Student Loan Bubble: Setting the Stage for the Next Crash

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Editor’s Comment: Except for the last paragraph about Obama being a communist, the article whose link is shown below is chock full of valuable information for students — both those entering higher education for the first time and those who are struggling with student debt they have no way of paying.

What is missing, just as the mortgage mess, is an understanding of the (1) the normal loan process, (2) the securitization of loans and debt and (3) the way Wall Street used securitization for a Ponzi scheme which they are repeating as we speak — declaring that the purchase of student loan-backed securities is driven by demand. That is crap just like the the mortgage bonds were crap. Nobody on or off Wall Street sat down and decided they wanted student loan backed debt which has the highest rates of default in the nation compared with all forms of other debt.

So we already know we are being set up. The scheme is the same — as long as pension funds and other managed funds buy the bonds backed by student loans, the longer this market will last, because the PSA and prospectus specifically allow the Wall Street banks to use the investor money to pay the interest and principal even if it is unearned and not likely to be earned. Like all Ponzi schemes (see Mortgage Meltdown 1999-2011) the entire infrastructure collapses of its own weight as soon as investors stop buying the bonds.

Investors would do well to think about the legal significance of converting a note receivable, with one set of terms, to a bond receivable, with an entirely different set of terms. (same problem in the mortgage mess). The specific legal question that pops out is whether there was ever a meeting of the minds on the terms of repayment, the principal, the interest rate and the identity of the parties involved in the transaction. (see mortgage meltdown as a primer for what happens — fabrication, forgery of documents and perjury).

It is true that investors are seeking high yields. It is also true that they think they are getting higher yields. But the truth is that they are being paid with their own money and, even worse than the mortgage meltdown, the investors are purchasing defective loans many of which are in de fault or about to go into default. As a financial analyst I would remove the pen from the hand of any family member who was about to buy what is clearly toxic waste carrying, once again, high ratings from S&P, Fitch, Moody’s et al.

How fund managers would believe anything said to them by the investment banks, rating agencies or the loan originators is beyond comprehension.

Of course direct loans from the government are not securitized — at least not that we know of. Remember that Fannie and Freddie were fronts for the securitization of loans in the secondary market.

The main protection for the lending banks entering the picture for student loans was that they could not be discharged in bankruptcy. Thus once ensnared by loans far in excess of prudence, and whose proceeds were often used for purposes other than education, the student is guaranteed a life of enslavement to a debt he or she will never be able to repay.

This has not slowed the rate of defaults. We are now at critical mass which means the implicit government guarantee is going to be called in like an IOU. The argument will be that the banks did us a a service by making loan dollars available for education and that society, as a whole, enjoyed the benefit. Thus, if the de faults get too high, the government should step in and pay them off.

The originating banks were in truth simply providing a fee based service to undisclosed lenders who could not be accused of predatory lending or other wrongful acts because they weren’t physically at the closing — or so they say. I doubt if many originating banks ever took the loans in and booked them as loans receivable. But we will wait an see on that.

The point here is that by allegedly subjecting the loans to claims from asset pools that were part of the securitization scheme they elected a different scheme to handle risk than the one offered by the government. The government offered them non-dischargeability and so far as I can determine, only chartered institutions need apply. The The trusts that were supposedly used to pool the loans were never funded with the investor money — they were ignored along with the rights of both the investor/lenders and the borrowers.

The investment bank that underwrote, issued and sold the bonds created the illusion that IT owned the loans in the “pool” and not the investors — just long enough to create the illusion of an insurable ownership interest in the debt. That way the investment bank got the insurance, proceeds of credit default swaps and other hedges. This left investors out in the cold, and young borrowers completely ignorant of their rights or obligations.

The Next Housing Bubble: Student Loan

How the Student Loan Crisis Drags Down Home Prices

14 Responses

  1. Too many graduating high school students are offered financial products marketed as “student loans” and they have no information about the reality of what they are getting themselves into. They are raised thinking that everyone goes to college and student loans are just part of it. Then they go into college with out an viable career path, as they are told it’s a time to explore and discover themselves. At the end of 4 years they have amassed so much debt it will take them 10 years to pay off. I know I’m generalizing, but it’s not right. I really think that the student loan companies are committing securities fraud. I’m surprised there hasn’t been an activist group of securities fraud attorneys that have challenged these instituions in court.

  2. If we don’t stop cooperating and revolt on all of these crooks, we will all be microchipped bankster debt slaves. What do people think all of this technology is really for….? Debit, Credit, smart cards, store discount cards, the driver’s licenses, cell phones, bank accounts …the SS#s are all attached to their data base and they are methods of spying and control by these bank owner & investor crooks. They use all of us as their own personal ATM machine.

  3. Well, check your tax dollars and all kind of fees and fines. WTF and we are fu@c?$c%K, America, period !

  4. Your true color is showing Christine… is commie red.

  5. “Telling the truth is what I do best.”

    No moron. Shooting your mouth off is what you do best. Repeating hogwash you don’t understand and know nothing about is what you do best. Being a parrot is what you do best. Indiscriminately filling that empty space between your ears with incoherent noise coming from every direction is what you do best.

