How the loan was sold multiple times.



It is like any hedge contract. The buyer of the hedge contract is the investment bank, sometimes working through sham conduits. It is saying it wishes to ensure stability of its “portfolio.” It provides triple agency rating and “insurance” from AIG for instance while at the same time buying insurance from  AIG based on the premise that hedge funds are selling hedge contracts. It looks like a safe bet as long as you don’t peek under the hood where you see that the debt, note and mortgage were split at inception and the enforcement of the debt, note and mortgage is at best a long shot if all the facts are revealed.

The hedge funds and insurance companies make money because they are receiving fees from the investment bank for assuming the risk. It’s income pure and simple. The risk is seen as nonexistent. But in fact a small move in the value of the certificates whose value is entirely derived from the investment bank’s promise to pay certificate holders is a discretionary promise controlled exclusively by the vinestment bank. So Goldman can reduce payments and cause the certificates to decrease in value thus triggering the insurance and hedge contracts. Goldman can also, in its sole discretion declare that the value has reached the trigger point. And the counterparties expressly disclaim subrogation or any claims to the certificates, debts, notes or mortgages.
In many cases the initial hedge contract was created for the highest tier of the tranches containing AAA rated mortgages. But the tier 1 tranche had received fees for issuing a hedge contract on the lowest tranche. The certificates were based upon the value of the tranche including the hedge contracts which investors thought were exclusively to protect the Tier 1 tranche but in fact contained a commitment to absorb losses for the Z tranche that contained 15% mortgages. So the modest but lucrative fees paid to hedge funds to assume the risk for stabilizing the Tier 1 tranche was in fact a guarantee of the entire Z tranche.
When Z tranche failed as everyone knew it would, it took down the tier 1 tranche and through similar devices the entire issuance of that “trust” was reduced to rubble with investment bank getting the full amount of the investment (by certificate investors) paid to the investment bank (not the certificate investors) in mortgages that had (a) not failed and (b) did not have nearly the effect on perceived loss of value that was reported.
Hence the investment bank sold, using the trust name as a fictitious name for the investment bank, to the investors who bought certificates whose value was perceived as derived from “underlying mortgages” and then sold again the same mortgages under guise of hedge fund and insurance contracts. In fact the value of the certificates was entirely derived from the value of the promise made by the  viestment bank with no right, title or interest to the indexed fictitious portfolio of debts, notes and mortgages arising out of the origination of or acquisition of residential mortgage loans.
When the credit market collapsed (nobody was willing to trade in derivatives) Goldman and others had insurance contracts pending with AIG et al. The bailout was used to fund AIG so that GOldman could receive $150 Billion on losses never incurred by Goldman and which were never attributed to anyone who might be construed as having purchased the debt. Goldman was not lobbying to recover losses made from risky investments. Goldman was lobbying and did so successfully in protecting a windfall expectancy from hedge contracts and insurance procured through false pretenses. Losses on the loans had nothing to do with it.
Goldman and Citi were successful at manipulating the story. TARP and FED and US Treasury and FDIC bailouts were at first predicated on losses caused by defaults on mortgages. But that is only part of the story. Mortgage Defaults actually were not a major cause of any collapse except in a few instances that Goldman PR seized on to make it appear that was what was happening marketwide. Most mortgage debt and all risk of loss had been sold multiple times. There simple was no owner of any debt in which the claimed “holder” had an pecuniary interest. Hence today we have no creditor — a proposition that virtually everyone finds unacceptable.
So TARP evolved from Troubled mortgages to troubled Certificates. And when the promise was revealed to come not from homeowners but form the investment banks, TARP evolved again into a generic ill-defined “troubled asset ” classification that meant anything the banks decided. The stuff that simply could not be reconciled was put into the maiden lane entities and then later recycled out as new securitizations as though there was nothing wrong with the inherently defective and illegal nature of lending, servicing, selling and profiting from the sale of loan products that were guaranteed to fail in many instances and whose failure was central to the bank business model in which they would profit from the failure.
What I am saying is that the infrastructure for all of that was established before the loans were made. That infrastructure and the expectancy of windfall revenues and profits from the origination or acquisition of loans was absolutely essential (condition precedent) to granting loans, whether they were viable or not. The funding of the loan was essential to getting the borrower’s name, signature and reputation as well as their house as collateral. Without that all the tranches, insurance contracts, hedge products and more advanced derivative products were never have been written, much less sold. This process did not, as was advertised, diversify risk. It concentrated it on borrowers, government and investors in that order.
Note that the banks are left out of that equation because they were intermediaries as it relates to risk and they were principals as it relates to profits. It is my contention that this was an implied contract in which the homeowners should be compensated for their essential part and focal point, but for which the rest of the scheme, undisclosed to borrowers, could not have occurred.
Consulting with insiders the average gross revenue from the loan of $1 was between $10 and $20 dollars. So for an average loan of $250,000 the gross revenue was in excess of $2, 500,000 and frequently topped $5,000,000. The average was $8,000,000. Royalties and license fees usually run from as low as 1.5% to an average of 6% and are applied to gross revenues. The implied contract that included the borrower and the investment bank thus computes as $480,000 plus statutory interest which at this point would average around 9% per year for an average of $43,200 per year for an average of 10 years or $432,000. Hence the value of the claim by each borrower is on average $900,000 for each $250,000 loan.
In addition there exists a further claim for recovery of all undisclosed compensation as outlined above amounting to several times the above estimate. this presents an unparalleled profitable opportunities to good litigators. Pro se litigators are not invited. The theory is simple and if presented correctly will almost definitely survive a motion to dismiss and could be the subject of mass joinder, class action and even Qui Tam relief.
While a DC group is forming I would be willing to help in the creation and development of a new group whose sole focus was on this theory.

