Imagine you have $1,000 in your hand. You are on your way to the bank to make the deposit into your savings bank when you meet a friend of yours who works at the bank. He offers to take your deposit to the Bank and make the deposit. You have known him and the Bank for years and he and the Bank are considered pillars of the community.His proposal would save you the trouble of making the trip to the Bank. So you agree and you hand him the money and the deposit slip. But you are still cautious. Who knows? Maybe he'll get hit by a truck on the way to work? So he offers to give you a "deposit receipt" that says "this will acknowledge receipt of $1,000 from Jack Pension for deposit this day into his account at First National Bank on the Corner." Satisfied, you go on about your day. Your "friend", Will Faraday, goes to work at the Bank.When Will Faraday gets to work, he walks up to a Teller, gives her the money and a deposit slip --- for an account owned by Will Faraday, with the express intention of using the money to buy some new electronics for himself at Best Buy. Later he goes to Best Buy and buys a new TV and stereo system for $850 and gives them a check for that amount drawn on his account at First National Bank on the Corner --- the same account into which he deposited your $1,000. Without your knowledge and consent, you have financed Will Faraday's purchase of electronics at Best Buy in the amount of $850.Later that day, Will Faraday meets his brother, Carl Faraday, and offers to sell him the TV and stereo for $1,000. He agrees. He hands $1,000 in cash to Will Faraday and Carl Faraday goes home pocketing the $150 "profit" that he will later declare and pay taxes on as a trading profit. He also still has the TV and stereo which Will has promised Carl he will deliver later. So far, Will Faraday has pocketed $1,000 from you, $1,000 from his brother and he also has $850 worth of TV and stereo equipment. Total "revenue" for Will Faraday is therefore $2,850 --- all from a simple "deposit" of $1,000.Meanwhile you think you have $1,000 in your bank account. You forgot to ask Will Faraday for the deposit receipt for his deposit of $1,000 into your account. You figured that the deposit receipt you received from Will Faraday was enough. After all he works right at the prestigious bank. Will Faraday meanwhile has deposited into his own account $1,000 from you, and $1,000 from his brother, leaving him with $2,000 in deposits and leaving you with zero in deposits. When the check comes in from his purchase at Best Buy, his account is debited $850. He now has $1,150 in his account that he never would have had but for your giving him $1,000 for deposit into your account. He also still has the TV and the stereo equipment.When brother Carl asks for delivery, Will Faraday tells him he decided to keep the TV and Stereo and he will pay back the $1,000 that Carl gave him. But Will tells his brother Carl that he has spent the money on household bills. So he will give Carl a note that says it will be paid in a month, with interest at 6% per annum, which means that Carl will receive interest at a higher rate than he can get at the bank which only pays 5%. Carl agrees (after, it is his brother). Will signs a note to Carl for $1,000 payable with interest at 6% in a month. Carl needs the money so Carl sells the promissory note from Will to his neighbor Sally. Carl properly endorses the note, delivers it and signs an assignment to Sally.So far, Will Faraday has succeeded at getting Cash of $2,000, plus TV Stereo Equipment worth $850. Carl gave Will $1,000 but received the $1,000 from Sally, so he considers himself out of the picture unless of course Carl knew that the money was taken under false pretenses from you, Jack Pension. Carl and Sally send notice to Will about the transfer of the note. At this point Will owes Sally $1,000, and the bank which was used as a depository institution owes nothing unless Jake deposits the money into a checking or savings account.Your savings account at the bank is a contract by which the bank agrees to pay you interest for leaving your money in the account. In this case the agreement is that the bank will pay you 5% on your balance, payable annually. So you expect to get a statement showing the Bank has paid you 5% on the $1,000 you handed to Will Faraday which is $50 per year in interest income.So Will Faraday, who has access to your account as an officer of the bank, simply deposits $50 into your savings account and fabricates a new statement from the Bank showing the deposit of $1,000 and deposit of the interest earned of $50. He sends the statement to you and you, Jack Pension, are none the wiser as to what is really happening.You issue a check for the $50 in interest and deposit it into your checking account. Later Will figures out that he can form a corporation that will issue the interest payments "for the Bank." The Bank of course has no idea that Jack Pension is supposed to have $1,000 more in his savings account than he really does. Or, maybe the Bank does know because what