They Are Trading on Data, Not Ownership

The word “derivative” is used like “alakazam!” It is as if the word conjures up some magical mystery formula by which brokers and traders can engage make money without ever investing in anything real. The most recent explosion happened with Mr. Hwang and the Archegos hedge fund. Here is the quote from the April 3, 2021 New York Times article by Kate KellyMatthew GoldsteinMatt Phillips and 

Hwang kept amassing his stake, people familiar with his trading said, through complex positions he arranged with banks called “swaps,” which gave him the economic exposure and returns — but not the actual ownership — of the stock. [e.s.]

See https://www.nytimes.com/2021/04/03/business/bill-hwang-archegos.html?referringSource=articleShare

The article points out that the positions taken by Hwang were “complex” and did not involve ever buying or owning the stocks that would bring him riches or losses. Hwang was not a shareholder. His complex positions boiled down to one simple point: he was betting on data that arose from reports about the movement of the real stock on real exchanges. He could not bring a shareholder derivative action because he wasn’t a shareholder.

This is a whole new level of securitization. And it was brought to us by Wall Street brokers. They were not satisfied by finding undervalued bonds that would pay out 3-4 times the price on the bond market. They were not satisfied by the creation of junk bonds in which value was created out of nothing with the near certainty that the acquired companies would fail. The broker’s next generation’s scheme was to bring forth a cloud of smoke and mirrors in which there was no value and there were no losses for the broker and they named it “derivative.”

So they invented certificates that would be called mortgage bonds. They were issued not by any lender but by the brokers themselves in the name of a brand name bank, as trustee for a nonexistent trust. The purchaser of the certificates received discretionary promises from the broker that they would receive some regular payment — not from the trustee bank who was guaranteed and indemnified against any claims or losses by the brokers.

The investors were told that the money to pay them would come from homeowners who were putting up their homes as collateral for a loan deal. The homeowners, of course, had no idea the investors, the brokers, the trustee or the trust was named or existed. The homeowner thought that he/she was dealing with a company that was lending them money. That company would become known as the originator.

But they were not given any right to collect that money. They only received a promise from the investment bank that the scheduled payments to investors would be made. Investors received no right, title or interest in any transaction, obligation, debt, note or mortgage from homeowners. And buried within the prospectus was the “disclosure” that the payments might come from the money the investors had advanced and not from homeowners. It might even come from investors in other deals. And any analysis by any competent securities analyst would have and did reveal that this was a Ponzi scheme.

Meanwhile, the brokers took part of the money from the investors and paid homeowners to execute the note and mortgage. But the brokers never took ownership of the transaction, debt, note, or mortgage. Like Hwang, the brokers started trading securities as if they owned the stock (or loan) but not really owning it. But the brokers took it one step further. Unlike Hwang who could not bring a shareholder derivative action because he wasn’t a shareholder, they instructed companies to pose as loan servicers who in turn would hire attorneys to foreclose on the loans that were not owned by any of the designated parties.

The linchpin problem in foreclosures is simple. The brokers had borrowed money from lenders like Credit Suisse against the sale of certificates to investors, the proceeds of which were used to pay off the lenders. The borrowed money was what was used to pay homeowners. So the investors’ purchase of certificates was in no way linked to funding any transaction with homeowners.

This meant that nobody owned the loan and nobody had ever made an entry on any general ledger on which any loan account receivable was ever started. It also meant that nobody had a loss arising from a missed scheduled payment from the homeowner. And since nobody in the chain had ever paid for ownership of a loan, no loan was created, despite the homeowners’ belief that they had applied for and received a loan.

Since the money for the homeowner transaction came from a third party loan to the brokers, and since that loan was satisfied by the sale of certificates (“mortgage bonds”) there was no possible transaction in real life in which anyone could legally transfer ownership of the loan. Such a transfer could only (a) come from someone who owned it and (b) be effective upon payment of value for the underlying debt of the homeowner.

So they faked it. And nearly all foreclosures in all U.S. jurisdictions arise out of the transaction described above. And that means that nearly all of them were fraudulent organized schemes to defraud homeowners, investors, and all related people. When homeowners agreed to pay money to the originator and its assigns and successors, they had no idea that there was no reason to pay any money to anyone under this scenario.

When the homeowner issued the note and mortgage, he/she did so with the contractual intent to enter into a loan agreement that never materialized. There would never be anything more than a payment history if the homeowner started making scheduled payments. there would never be a loan account a loss arising from performance on the “loan,” and there would never be compliance with federal and state lending statutes, rules, and regulations.

Homeowners didn’t know it and they had no way of knowing that they were not involved in a loan that would be owned by anyone. They were paid a fee ranging from 2%-10% of the total amount of revenue generated from the fake “securitization” of their “loan.” They had no reason to return that fee without their specific and explicit contractual assent to the arrangement.

But what homeowner would have entered into such a transaction where there was no risk of loss by a real lender, complying with the law? What homeowner would have wanted to be part of any securitizations scheme? What homeowner would not have sought professional help from advisers? What homeowner would not have been advised that the incentives for this transaction, were not to profit from payments of interest, but rather to profit from the sale of securities? What homeowner would not have been advised that the appraisals produced for the “Closing” were merely made as instructed and did not represent actual value? What homeowner would have signed a deal where the securities stood to gain windfalls of money if the loan failed?