  6. Telling the truth is what I do best. If you “get it” and you hold your liberty, freedom & independence, our Constitutional Republic and our National Sovereignty dear than, you should be hyperventilating and throwing an absolute fit about what these TBTF GLOBALIST CROOKS have done and are doing is outright THEFT.

  7. more from article I linked below (Matt Taibbi):

    “…But the rest of the letter totally ignores the Brown/Grassley questions, particularly on the matter of which experts were and are being consulted.

    On those questions, the DOJ would say only that “it is entirely appropriate for prosecutors to hear from subject matter experts at relevant regulatory authorities” and that . . .:

    ‘”When the Department consults with relevant regulatory authorities, or hears from companies who are targets of the Department’s investigations and their counsel regarding potential collateral consequences of enforcement actions, neither those agencies nor the target companies receive any compensation from the Department.”

    That is one hell of a slippery piece of language. It’s great that the Department of Justice is not paying, say, HSBC to consult with them on the question of whether or not HSBC should be prosecuted. What a relief! But that doesn’t mean they’re not paying someone else for that kind of advice.

    The DOJ similarly blew off naming any individual experts and they refused absolutely to turn over information about any compensation they may have paid out to whomever it is who is whispering in their prosecutorial ears.

    The two Senators late last week issued a blistering answer to the DOJ letter, saying, “the Justice Department’s response is aggressively evasive,” and that “the Department’s only clear response was that it speaks to regulators and the banks themselves…”

  8. The America on paper is the the only America that really matters. All of the Globalist TECHNOCRAP IS A GIANT FRAUD……THAT IS WHAT THEY ARE HIDING….ELECTRONIC FRAUD ON STEROIDS. The Second Amendment is the only thing keeping you Globalist crooks from a Complete Totalitarian take over….WE THE PEOPLE will never give up our legal rights to defend our LIFE, LIBERTY & PROPERTY….no matter how much criminal fraud you commit by trying to strip away the truth…….I will tell the truth and strip away the lies. YOU CROOKS DON’T OWN ANYTHING….THAT IS ALL A MANUFACTURED ILLUSION BY THE MONEYED ELITE.

  9. There is no America left. Only on paper. Get over it, stripper. Becoming hysterical, hyperventilating (what you do best) and grabbing a gun ain’t gonna change that.

  10. And come to think of it…

    A lot of people getting “sick” lately… Bush Sr. (ok, let’s give him the benefit of “age”), the Queen (ditto), the pope (likewise) but Clinton? Chavez? I don’t know… I hear fear does that a lot: cause illness. Might be worth taking the count.

  11. The problem is the manufactured horrible economy and the ongoing robbery by the foreigners disguised as TBTF American Institutions. They are not American Institutions, they are foreign controlled black ops….designed to suck our wealth out of the country. GLOBALIZATION IS A BIG FAT FRAUD…..IT IS ROBBERY OF OUR WEALTH BY OUR ENEMIES BOTH FOREIGN & DOMESTIC…..

  12. Ah bullshit Christine. The dollar is only worth what is spent into the economy. I knew you were a foreigner in disguise.

  13. Yep… your dollar is only worth what IMF says it is. It’s been like that for years but, since 2009 (last year any country has printed actual paper money), it has been institutionalized worldwide. Like Unesco taking over national parks and monuments. Like… Unicef taking over world education. Like WHO taking over world health.

    Globalization has been alive and well for years. Don’t believe me? Go ahead, stripper. have one of those sudden apoplexy attacks. Funny thing, though… St Kudlow and St Alex Jones (or was it Limbaugh? I always get mixed up in my AHs) never said a word about that. Any idea why?

    The world is going to belong to people willing to expatriate themselves… until there are no borders any longer.

    Special Drawing Rights (SDRs)

    August 24, 2012

    The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to around SDR 204 billion (equivalent to about $310 billion, converted using the rate of August 20, 2012).

    The role of the SDR

    The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

    However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

    The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

    (PS: check your bills. In some of them, the amount is written both in US $ and SDR)

  14. The following is a link and an excerpt from that article…keep in mind there was no “FUND’EM”—because there was no funding…only COLLECTION RIGHTS (to false default debt) were transferred in the subprime—so OF COURSE you could give a “loan” to anyone who could “fog a mirror”—because they weren’t “loans”…they were collection rights—all they needed was a “signature” of a “mark” (the unsuspecting borrower) to push the ponzi of the subprime…

    …Winston, curious, asked the guy what the plate meant. The man laughed and said, “That’s Angelo Mozilo’s growth strategy for 2006.” Here’s how Winston described the rest of the story to PBS – i.e. what happened when he asked the man to elaborate:

    “What if the person doesn’t have a job?”

    “Fund ’em,” the – the guy said.

    And I said, “What if he has no income?”

    “Fund ’em.”

    “What if he has no assets?” And he said, “Fund ’em.”

    Later on, Winston would hear that the company’s unofficial policy was that if a loan applicant could “fog a mirror,” he would be given a loan.

    This kind of information is absolutely crucial to understanding what caused the subprime crisis. There are people out there still willing to argue that the government somehow “forced the banks to lend” to unworthy applicants. In reality, it was unscrupulous companies like Countrywide that were cranking out loans en masse, knowing that these loans would be unloaded down the line, first to banks and then to sucker investors like pension funds and foreign trade unions, almost as soon as they were created…

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