FAUX TRANSACTIONS: The Mathematics (Bookkeeping) behind the securitization myth

“You got the loan, didn’t you?” The correct answer is “NO.”
While most Americans understand that Wall Street “securitization” is operating behind the scenes, as consumers they have no knowledge of how this is impacting them. And worse, they like to pretend that they do know.
Millions of American homeowners have been asked the question. And they have answered that question as if they know all about Wall Street finance and the lending marketplace. *
By accepting the Wall Street myth, smoke, and mirrors and incorporating their well-developed sense of morality, American homeowners answer “YES, I got THE LOAN” because they want to be truthful and accurate and maintain their credibility.
And Americans like their victimhood.  But that is the lazy way out of a challenging situation. The truth is that virtually no consumer knows any more about their installment payment transactions than they do about rocket science.
I have spent 16  + years so far educating lawmakers, homeowners, law enforcement lawyers, and regulators about false claims of “securitization of debt,” much like the whistle-blower who warned the SEC about Madoff ten years before the scheme collapsed. This, too, will eventually collapse. But like Winston Churchill said a long time ago, “You can always count on the Americans to do the right thing — after they have exhausted all other options.”
Some consumers become lawyers and carry their faux knowledge with them. And some lawyers become trial judges. Some trial judges became appellate judges. Some lawyers become lawmakers. And all of them are heavily influenced by well-scripted vomiting of fake news, false theories, and empty threats.
Since 1998, when President Clinton signed waivers and outright deregulation of the most dangerous financial instruments ever devised, everyone has been making decisions based on faux (false) knowledge.
Through generational errors in judgment and facts, most consumers grow up with a skewed view of the world and personal finance. Through repetition and coercion, most Americans are far more interested in what they can borrow (i.e., their FICO score) than what they have in the bank. Through the lens of history, this is obvious lunacy.
The consumer-driven economy has turned every American into food for a vast monster of the machinery of decreasing choices, unwanted merchandise, unneeded services, and increasing prices while depressing the wages of those who produce the goods and services. So much for the opening words of our constitution about the general welfare. Aspirin can be very helpful, but you will bleed to death if you take enough of it.
Since consumers mostly do not want to play the part of an “issuer” in the risky business of selling securities, they refuse to accept that they did exactly that, albeit unintentionally.
When the few consumers willing to research and get informed become knowledgeable in the world of accounting auditing and high finance practiced by Wall Street, they come to vastly different factual, legal and moral conclusions. When they become knowledgeable, the moral conclusions drawn by consumers regarding their so-called “credit” transactions shift 180°.
They suddenly realize that they were duped into issuing paper that was instantly converted into data creating marketable bets on how that data would change or be announced. There was nobody on the other side of their loan transaction. There was no lender.
In fact, there was no creditor. At the time of the faux closing with a closing agent, an investment bank had already made more money than anything paid to or on behalf of the consumer. It was on its way to generating revenue geometrically (and sometimes exponentially) higher than anything known to the consumer. All this was done solely because the consumer signed and issued the required papers.
The consumer was cheated out of the opportunity to bargain for economic incentives or participation in the scheme. Their share, it turned out, went to paying tens of billions of dollars in bonuses, commissions and fees each quarter to such high rollers at the peak of management of investment banks to the lowest pizza delivery guy who was willing to say anything to get the consumer to issue the paper.
Institutions like U.S. Bank N.A., Bank of New York Mellon, and Deutsch Bank have been raking in hundreds of millions of dollars per month in exchange for the use of their names under very restricted circumstances without any risk that they might lose money, pay fines, sanctions or damages to the governments or people that were injured by the faux securitizations scheme.
The money is there to pay all the players and actors on the stage as much as they want and more simply because the sale of bets on data so vastly exceeded the transaction with consumers/homeowners that Wall Street and to invent new ways to park the money overseas to avoid accountability and worse, taxation.