And all of that is useful to know not because you are going to prove it in court. It is useful because it is true and you can be confident that when you insist on compliance with timely and proper discovery demands your opposition will fail or refuse to do it. And that is what opens the door to the homeowner’s victory.

The claim against the homeowner cannot be proven as a prima facie case unless the named claimant can be proven to have owned the loan, debt, note, and mortgage and would receive the proceeds of foreclosure to make up for an economic loss caused by the homeowner. that prima facie case is generally viewed as presumed from the start of the litigation.

But once the homeowner contests the presumptions, and demands discovery relating to the actual movement of money in the real world in exchange for ownership of the debt, note and mortgage, the presumption can be rebutted if the opposition fails to comply. And it will be rebutted because the opposition can’t comply.

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Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.
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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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8 Responses

  1. Absolutely Papergate!!!

  2. I bought “Too Big to Fail” and “Panic: The Untold Story” which involves the real governmental actors – have been transcribing their statements in the films – since the films are publicly available, their narrative is clear where their ‘loyalties’ were – definitely not on the people but their financial cronies.

  3. Anon – papergate at aol com – I’ll give you home no. Thanks, I always feel I’m in the right fight when I read your commentary 8142593290!!

  4. Ian — I recall well what was happening. Knew in 2007, before all went public, that something very wrong. And, I recall high officials being in the newsroom lobby. They were supposed to come on to speak, but they never did. Why were they in the lobby? Influence? One of the first movies out was “Too Big To Fail.” There is actual discussion how they were going to blame the people. Recall — “The People bought too much house.” Why? I think there was such embarrassment that the “Crisis” occurred with regulators sleeping. The only “loss” was that the banks, and investors, could no longer reap adjustable high interest rates on the backs of people who would never be able to pay rates that could increase to 13 or 14 % (Or even higher) — way above the market rates. It made no sense. American homes, and ownership, were targeted for destruction. No one cared. Had they investigated instead of big settlements — the truth would have been told. But they knew what an investigation would actually reveal. And it is not pretty.

    Papergate — leave some way I can contact you. Thanks.

  5. ANON- you’ll remember reading that the bailouts for the 08-09 “financial crisis/fraud crisis ) according to Bloomberg, Forbes/ WSJ was between 29 trillion and 33 trillion dollars , which of course (at the time) roughly 1.4 to 1.6 times the GNP for the US. No one ever mentioned this, with perhaps the exception being Better Markets website. All we peasants heard was the $800 billion TARP bailout, “foaming the runway” for the banks. I remember the grim faced talking heads on CNN, MSNBC, etc telling us that the banks took heavy losses due to their exposure to subprime mortgages. Even way back then, I thought “ how could they have losses? They were selling the mortgages- the people who bought them would incur the losses. Comments please.

  6. Anon – going after the big guys would love to have your feedback of papers being created – you have a great sense of what’s going on and articulate – Neil is too busy and can’t be of any assistance . . . please communicate with me . . . it’s time for less words and more direct action – mine involves a very hot potato right now with Leon Black and the boys …if you can’t or won’t I understand.

  7. Oh — and we (and Congress) were told at crisis explosion, by Mr. Bernanke, that there is no money to help the homeowner victims. I remember it well. “There is no money to help the people.” PERIOD. I could not believe the words said. They could only help the banks, and likely anticipated getting some money back by settlements and public private programs. That would save more people they thought. They thought they were doing the right thing for the benefit of all as a country. NOT!!!! There had to be scapegoats. The people became the victims and scapegoats. AOC? Pretty lady – you listening? You are worried about student debt? This is much bigger. Covered up. Where are you? Hmmm — found the means for a lot of money for the pandemic. Hmmm. The means was not there back then at crisis fraud explosion.

  8. Quote – “Since the money for the homeowner transaction came from a third party loan to the brokers,” So, this is all not quite clear. What is not described here appears to be the warehousing lending to non-bank entities that falsely claimed to have lent money during the crisis. These non -bank entities had “loans” with the warehouse lenders. If they could not meet those loans, the warehouse lender becomes the collateral holder. The warehouse lenders were the first to shut down at crisis explosion. This caused the non-banks to then rapidly shut down. Meaning — they could not and did not pay the warehouse lenders – who then become collateral holder (and by collateral – that means the home – not the loan). These same warehouse lenders were security underwriters to the crisis trusts. The security underwriters either purchased the certificates (but not all of them) to the fake trusts (and then marketed them), or purchased the collection rights directly from non-banks – who falsely claimed to originate the “loans” – on the collection rights the warehouse lenders/security underwriters themselves (formerly servicers to GSEs) purchased from the GSEs. So the government settlements were with the security underwriters for, basically, passing off fake securities to investors who should have known better. Result to homeowner victims? Well – the loan was fake to begin with, so the reasoning was, either you get a modification (with no lender) if non-bank debt collector qualifies you – or we take the house by foreclosure. In other words, since the loan is fake, the people don’t deserve a loan – or the house. By the settlements and government the fake loans collection rights were sold off to distressed debt buyers.
    While the loans have no value, the house does. The problem in foreclosures is that the distressed debt buyers are never represented. They are concealed. And, distressed debt buyers should never have been there in the first place as the game was a con to begin with. Thus, there is no “holder” (as there was no real mortgage/note), and there is no creditor, as all was fake. The people were conned, but the response to the con, and concealment, is even worse than the con itself. While there may be deeper problems with the entire system of lending (not real lending), the financial crisis is an example of a bad wrong, that has never been righted for the people.

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