few countries, Mr. Tarnoff writes, “have had as rich a counterfeiting history as America.” Creating fake currency, he states, “gave enterprising Americans from the colonial era onward a chance to get rich quick: to fulfill the promise of the American dream by making money, literally.”

Mr. Tarnoff, who graduated from Harvard in 2007 and has worked at Lapham’s Quarterly, focuses on the lives of three counterfeiters who lived in the 18th and 19th centuries. Taken together, he writes, these three biographies “tell the story of a country coming of age — from a patchwork of largely self-governing colonies to a loosely assembled union of states and, finally, to a single nation under firm federal control.”

The first subject of this rollicking good read is Owen Sullivan, an Irish immigrant who was born around 1720 and originally was a silversmith in Boston. In the seven years he was a counterfeiter, he built a loosely organized team called the Dover Money Club.

Like his partners, Sullivan was behind bars several times in the course of his career. Until his final arrest, however, these encounters with the law were small detours on an entrepreneurial journey in pre-industrial crime. When he was hanged in New York City in 1756, he claimed to have forged more than £25,000 worth of colonial money.

Sullivan capitalized on a number of prevailing conditions in the colonies: the collective thirst for liquidity to fuel a growing economy, the often unruly nature of the financial system, and scanty law enforcement.

Underlying these factors was a deep, abiding ambivalence about paper money. Many early Americans, like Benjamin Franklin, recognized the pressing need for paper money as a medium of exchange and a store of value in a world where specie like that made of gold and silver was in short supply.

At the same time, paper money made the economy more mercurial. Unlike precious metals that could be bought and sold as commodities, paper money had no intrinsic value; it could become worthless overnight. Paper money had other dangers, including a greater vulnerability to inflation. Cognizant of all this, the delegates to the Constitutional Convention in 1787 voted against giving the federal government explicit authority to print paper notes, coming down squarely “on the side of a hard currency under national control.”

But the demand for a ready medium of exchange and a recognized measure of value in the burgeoning American economy continued to outstrip the meager supply of precious metals in circulation.

By the early 1800s, paper money in the form of individual bank notes had returned in force. And with it came enterprising counterfeiters like David Lewis (1788-1820), who worked the rural counties of southwestern Pennsylvania forging notes and stirring up populist rage against financial elites.

Lewis became something of a popular hero, known for audacious jailbreaks and sporadic generosity toward strangers. Mr. Tarnoff argues that in the financial panic of 1819, crime acquired a certain status. “Not only was it a way for the dispossessed to make a living, but compared with the perfectly legal frauds perpetuated by the nation’s banks, lawbreaking seemed honest.” Lewis was apprehended for the last time after being shot in the arm and leg. He died from these injuries in a jail in central Pennsylvania.

Finally, Mr. Tarnoff recounts the story of Samuel Upham (1819-1885), a Philadelphia shopkeeper who, in 1862, began printing $5 Confederate notes, which he sold as “mementos of the Rebellion” for a cent each. Along the bottom of each note, he included a strip with the following lettering: “Fac-Simile Confederate Note — Sold Wholesale and Retail by S. C. Upham, 403 Chestnut Street, Philadelphia.”

Backed by heavy newspaper advertising, Upham’s souvenir notes became best sellers, and at some point he must have known that they were no longer being viewed as facsimiles, Mr. Tarnoff says. Borne by Union soldiers, they found their way into the Confederate money supply as counterfeits, and helped fuel rampant inflation and monetary disruption.

As the war progressed, Confederate authorities became convinced that Upham and others were part of a Union campaign to wage economic war on the South. There is no historical evidence that Abraham Lincoln or his administration was involved in such tactics.

But Upham and other moneymakers did play a de facto role in the Union war effort. As Lincoln and his Treasury head, Salmon Chase, understood all too well, the military prospects of either side owed much to the reliability of their respective money supplies. Without a stable, trustworthy form of liquidity, neither combatant could continue to wage war while sustaining its citizens.

Responding to this imperative, Congress in 1862 passed a law that, for the first time since the Revolutionary War, made money printed by the federal government legal tender. A year later, legislation set up federally chartered banks that printed a uniform national currency — making counterfeiting more difficult, though not impossible.

Mr. Tarnoff is an engaging writer who has a fine eye for detail and the relevance of larger, historical forces. But the book ignores a larger question, raised by its description of early American capitalism as an “evolving confidence game” that oscillated “between manic exuberance and total collapse”: Is there something in the speculative nature of the American character and the nation’s economic beginnings that continues to produce people like Bernard Madoff, as well as excessive volatility in the system itself?

Though this and similar questions are unanswered, they do not tarnish the power of the stories that Mr. Tarnoff so delightfully uses to teach us history.

4 Responses

  1. Too bad Mr. Tarnoff didn’t have a chance to include the (perhaps) biggest and fourth counterfeiter of all times:
    Bernard Madoff.(after WS of course) And too bad this one didn’t have the same luck as David Lewis 🙂
    Great book by the way.
    I find it atrocious that while Madoff was scamming a “few” investors, Wall Street was scamming us all, hence the reason they didn’t neither stop him nor turned him in. Had WS done that, they woul’ve had to turn themselves in, and as we can see, they still believe in their “sick and twisted” minds that they are innocent and immune to our current laws. The gap between the Law and the thieves is closing, one inch at the time.

  2. 1998 LAW – Neil might be talking about the Gramm-L:each-Bliley Act or GLBA—
    one senator in particular, Senator Phil Gramm, is primarlly responsible. He now works for UBS (Swiss) in a very senior capacity.

    His wife was somehow involved with Enron.

    Just google him and his wife.

  3. What is the name of the 1998 law Clinton passed?

  4. Neil look at the the Site for the American Monetary Institute web site for authoritative well documented history of Money and look at HR 6550 on their site. They helped author the bill which call for deprivatization the Fed. http://www.monetary.org/

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