Worse, the consumer was absorbing the risk of nobody being home. Since there was no company, bank, person, or legal entity that recorded an unpaid loan account receivable on its own books, and each party who was implied to have such a data entry had contracted away any rights to administer, collect or enforce the “transaction,” there would never be anyone who had the legal authority or duty to offer workouts or even anyone who had the incentive to redo the deal to save the value of the putative loan account. The loan account did not exist. Nobody had an interest in any value derived from ownership of an unpaid loan account.
In fact, the actors had the reverse incentive. Since there was no loan account, there was no loss. And since there was no loss, any money they could get through collection was pure revenue. *
And any money they could get through foreclosure was a pure windfall bonus. Consumers did not bargain for such an outcome. They bargained for what was enshrined as law in the Federal Truth in Lending Act — that “lenders” were responsible for assessing the viability of each transaction and “lenders” were responsible for creating fair appraisal of values.
As early as 2005, 8,000 licensed appraisers warned congress that they were under heavy pressure to issue appraisals far over property values. By 2007 the Case-Schiller index showed clearly how prices were at unprecedented ratios compared to fundamental value — i.e., the median income for a geographical area.
The more anyone probed, investigated, and analyzed, the more apparent it was that consumers/homeowners did not get what they had asked to receive — a loan transaction. Instead, they were given “loan papers.” or “closing papers.” They received no money from a lender. They only received money from a closing agent who did not know the identity of his principal. Consumers were accepting risks that were in violation of existing laws, rules, and regulations. And they paid the price.
Wall Street lawyers knew they had no legal way of enforcing loan accounts if they did not exist. So they created the illusion of loan accounts by presenting in court an uninformed witness who testified he or she was familiar with the records of the company that was designated as a “servicer.”
By argument (but no evidence) from lawyers who are protected by litigation immunity, they convinced thousands of judges that a payment history appearing as a possible record of business performed by the faux “servicer” was an acceptable substitute for what had always been a rock bottom requirement in all such actions — production of the loan account. They called it a Payment History, but it was not a history of any payment that the company received.
And Judges being lawyers and not accountants had no choice but to believe them because the consumer was not an accountant or sophisticated in Wall Street finance. Hence no timely and proper challenge was made to the obvious: there was nothing to enforce.
So millions of homes were foreclosed to satisfy greed under the illusion that the money was being used to pay down an unpaid loan account receivable. So far as I have been able to ascertain, there is not a single case where foreclosure resulted in the payment of a creditor who owned an asset deriving it value from the promise of a consumer to make payments.
This mammoth fraud was avoided by Iceland, who put the bankers in jail, reduced household debt at the expense of the banks, and enjoyed a recovery from the 2008 recession within 4 months. The stimulus that Wall Street convinced the American government to pay out in the form of bailouts and bond buying was completely avoided in Iceland.
Having said all that, several readers and commentators have asked me to give a brief explanation and description of the accounting involved. Be advised that this is not complete. Some facts have been shifted (not changed) to support the reality implied below.
Additional caveat: Although not a licensed CPA, I received my degree in accounting and auditing. The revelation from this accounting led to a concealed agreement in Arizona that eliminated the State’s deficit following the 2008 crash. The banks agreed to it to avoid income taxes and other fees owed to the state, county, and municipalities. Total $3 Billion.
Wall Street banks could have shared the prize money with the consumer/homeowner who made all this possible. But that was unthinkable because sharing money with the proletariat was unthinkable.
So here is a short history of accounting entries starting in the late 1990s as it was applied to what was falsely labeled “homeowner loans.”
  • On the books of an offshore lender (like Credit Suisse), you have a debit to the cash account and credit to the loans receivable account. The cash account appears on the left side of the balance sheet under assets, and the loans receivable account also appears on the left side under assets. The total assets do not change. They are categorized as reflecting a decline in available cash but an increase in the asset consisting of ownership of the unpaid loan account.
