How Much of That Bonu$ on Wall $treet Should Be Yours? Each Time You Use an Installment Plan You Are Creating a Huge Bonus to an Investment Banker

Some of the facts recited here are taken from the true story of one entrepreneur who turned $25,000 into $300 Million.

Has anyone ever asked how entrepreneurs with only $25,000 to their name in 2001 now have a net worth of $300,000,000?  Has anyone done the math? That money could not possibly have come from making loans using $25,000. That money could not have come from obtaining “warehouse” loans and then making loans. It all started with transactions with homeowners and investors. But where did the revenue come from?

Starting with $25,000 in 2001 and having a net worth of $300 million in 2021, the entrepreneur would have averaged a net income of $15 million per year (over 20 years). And since all that money supposedly arose from transactions with homeowners, we know the range of interest rates charged to homeowners contained in the disclosure statements made to homeowners. That would be an average of around 7-8%. Let’s give our entrepreneur the benefit of the doubt and go with 8% on the alleged “loans” that were “given” to homeowners supposedly by our entrepreneur.

On the back of a napkin, you can estimate the amount of such “loan” transactions with homeowners to produce $300 million over 20 years. If you are getting 8% it would require making almost $4 billion in “loans.”

But wait! The loans are not 20 years in duration. They are 30 years. So that raises the total to around $6 billion in “loans” that were made by a $25,000 company. I know and you know that is impossible but on paper that is what happened. The math is correct. It would require $6 Billion in loans to have generated $300 million over 20 years.

But wait, there is more! Since you only have a $25,000 company it must get money from someone else to make all those loans, right? It’s not a licensed or chartered financial institution so it is impossible for it to increase the money supply with the stroke of a key or a pen. Third-party warehouse lenders would have charged at least 3% to lend the money to the entrepreneur who in turn would lend the money to the homeowners.  So revenue of the entrepreneur in this example is reduced from 8% to 5%.

And that increases the dollar amount of loans made by the entrepreneur from $6 billion to over $10 billion. Big volume for a $25,000 company.

But wait, there is more! The entrepreneur had to pay really good salespeople to steer people toward his loans and away from competitors with established brand names. And extensive expensive TV, radio, and media advertising would have been required. That cost is around 4% per loan. which reduces net revenue from 5% to 1%. And oops we forgot administrative expenses of rent, utilities, communications, etc which is around 1%. That reduces total net revenue from 5% to 1% and then from 1% to zero.

And one last thing. Some portion of the “loans” would default. Those high-interest rates that were charged in the “subprime” market were in fact ratings on the likelihood of default. The higher the rate, the more likely the default based upon prior credit history and also because the rates were not viable — i.e., many people would be unable to sustain payments that were inflated by rates that were at or near the old limits for usury. That is why usury laws were first passed centuries ago.

So the bottom line is that making bad loans at relatively high-interest rates does not make any money and in most cases will produce losses —- the amount of which grows in volume proportional to the total amount of such “loans” that were  “given.” So that begs the question of why a securities broker would see such transactions as a gold mine.

And it begs the question of how our entrepreneur could amass a $300 million fortune or a pizza delivery guy could end up getting paid hundreds of thousands of dollars per year selling such “loans” to unsuspecting consumers. So if lending always means losses and the entire industry plowed into the lending marketplace, what were they really doing? What were they really selling? Because we know that our entrepreneur grew a $300 million fortune from an investment of just $25,000.

Nobody goes into business to lose money. You can do better than that by doing nothing. If they were not losing money, what was the other part of the deal — i.e., the part that WAS making money? And did that part interfere with the presentation of the apparent loan transaction and documents that memorialized the loan transaction?

“Bad” loans were apparently good for the players even though there was no possibility of ever recovering the entire amount paid to homeowners. So why was anyone paying or giving money to homeowners?

Is anyone curious?

After all, we all know by now that had it not been for sellers, appraisers, and brokers whose income soared far beyond what they were making the year before, the entire scenario described above would never have occurred. Where did their income come from? All based on making “loans” that in many cases were forced to fail, based on “collateral” that was valued at a fraction of the “loan” principal but based upon prices that were inflated by the flood of money from Wall Street onto Main Street on terms that were deceptively presented as affordable.

No reasonable person would knowingly accept a deal in which they purchased a vastly overvalued asset and borrowed the money to do it. And we know that homeowners did stop paying in large numbers and that someone “declared” a default based upon the data: a scheduled payment was not made or received by anyone.

So I have three questions for you.

Why would the entrepreneur take his last $25,000 and invest it into a business that will give him nothing in net revenue? If the net result was going to be losses that would leave the entrepreneur owing money not making it.

How did the entrepreneur make $300 million despite those circumstances?

Why would a “warehouse lender” lend money to an entrepreneur who only had $25,000 and wanted to enter a business where there was no hope of net revenue and no hope of profit?

The answer is that given the facts that can easily be confirmed, neither the entrepreneur nor the “warehouse lender” would ever be part of a lending business as described above; but they were very interested in and did participate in the Wall Street “innovation” designed to allow securities brokerage firms to create, issue and sell securities and keep most of the money.

But the securities business contained well-known risks. So the securities sales program was designed to lure all participants to ignore the legal and financial risks by rewarding them with more money than they had ever seen in their lives. Everyone has been making money hand over fist. Everyone except homeowners.