7 Responses

  1. Bob G — you are right — nothing showed up in the accounting. If these loans were actual “assets,” they would be recorded on the balance sheets of the investment banks as they were acquired, and as is required to be for securitization (removal to off-balance sheet). In fact, the “assets” were on no one’s balance sheet — not even the non bank claimed originators balance sheet. .

    Brian Tracey — OK Agree. Who was in office was the Financial Crisis imploded? And, who cares nothing about fixing it today?


  2. Neil makes a strong analytical case here, especially because he has spoken to insiders. But I’m still having trouble with the math. Why didn’t all these profits show up as income and assets on the investment bankers’ financial statements? also, there was a finite amount of money lost by the insurers. wouldn’t all those investment banker profits resulted in an equivalent amount of losses to the insurers and the certificate holders? to the best of my knowledge a quadrillion dollars of losses would have shown up on the lossees income statements and balance sheets. i see no evidence of that, but perhaps i’m looking in the wrong places. in any event, i think if that had happened, it would have been well reported

  3. @ Anon …

    “Withheld from Congress” Nothing was withheld… our “leaders” have sold our Uranium to Russia ,, ICBM tech to China ,, Sold enrichment equipment to Iran ,, killed millions in the middle east keeping countries at each others throats to sell arms and create an environment that supports the CMIC … you go to congress a pauper and come out a 100x millionaire …. Planes loaded with pallets of $100’s ,, $Billions ,, sent to multiple airstrips … what percentage was “kickback”? Benghazi was a simple weapons sale outpost where the nosy people were 187’d … How many people that crossed the FED took their own lives with nail guns or shot themselves twice in the head? Unlimited funds printed willy nilly with no oversight is the root of all monetary evil.

  4. A lot of what is stated here is true — especially the tranche structure and fees. Also true is how the bailout was handled.

    But, much is missing. Loans are are not actually sold to multiple parties at once as each contract negates the prior one. While loans may appear to remain in bogus trusts, there is coding that actually removes them. .

    The biggest problem is not stated here. The loans, for the most part, were not “poorly unwritten,” but rather manipulated to be included in the distressed debt path that is described above. This manipulation occurred at origination and, should be cause for the “contract” to be void.

    However, the government has done what it did, and will not go back. The government may try to fix the “Debt Collection” but will not be able to do so, as they cannot correct or fix the original fraud – which the debt collection is dependent upon. Also, modifications became the mechanism to keep all the fraud going. It was sort of a bribe to keep your mouth shut. The debt collection is dependent upon the original fraud.

    I really wonder what was withheld from Congress, when the three together handled the bailout, and the crisis. Sometimes, it appears that nothing was disclosed to our representatives because they all appear clueless.


  5. When is someone going to file a class action against the investment banks?

  6. Good example of royalties – which should be paid to home owners for producing MBS. Lets demand it!

    oil and gas royalty is the percent of the money generated by the oil and gas from his property. Traditionally 12.5%, but more recently around 18% – 25%.

    So if the oil well produce 100 barrels a day, and the price of oil is $80 per barrel that month, then the cash flow is 100x$80 = $8,000/day The royalty owner, who agreed to 15% royalty, would receive $8,000 x 0.15 = $1,200/day. Over a month, that brings in $36,000 per month to the mineral owner, who in this case, is the landowner.

  7. This theory is great, I want to add that this MBS Ponzi scam only works for buyers-investors who plan to use the property for 3-5 years and sell.

    For those who wants to have a HOME MBS do not work since it does not benefit investment banks whose securities are losing value as long as loans are re-paid. So, banks are very interested in DEFAULTS not payments. I want to share a link to GNMA REMIC Trust.

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