Will Faraday is doing is well known to the officers of the bank. Will's "personal service" is bringing in lots of new customers.Because you already have deposited money on a regular basis into your savings account there is plenty of money there to cover your withdrawal of the $50 in interest you thought you earned from the bank. But truth be told, the $50 came from Will Faraday's account and was deposited in your account not as interest from the Bank but as repayment of the money Will Faraday took from you. Or, Will played the odds and simply didn't deposit the interest at all knowing there was enough money in the savings account from your multiple deposits from deposits in prior months and years.Bottom Line: The number of transactions and amount of money involved in this scheme is already mind boggling. From a simple "favor" of depositing $1,000 into your savings account like you do every month, Will Faraday has taken your money, taken another $1,000 from his brother, acquired TV and stereo equipment worth $850. Carl has paid $1,000 to Will which he has kept and accepted a note for $1,000 from Will, his brother. The note as a negotiable instrument is the same as cash so we have another $1,000 in "cash" created. Carl negotiates the note to Sally with another $1,000 changing hands. $4,850 in "funds" were created and changed hands in this simple deal.It doesn't take long before Will Faraday starts doing more "favors" and running deposits from other people in his neighborhood and then all over town. With over a thousand "depositors" he has created almost 5 million dollars in transactions --- per month!He is able to pay Sally the $1,000 plus interest in full without touching the original money because people are giving him "deposits" all over town. And he and his brother are issuing notes all over town that promise to pay interest 20%-30% higher than market rates. Instead of 5% at the Bank they are offering 6%, 7% or even 8%. It is high, but not so high that everyone would know there is something wrong.This is the essence of a PONZI scheme. As long as people keep giving deposits for their savings account to Will Faraday he can pay the interest expected by the "depositor" without raising any suspicion.If you or one of the other "depositors" comes in and wants to withdraw all their money, Will Faraday simply explains to them there was an error in posting and hands them their money (secretly transferring the shortfall from one of his own accounts).But if everyone stops giving Will Faraday deposits then it is only a matter of a short period of time before the shortage becomes obvious and he goes to jail --- unless of course he can't be caught because he has taken up citizenship in a country that does not recognize extradition OR, more likely, the Bank that was used realizes it could be sued for negligent supervision --- it knew that Will Faraday was paid $25,000 per year but it saw his various individual and new corporate accounts swell into tens of millions of dollars.The Bank also knows that being drawn into a scandal of this size would ruin the Bank and everyone would take their money out leaving the Bank insolvent --- which nobody wants. So the Bank asserts its influence with prosecutors and the courts, and before charges are even brought there is a settlement in which some money is returned to the "depositors" and no charges are brought against the Bank or Will Faraday, even if he will never work in Banking again. To quiet down public outrage, Will Faraday throws his brother Carl Faraday under the bus, and Carl gets to spend 6 years in a minimum security prison for white collar criminals.Is it theft? No because Will Faraday didn't use a gun to take the money. Instead he used false promises, which is fraud. And when it comes to fraud, prosecutors are more likely to consider the matter to be a civil matter than a criminal one. But it might be theft if brother Carl had started trading in notes and buying insurance on the money Will owes him. But it would not be theft of money. In all probability, if it was theft, it would be theft of identity.REALITY CHECK FOR MORTGAGE SECURITIZATION: If you substitute a pension fund for Jack Pension, and change the wording of the "deposit receipt" from Will Faraday and change the "promissory note" to a prospectus and pooling and servicing agreement, you will see that the Pension Fund expected the money to be deposited into a trust which in turn was supposed to buy mortgages, whose interest income would be higher than the usual market rates.In exchange the Pension Fund received a mortgage bond issued by the trust --- which is a promissory note under another name. But the Pension Fund managers didn't actually receive the mortgage bond. It was generally "uncertificated" which means no physical bond was ever printed and the Bank that did the underwriting for the issuance of the mortgage bonds merely kept records on one of several manual or computerized systems were in use. It might surprise many people that paper records of "securitization" were kept so they could