The “innovation” consisted of creating the illusion of a business entity that appeared to be raising money as an issuer of securities for the purpose of purchasing loans that were never purchased. No loan, debt, note or mortgage was ever purchased. But enforcement of the “loans” required a lawyer who was willing to represent that he or she represented a valid claimant to also produce documents that appeared to be facially valid. From such documents, a legal presumption could arise for the judge to conclude the documents contained true information about actual transactions in the real world that the loans were purchased. They were all fabricated, forged, backdated and robosigned — But most of all, they are false.

The apparent issuers were, in reality, the same securities brokerage firms — thus extending their role from the underwriter, broker, and seller to the principal issuer. The illusion was accomplished by naming a trust that was entrusted with nothing and a trustee empowered to do nothing. This was partially enabled by 1998-1999 legislation in which such securities were redefined to be private contracts that were not subject to SEC regulation.

Regulators completely missed the fact that these were not “asset-backed securities” (ABS) as labeled by securities brokers. They missed the opportunity to shut down a plainly illegal unregulated securities scheme that depended entirely upon deceiving homeowners about the nature of the transaction that they were sold — and which also depended upon deceiving fund managers and other people who thought they were sophisticated in matters of finance.

Securities brokers covered their tracks by creating more fictitious entities or entities that were mere placeholders, like “warehouse lenders.” No warehouse lender would ever trust an entrepreneur with only $25,000 and no hope of positive revenue or profit. And no source of funds managed by people of at least ordinary intelligence that in fact stood behind the warehouse lender would have invested one cent in such a scheme. But they did. And they did it because they knew the real plan. Anyone who is a paid a fee to do nothing would be attracted to that plan.

The sources of real funds would never give access to the funds being paid to homeowners and they would never allow access to money paid by homeowners who reasonably believed they owed the money because the transaction they sought was a loan and that appeared to be what they received. In the only case I know of where that mistake was made, the entrepreneurs stole the money and went to prison. See Taylor Bean and Whitaker. And the answer is that such sources of money never did give up access or control over any money or documents created to the transactions with homeowners.

The sources of real funds were people who actually paid money for the enterprise — without ever knowing the true nature of the venture. These are not people who were merely making promises, commitments, or pledges. In the financial market, and frankly all the markets, people who pay money expect to receive something back, usually in the form of a financial (monetary) return on investment. But so far we have seen that there is no viable investment. The prospect of the return on investment is less than zero, since at least some portion of the “Loans” would “default” if it really was a loan that created a loan account, or at least a transaction that served as the foundation for declaring a legal “default.”

So where did all those trillions of dollars in revenue and profit come from?

See my next post.

3 Responses

  1. Neil has a very unique nice creative way of writing!!! Makes interesting!! A book Neil? I think Hammertime is correct, but the repackaging occurred prior to any claimed bad loans. First, homeowners only stopped paying when the crisis exploded and home prices collapsed (owing more than house is worth) – before that the rate of default was small. Second, no flood of money ever went from Wall Street to Main Street — nothing was funded. I tell the same narrative – to emphasize. All was initiated at about the same time. That is – the Community Reinvestment Act (CRA), deregulation, and Pilot “RMBS” programs for PLMBS. There may have been some good incentive in the CRA — funding available to purchase homes for low/middle America. But the process went haywire. Previously, the big banks were the “servicers” to the GSEs. They reported to GSEs on the loans. But the GSEs were not making money (also about the same time). Congress mandated that the banks fund loans and sell them to the GSEs!! What the heck was in that for the banks? Banks went to Congress and complained — then they stopped complaining. They had figured out a loophole. Get the loans out of GSEs (and solicit to get them) – report any default they wanted, and BINGO – the remnants of internal recorded debt is in their hands. They take it on as Troubled Debt Restructuring — and pool restructured debt into the pilot program for PLMBS. No need to fund — no flood of money – just restructuring. And, the big first tranche holders in this PLMBS were the GSEs!! Thus, CRA satisfied!!! Yay! Says congress. Mission accomplished! GSEs no longer had a profit issue — they would get higher rates — assessed to low/middle income. GSE profit issues solved! Neil is correct – this was absurd – the low/middle income people were going to fund the pensions and investments of the rich, and judges and attorneys and Joey the pizza delivery investor? Really? Oh – how angry they all were — when those nasty homeowners could not pay the high rates (and Neil — rates went much higher than 8% on adjustable loans – and don’t forget those interest only loans). The only problems was – you can’t securitize Troubled Debt Restructuring — as it does not come from balance sheet accounts receivable. Never mind that investors and homeowners were never informed of the fake scheme. How did the government handle all? Blame the homeowners — “You bought too much house. You used house as an ATM.” No investigation occurred or was public. Settlements happened — for everyone but the homeowner targeted victims. If the public does not understand, the public can’t fix it. Although affected at least 40% of the population — we have been silenced. And, who were the Joey’s that invested 25K? Not pizza delivery guys – they were the front guys for the big banks who did nothing more than restructure already declared default debt. They are all gone.

  2. Narrative has been changed to everything has been fixed by settlements while still re packaging “bad” loans

  3. They are coming from theft of money from homeowners and pension funds

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