Livinglies's Weblog

A very  good friend of mine with no dog in this race asked me what the hell I was ranting about. Since she was really interested I responded with the following email I thought I would share with you. I admit to probably giving her a lot more than she probably was asking.

I referred to “deadly transaction” and others have referred to the transactions with homeowners as financial weapons of mass destruction. What do we mean?

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Tigers may look appealing in a strong cage, but if you let them out, they will devour you. the same is true for investment bankers whose products become unregulated and whose behavior is not subject to aggressive law enforcement. In the 1980’s savings and loans crisis more than 800 people needed up in jail within 3  years after the scandal broke — arrested and convicted of effectively treating the economic system as a private piggy bank where stealing, lying and deceit were carried out in the name of capitalism. It wasn’t capitalism. It was theft.

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The 2008 crisis is an unfortunate example of how far the banks have come. With the exception of one Lorraine Brown who admitted to falsifying tens of thousands of documents for foreclosure, nobody has  gone to jail despite ample evidence of the same base behavior that occurred in other crises generated by bankers who ran amok.

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So what are the deadly transactions?

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Start with what you think of as a loan. You borrow money and you expect to ay it back, right? And when others borrow money you expect them to pay it back or pay a price in loss of collateral (house or car etc.), credit rating and whatever other impact it has on their lives. Everyone is in agreement with that. So what is the problem? How could there even be a problem?

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Deep down inside most people know that they, the system, the society, government and the world of finance got screwed which is why the the world almost exploded when governments decided to bail out the banks who caused the meltdown.

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The tea party was born and everyone on every part of every political spectrum was questioning why the banks were not nationalized, put out of business and their management thrown in jail just like past times. The fact that it is still happening is making people crazy even if they don’t understand how it is happening. Hence the election of Trump, Jonson et al.

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It wasn’t until Wall Street people in government convinced George W Bush and Barack Obama to disregard their own instincts that the bailouts involving, so far, tens of trillions of dollars has occurred. That is a literal number, not some exaggeration to make a point.

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So stop the suspense, right? You want to know what was the toxic transaction with consumers.

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Let’s go back to the days of DITech and  Quicken loans et al emerging as “loan originators” posing as lenders.

• Why would anyone spend billions of dollars marketing loans whose interest rate of return is barely above the cost of maintaining the loan? Who does that?

• Why would anyone loan money to someone they never met without any documentation (No doc loans)? Who does that?

• Why would anyone loan money based upon collateral with a grossly inflated appraisal value that far exceeds any standards set by certified appraisers? Who does that?

• Why would anyone hire an army of sales people, mostly felons convicted if financial crimes to sell “loans” to people in poverty stricken areas living in homes previously appraised at $15,000  and full paid for, using appraisals that “valued” the home at over $200,000. Who does that?

• Why would people in that army of salespeople be paid more than  $500,000 per year when they were previously, literally making $15,000 per year delivering pizzas? Who does that?

• Why were rating agencies suddenly getting paid three times normal fees for rating unregulated securities that they should never have rated in the first place? Whose paying that and why did the rating agencies accept that?

• Why did insurance companies accept triple fees for insuring securities that were indexed on the above loans? Who paid that? Why did the insurance companies accept a guaranteed loss (spoiler — government bailout).

• Why did fund managers buy unregulated securities that were indexed on the above loans (later referred to by experts as “toxic loans” or loans “guaranteed to fail”. Who does that?

• WHY WOULD ANYONE MAKE A LOAN THAT WAS GUARANTEED TO FAIL?

• WHY WOULD ANY ONE BUY AN UNREGULATED SECURITY THAT WAS BASED UPON A GROUP OF LOANS THAT INCLUDED LOANS THAT WERE GUARANTEED TO FAIL?

• WHY WOULD ANY INVESTMENT BANK UNDERWRITE THE ISSUANCE OF SUCH SECURITIES?

• WHY WOULD ANY INVESTMENT BANK SELL SUCH SECURITIES OR FUND THOSE LOANS?

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The obvious answer is that for the investment bank operating through multiple intermediaries and sham conduits, they were not making loans. Homeowners were asking for loans and thought they were getting them. It was all a ruse. Investment bank paid homeowners, but not with the expectation of getting the money back. They refused to be considered lenders or subject to any lending laws.

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Their incentive was to get homeowner signatures, sell the personal data of each homeowner and the issue and trade securities that bet on an index (but not the actual performance) of any loan. In short the investment banks were actually purchasing and selling data, not debts.

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As a result the basic paradigm of reasonable expectation of any borrower was not present, which is what made the transaction deadly. The complete absence of any risk of loss combined with the ability to bet on the failure of transactions with homeowners resulted in  an obscene windfall to investment banks at the same time that it deprived “borrowers” of the most basic protection of any  “loan” transaction, to wit: the fact that the lender exists and has a stake not in the failure of the loan but in its success.

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In any standard loan transaction with a lender and a borrower, the lender appraises the value of the collateral conservatively to protect against the risk of loss, and takes every measure possible to get know their borrower to assure themselves that they will receive repayment. That element was completely missing and it still is missing. There is no lender transaction because there is no lender.

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And at the conclusion of a transaction with a homeowner, there is literally nobody left who owns the debt, nobody who has any risk of loss from lack of payment from the homeowner and therefore nobody who could legally claim a financial loss arising form the lack of performance by a homeowner. But that has not stopped millions of foreclosures that resulted in payments to securitization scheme players who received the proceeds of sale of forced sale of homesteads as revenue.

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Foreclosure has been called the equivalent of capital punishment in civil court Forfeiture of one’s home is the most severe penalty anyone can pay in civil court. What we have operating now in our courts, in law enforcement, in our legislatures is a coordinated effort to sustain a scheme for profit by killing the homeowner ownership of tens of millions of people who made the mistake of believing that the sophisticated people on Wall Street had created a safe way to provide capital to homeowners and home buyers. It was safe ONLY for Wall Street. It was and remains catastrophic for Main Street. It has been deadly for the average consumer.

Filed under: foreclosure |