Jan 4, 2021
For the last 20 years nearly everyone has had it wrong about the legal, moral, and ethical position of investors and homeowners. It is time to get it right.
The economy and the world of finance will remain on thin ice until we get back to basics. The only things holding us up right now are two things: artificially depressed interest rates and a return of “irrational exuberance” in the stock markets. Meanwhile, the siphon into the wealth of our nation is firmly in place. The Fed’s impact is diminishing by the day because the real action is in the shadow banking market with cash equivalent notional values instead of the real fiat currency market.
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The bottom line is that both investors (i.e., fund managers) and homeowners (falsely labeled as borrowers) bought a hologram of an empty paper bag. Public policy, law enforcement, and regulation utterly failed to learn and regulate the “new” derivatives. There were no derivatives. There were only lies. The same thing occurred with homeowner transactions in which the false labels promoted by Securities brokerage firms made their way into the lexicon and were treated as loans simply because the Wall Street brokerage firms said so.
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The mortgage-backed bonds were neither mortgage-backed nor bonds. They were IOUs issued in the name of trusts but the proceeds went to the bookrunner investment banks who were falsely claiming to be “underwriting” the sale of certificates, and they claimed those certificates were exempt from securities regulation because the various congressional acts that ended in the repeal of Glass Steagall resulted in such certificates being labeled “private contracts” instead of what they were — securities.
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“Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments. The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. Although the mechanics have changed over time, underwriting continues today as a key function in the financial world.”
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Despite all appearances to the contrary, no securities firm (“investment bank”) ever accepted any risk of loss on the sale of any certificate to investors or on any transaction with homeowners that they labeled as a loan. The “loan” label was as deceptive as calling the certificates “mortgage-backed bonds.”
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The investment banks were issuers not underwriters and they were not selling portfolios of loans; they were selling bets on their own reports of data performance about a group of business transctions that were neither owned nor controlled by them. Check it out.
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There is not a single instance where any payment from any homeowner or any foreclosure sale ever resulted in more or less payment to investors. Investors were sold on the idea that they were being protected as passive owners of certificates that conveyed no interest or control in any obligation, debt, note, mortgage, payment from any homeowner, or proceeds of any forced sale. Certain banks were paid fees to allow the use of their names as trustees on the same premise. Since they had nothing entrusted to them and they had no rights, duties or obligations relative to any “loan” or portfolio of any assets, licensing their names was a simple transaction.
Investment banks leased the name of certain banks to pretend to be trustees because they wanted cases in court to be styled as “U.S. Bank, N.A. v John Smith” instead of “Unknown parties vs John Smith.”
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Payments to investors were based upon two factors — (1) receipt of scheduled payments from homeowners who had been duped into paying back their commission on the concealed securities deal and (2) continued sales of uncertificated “certificates” in “street name” wherein the investment bank retained legal ownership of the certificates and the investors only received a statement of account.
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This bears stark similarities to the “paper crash” in the late 1960s. There again the press and regulators failed to report the essence of the problem — that securities brokerage firms had been playing with money and securities that did not belong to them. The difference is that the losses hit home because the firms were partnerships, not corporations. Now managers can engage in such moral and legal turpitude without fear of any personal consequences.
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Homeowners, for their part, issued promissory notes solely because they thought they were buying a loan product. What they received was a business transaction with no lender, no loan account receivable on the books of any entity, no compliance with lending statutes, and built-in incentives to inflate appraisals and pay money under the false premise of a viable loan.
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Homeowners were convinced that they were part of a loan transaction when in fact their services were being purchased for issuance of the fundamental element in the false representation of a loan transaction, to wit: the promissory note and mortgage. If homeowners had known that they were being asked to promise to give the commission back, none of them would have done it. Who would?
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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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