  • On the borrower’s books (like Lehman or JPM Chase), you have a credit to the cash account and a credit to the loans payable account. The cash account appears on the left side of the balance sheet under assets, and the loans payable account appears on the right side under liabilities. The total assets change, reflecting the increase in the amount of cash available. Total liabilities increase reflecting the amount owed to the lender. This si teh soruce of funds that is used to send to closing agents — if there is a payment of money. If the soruce of funds is the same on a “refinancing” there is no payment of money, only an instruction is sent to the closing agent on presetnign a settlement statement. The books are balanced because of the accepted basic principle that assets = liabilities + stockholders’ equity. 
  • For reasons that will be apparent in a moment, these entries are not made on the books and records of the borrower (e.g., Lehman or JPM Chase) directly. They are made indirectly on the books of an offshore controlled entity — with full permission and cooperation of the lender (e.g. Credit Suisse). These entries are referred to as “off balance sheet” transactions because they are not reflected on the books and records filed with the SEC or banking authorities. This trick of accounting was born and approved in the 1960’s see Unaccountable Accounting by Abraham Briloff, who predicted this mess.
  • Continuing with the borrower’s off-shore books (i.e., Lehman or JPM Chase), you have a debit to an off-balance sheet cash account in the amount required to send to a closing agent who is closing a transaction with a homeowner or prospective homeowner. This is where the accounting gets funky because instead of making an entry that would establish an unpaid loan account as an asset of the borrower (Lehman or JPM Chase), there is no entry. This avoids or evades the category of a lender in the transaction with the homeowner/consumer. Hence no compliance with lending or servicing statutes is required, and no liability for violation of lending statutes applies.
  • The closing agent receives the funds and instructions to prepare documents in favor of ABC Loan Broker, Inc., who has already assigned the transaction, even before a loan application is made, to a controlled intermediary for the borrower (e.g. Lehman or JPM Chase). ABC Loan Broker is temporarily assigned the title of “lender.” It is an undercapitalized entity that removes the risk of bankruptcy or legal liability from the investment bank borrowers (e..g. Lehman or JPM Chase).
  • Hence the closing agent has equal entries of cash in and cash out — less the closing fee (posted to the general ledger like all other financial transactions) but appearing on the income or cash flow statement instead of the balance sheet.
  • The faux originator or “lender” has no entries on its ledger, assets or liabilities. It only has an income entry for cash receipt for its fee in playing a role in the faux lending scheme with the consumer/homeowners. This is posted to the income statement rather than the balance sheet.  When it goes out of business, it never reports in any bankruptcy that it was the owner of any loans receivable. Never.
  • The closing agent reports the transaction to the homeowner/consumer as though there was a loan agreement and transaction between the faux originator/lender and the homeowner/consumer. In fact, though, there was a loan agreement (i.e. note and mortgage), but not a loan transaction — and even the agreement is not executed by the originator/lender.
    • The transaction — i.e., the passing of money between parties — occurred between the borrower (e.g., Lehman or JPM Chase) and the consumer/homeowner.
    • People assume that the grantee of an instrument obviously knew about it and wanted it because they paid for it.
    • This assumption is wrong in nearly every document executed in every situation involving homeowners.
    • Entities like US Bank will later disclaim any knowledge, control or interest in any conveyance. If that is pierced, then they have an indeminfication agreement from, for example, Lehman or JPM Chase.
  • The faux transaction is then “corroborated” by the illusion of a company that is named as “servicer” for the account without anyone saying that the “Servicer” is acting for the originator acting as “lender” to the consumer/homeowner.
    • The consumer receives correspondence prepared and sent under the letterhead name of the company that has been declared as a “servicer.” Thed lcaration si authroied by AI correspondence and statement robots owned, maintained and oeprated by third aprty  FINETCH companies who take their direction from, for example, Lehman or JPM Chase.
    • By the time the consumer gets access to information that is inconsistent with what has been told to him or her, the statute of limitations on violations of lending and servicing laws has expired.
      • Worse yet, the rendition of court orders contrary to what the homeowner newly learns creates a bar to even raising the issue of fraud under claims preclusion (res judicata, collateral estoppel and law of the case).