be destroyed --- along with the notes and closing documents with borrowers, whose names, credit scores and signatures would be traded in ways they never imagined, much less consented.And if you substitute a Bank with the same or different initials as Will Faraday it would be trusted. Like the simple transaction described above, the Bank took the money into its own account and never deposited the money into the Trust, thus making it obviously impossible for the Trust to buy or fund mortgage loans. And the closing with borrowers saw closing agents apply wire transfers from strangers to the closings with a "lender" that was operating under the control and supervision of a cluster of people and companies. In the same way that the Bank diverted the money from the Trust, the bank diverted title from the Pension Fund at the closing, leaving out the Pension Fund entirely.Like Will Faraday the Banks fabricated statements and made payments out of incoming purchases of "mortgage bonds" for as long as the mortgage bonds were being purchased.The comparison doesn't end there. Like Will Faraday buying $850 worth of TV and stereo equipment, the Bank only set aside 85% of the Pension Fund money for the actual purchase or origination of loans. The Bank skimmed 15%-25% of the Pension fund money and said it was a proprietary trading profit. Since the Bank stock was being publicly traded at a multiple of its earnings, each dollar of profit produced as much as $10-$15 dollars in value on the stock market.But the skimming of the money as "proprietary trading profit" caused a shortfall, the only cure for which was either to put the money back (which the Bank had no intention of doing) or to increase the nominal interest rates far above the interest rate expected by the Pension Fund. If paid, the extra interest would, over time, make up for the difference between the amount of money the Pension Fund gave the Bank and the amount of money actually used to fund mortgages. Theoretically it would cover the theft by the Bank. In actuality the Bank knew that the higher interest rate represented higher risks or even caused higher risks, and that they needed to find another way to cover up the shortfall caused by the bank taking part of the money meant for mortgage lending and putting it in their own pocket as trading profits.But the higher interest rates could only be achieved if people with good credit were steered into loans given to people with bad credit. And when they ran out of people with good credit they were forced to go to people with bad credit and sell them on the idea that they could afford to buy a $500,000 house, no money down, and pay only $300 per month in a teaser payment.No Bank would assume the risk of any of the loans because the likelihood of default was enormous compared to the loans of yesteryear when everything was checked out about he borrower, the property and the proposed deal. The basic rule was that at no time would the banks ever be subject to the risk of loss on any loan subject to claims of securitization. The object was to get signatures and that is exactly what they did. The Banks collected signatures on tens of millions of loan transactions including refi's that sometimes were as close together as 1 month. Anything goes. Applications for loan were doctored by originated and then further tweaked as necessary by "aggregators." There was even a case where a dog literally was approved for a loan in California.Only people with minimal financial sophistication or language problems would be likely to fall this ruse. So the Banks hired originators and mortgage sales people many of whom had previously been convicted of economic crimes --- because it was just those people who had the skills necessary to sell a doomed financial transaction. This enabled people who had been flipping burgers at McDonald to earn hundreds of thousands of dollars per year because they were so highly paid to do their work and not confess to their methods.The "nominal" interest rates rose on the promissory notes even as the availability of loan money was in a state of over-supply on steroids. But the closing papers indicated a payment that anyone could afford, giving the impression of much lower rates. The borrowers, whether they were new homeowners or getting refinancing on a home that had been in their family for generations were assured that because of these new innovations on Wall Street they would never be the ones to pay the loan off. And that representation, paradoxically enough, was the only true statement in the whole scheme.The next thing that had to be done was to figure out a way to both cover the theft of the Pension Fund money and make even more money. Meanwhile you, Jack Pension, were completely unaware of what was going on and that Will and Carl were even fabricating documents that implied you were part of the deal as well as your savings account. You might even find out later that lawsuits and foreclosures were being filed in your name on deals you knew nothing about.
ANY TAKERS FOR THIS RESPONSE ?? LOL