It's free money! Why Wouldn't Wall Street Do It Again?

the entirety of what is labeled as the securitization infrastructure is based upon a report that says something like this: “Here is our assessment of our own discretionary report regarding homeowner behavior in making payments that were scheduled but which are not due (at least not to us).”

If there exists a trough full of money, it is not surprising to see players get as close as they can to dip their heads in. The fact remains that no government law enforcement regulator has undertaken any meaningful effort to control the entrance of investment bankers into the lending marketplace.

As a result, the fundamental elements of all supposed “loan” transactions have changed. Homeowners assume risks they didn’t know existed and they assist investment banks, who they didn’t know were involved, to obtain revenue that they didn’t know existed.

With zero risk, the investment bankers play the role of “broker” for transactions that do not exist in the legal world. They then pretend to be not brokers but investors and then act as indirect creditors on loan accounts that (a) don’t exist and (b) wouldn’t be owned by the investment banks even if they did exist.

See https://www.wsj.com/articles/new-appetite-for-mortgage-bonds-that-sidestep-fannie-and-freddie-11629711001

Wall Street is diving back into the business of turning home loans into bonds, injecting new competition into a market long dominated by government-backed mortgage giants Fannie Mae and Freddie Mac .

The so-called private-label mortgage market—in which financial firms serve the middleman role of creating giant pools of loans and selling them to investors—had more than $42 billion of issuance in the second quarter.

Here is the rub: Wall Street keeps saying it is converting loans into mortgage bonds while they’re retiring the loan accounts. Wall Street firms are not middlemen. They’re the principals in the PONZI scheme vaster than anything ever created in human history.

Ask anyone, read anything. Nobody ever buys the loan account. That is the point for Wall Street. Since they’re NOT selling the loan account they can create the effect of selling it multiple times without ever accounting for the profit or revenue from the scheme. They pay no taxes on this scheme and they park the illicit gains offshore in various enterprises all over the world.

And because they are not selling any legally recognizable asset, the investment banker is able to sell multiple layers of bets on the content of future discretionary reports from the investment bank — these are reports rather than ownership of any promise or scheduled payment from homeowners. With no risk, the investment bank (i.e.,s securities broker) is free to bet against the probability that the homeowner will make a scheduled payment.

And free to bet against the homeowner, the investment bank makes sure a significant percentage of the homeowner transactions will result in no payment — regardless of whether it is due or not. And while it is collecting more and more revenue from more and more securities issued without any legal limit, the investors in “certificates” continue to get paid regardless of whether any payment is received from any particular homeowner. But they only receive such payments while more certificates and hedge contracts are sold.

So the “broker” makes all the money while the homeowner and the investors undertake all the risks. This is not capitalism. It is raw unbridled greed. The investment bank gets to sell “securities” bringing in more than $12 for each dollar transacted with consumer homeowners. None of that gets credited to the homeowner loan account because there isn’t one. There is only a payment history generated from some company posing as a “servicer.” Check with any accountant on the required elements of a loan account receivable.

So now more investment banks are saying they want to print free money in the form of nominal value certificates and hedge products that are all bets based upon the reports of data about homeowner behavior. This is not the same as the agricultural report on the orange harvest. There you either own the fruit or you have sold it in the hope of buying it at a lower price. Or you have purchased an option to do either one or both.

No, here the entirety of what is labeled as the securitization infrastructure is based upon a report that says something like this: “Here is our assessment of our own discretionary report regarding homeowner behavior in making payments that were scheduled but which are not due (at least not to us).”

But by institutionalizing this PONZI scheme (reliant entirely on continuing sales of new certificates and hedge contracts) the world has come to believe that Wall Street is pooling loans and selling interests in those pools to investors who are buying some right, title, or interest in the underlying loans. And the courts are assuming that too. So even if there are defects in the fabricated assignments and endorsements, they overlook it to enforce the original “loan” agreement.

At least that is what Wall Street hopes will continue to happen. But besides the obvious strategies that homeowners can use to successfully challenge the administration, collection and enforcement of loans, there are other possibilities up at the investment banking level.

What if some smallish boutique investment banking firm decided to really securitize loan pools? They would really underwrite the loans to homeowners and the securities to investors such that all the players shared in the bounty. They would still be making plenty of money plus they would not face the challenges that I have been writing about for 16 years. Of course, they would disclose the intense revenue generation that previously was concealed to both homeowners and investors. And that might have a negative effect on the prospects for such entities like Chase that has illegally claimed ownership of nearly $1 trillion in transactions originated by Washington Mutual.

That is only the first step toward bringing order to the chaotic world created by Wall Street.

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