  • The Borrower (e.g. Lehman or JPM Chase) then sells IOUs (“certificates”) to investors, promising that they MIGHT make installment payments indefinitely if certain conditions are met. Those condition include but are not limited to the complete unfettered sole discretion with or without cause vested entirely in the Seller (e.g. Lehman or JPM Chase).
    • Like the transaction with the consumer/homeowner this off-shore transaction is conducted under the name of an existing or nonexistent special purpose vehicle, usually falsely labeled as a REMIC Trust.
  • For example, “U.S. Bank, N.A. as trustee for the SASCO 2006-A1 Trust Certificates,” where it is not clear whether the reference is to US Bank as a trustee at all, or if it is a trustee for a legally organized trust in some jurisdiction, or for certificates that form the res of an unanmed trust, or for the holders of the IOU certificates.
    • You will never find any agreement even offered during discovery that provides any information relating to the authority of US Bank (or Bank of New York Mellon or Deutsch) wherein they have some duty or power of representation to act for the holder of the IOUs (certificates).
    • But if you ask U.S. Bank, they will admit they know nothing about the transaction with the consumer nor any action undertaken to administer, collect or enforce it.
    • They are willing (i.e., they have issued a license) to allow their name to be used as the principal in the principal-agent relationship with the apparent “servicer” (who is NOT allowed to touch any money — and therefore has no record of any such receipt).
    • So neither the designated “servicer” nor the designated “trustee” is allowed to do anything.
  • The proceeds from sale of the IOUs (certificates, aka mortgage backed certificates that are not mortgage backed) that is received by the Borrower (e.g., Lehman or JPM Chase) is sufficient to cover the money sent to the closing table of the closing agent.
    • The money is received from managers of stable managed funds based upon false ratings from accpeted ratings isntitutions who have been bribed to issue reports wihtout research or relyining solely upon reports from the issuer.
    • The Lender (e.g., Credit Suisse, owner of Select Portfolio Servicing and a family of companies acquired by SPS) is paid in full for the loans.
    • The balance is pure profit but it is “booked” as trading profits on an as needed basis to maintain the illusion of rising profits of the borrower thus elevating the price of the commons tock of the Borrwer (e.g. Lehman or JPM Chase). This is accomplished by repatriating incremental portions of the vast sums (around $3 trillion currently) that is parked off shore as management chooses.

Hence the Lender (e..g. Credit Suisse) has a credit to the cash account and a debit to loans receivable. In addition, they have an equity stake in the offshore and onshore transactions involving “derivatives” whose value is “derived” from reports of value by the borrower (e.g., Lehman or JPM Chase). But neither Borrower or Lender has any stake in owning the IOUs. 

2 Responses

  1. Madoff targeted the wealthy. Not that anyone should be a target. But not the same with financial crisis fraud which was targeted to low and middle income America. The heart of America. Fraud was allowed under deregulation and the guise of the Community Reinvestment Act. Any discovery of same by any existing regulation was too late. Settlements? Nothing for the true victims. Neil is correct. No financial balance sheet accounting, no funding, no loan paid off by borrowers despite what a HUD statement and mortgage conveyed. You paid for — WHAT??? Quote from Neil – “You got the loan, didn’t you?” The correct answer is “NO.” Correct. You paid title insurance for that (Non) loan. You paid fees. You paid off nothing. I limit to financial crisis fake loans and the remnants that followed. Not all loans. I don’t understand why there is not outrage. Believe that no one traces the cash flow. And, if we or government do not or cannot trace — who will?

  2. Same as Madoff. He went to jail. Same as PHH’s former name “Cendant” who went to jail for accounting fraud. Wall St. picked up Madoff’s “Baton” and ran with his scheme. Accounting professionals are trying to confuse everyone with their knowledge of how debits and credits work. (One way for financial) just the opposite for bank statement postings. You need to compare the bank statement to the financial for the exact same period of time.It will become crystal clear. Thank you Neal for all that you do.

Contribute to the discussion!