Self-denial and cascading economic pandemics

Borrowers are Assessed Undisclosed Risk by Most Courts

Self-denial and cascading economic pandemics

The purpose of this article is to piggy back on the recent articles from dozens of economists who are yelling at the top of their lungs that we are deluding ourselves if we think acceptance of the status quo is self deluding and will lead to economic and societal chaos. The focus of my writing is on legal, moral, economic and accounting reasons for denying foreclosure as a remedy BEFORE assessment of the transaction and the risks that were withheld and with intentional misrepresentation (fraud) of the risk factors with inflated appraisals, and failure to disclose the real lenders, the fees earned and the parties involved.

This continues the discussion about whether we should be saying that borrowers should pay the debts AS CLAIMED or whether we should be asserting that borrowers are liable only for the risks they assumed and accepted. I again remind the reader that this issue has already been decided under Federal law. The Truth in lending Act and the
State deceptive lending acts spell it out quite clearly --- the borrower is to be informed, with enough time to process the information and seek professional advice about the terms, parties and details of their loan transaction. Most important amongst the disclosures is the requirement of disclosing the true lender; transactions by lenders with a pattern of engaging in such withheld disclosure are branded "predatory per se."

The horrid state of self delusion in our society is chronicled in Naked Capitalism. The basic thrust of a deep and broad analysis of our economy and the effect of major shocks is presented, documented and proven. The bottom line is that the deeper the shock and the longer it is allowed to persist, the harder it is for society to recover. Applying the principles enunciated in this article which expresses irreversible damage that occurs over weeks, the seven years of economic collapse endured thus far presents a high probability that the economy and our society will never be able to restart without widespread acceptance of changes in deeply held beliefs and presumptions. Pervasive self-delusion is clearly documented here as the major impediment of starting to repair, regroup, and take us from what is actually a continuing net decline to an actual positive growth curve.

Interpolating the data, it is obvious is that the state of our society and economy is improperly reported (self-delusion) in a vain attempt to maintain consumer confidence while those same consumers are short on cash, short on income, short on savings, suffering shrinking income, increasing costs, and are short on available credit. The current model, developed over 40 years, was to replace earnings with credit. This was a going out of business strategy. And that is what happened.

We now live with an unsustainable anomaly --- the financial and data intermediaries are thriving while the real parties in interest (buyer and seller of products or services) are not reaching sufficient levels of income and growth. This has led to an economy which shows that roughly half (46%) of "economic activity" comes from financial services, that supposedly intermediates capital and payments but now accounts for an out-sized share of GDP. If the reported figures are even close to being truthful from the financial services sector, our GDP should be at least $50 Trillion, based upon long-trusted ratios in which financial services typically account for about 16% of GDP, intermediating in commerce.

Only two conclusions are possible. One is self-denial in which we act as though the economy was in fact operating at a $50 Trillion level --- an obvious run for the edge of a cliff. The other is addressing reality, which is that the growth of the financial services sector from 16% of GDP standard to 46% of GDP as reported is fictitious and based upon false reports based upon fictitious transactions. This would mean that as a minimum the $17 Trillion in GDP would be adjusted downward removing 30% as mere smoke and mirrors.

With the real GDP thus set at around $10 Trillion and removing the veil from fictitious transactions, fictitious assets and fictitious liabilities, the too big to fail conglomerates would either sink or swim on actual water rather than the appearance of water.

Nowhere are these transactions more pandemic actions of self-denial than in the alleged mortgage bonds that are neither mortgages nor bonds. Nor are they owned by the intermediaries. The fictitious transactions in which ownership of those non instruments are booked as sales, commerce and part of GDP, once removed would necessarily cause compensating adjustments elsewhere in the economy. Profits reported by companies providing financial services would be reduced and past reports would be adjusted downward, resulting in lower stock prices for their stock and higher rates for them to borrow.

The corresponding credit entry would fall to homeowners who were punished by a system that had blamed them for taking on more risk than they could afford. In fact, the adjustment would recognize that the assumption and acceptance of excess risk was hidden under deceptive underwriting and lending processes --- thus created by the Wall Street banks who are the sole parties against whom the excess risk would be assessed. But first it must be acknowledged that in cases of widespread systemic fraud that neither the lender investors nor the homeowner borrowers were given any reasonable opportunity to assess or accept the excess risk and that therefore their contracts must be reconstructed from the totality of the circumstances rather than the recitations in instruments prepared by the Wall Street banks.

We do have enough information to know that neither the lenders nor the borrowers would have signed up for the highly complex deals being offered to them under the guise owing offered FOR them. Since that is axiomatically true based upon formal a studies and the 50 states Attorneys General and the myriad of state and federal agencies that have concluded that lending and servicing practices were wrong at origination and continue to be wrong.

Continuation of Foreclosures based upon an untrue assumption of risk sharing as expressed by instruments based upon false pretenses will only continue the pattern of self deception and the resulting pandemic of economic decay and decline.

Lies of the Banks Coming Back to Haunt Them

by Neil Garfield

Now that Federal Reserve is nearly done buying the worthless mortgage bonds, the banks have shown that they are in fact making money hand over fist and the government is feeling less fearful about toppling the financial system with financial regulation.

Based upon my interview with a highly placed well-informed source who prefers to remain anonymous, it appears as though the playing field and the goal posts have been moved.

The starting point is the sale of worthless mortgage bonds to investors under false pretenses. It isn’t just that the underwriting standards that were to be applied to the mortgages were not followed; the problem is really that the money from the investors was never deposited into an account that was legally or even apparently owned by the investors or the asset pool shares that they thought they were buying.

The banks were claiming the investment shares (mortgage-backed securities) to be their own despite the clear money trail and paper trail showing that at no time were the investors informed that they were lending their money or their right to the mortgage loans to the banks and their co-venturers.

Then the banks claimed losses on those investment shares and collected from insurance, credit default swaps, other hedge products, and the taxpayers.

Then the banks claimed insolvency that threatened the entire financial system despite having received money from investors, part of which was never invested in anything related to mortgages or mortgage bonds. The threat of insolvency and the threat to the entire financial system was taken seriously by people in government that should have known better and perhaps did know better.

Then it was decided that the Federal Reserve would cure the insolvency issue by purchasing the worthless mortgage bonds at full value. They purchased it from the banks who it no time actually owned close bonds nor did the banks own any of the loans that supposedly “backed” the mortgage-backed bonds.

Then it was revealed that the banks were making a lot of money while the rest of the economy went into a nosedive. Any economist who is questioned on this subject will respond that it is very unlikely for intermediaries who act as conduits for transactions to make money when economic activity is on the decline.

If they are reporting profits it is from fictitious transactions. In this case fictitious transactions are “trading profits.” In reality the banks are feeding part of their ill-gotten gains back into the bank, and claiming it as profits. When the chips were down and the banks had to show that they were strong enough to exist at their mega size, they came up with the capital without any problem.

Now that they came up with the capital and the profits, they have demonstrated that the extra restrictions that regulators want to put on the banks will neither damage the bank’s profitability nor threaten the financial system.

But the Banks know that their ability to come up with money all stems from the fact that they lied to everyone and stole trillions of dollars and that it did not come from ordinary banking activities. SO they are currently in a bed they made for themselves: they don’t want the restrictions to be too restrictive because it might have a negative effect on their legal earnings, but they have proven the opposite with their illegal earnings --- which is precisely what the regulators were waiting for.

Hence the banks are stuck with whatever regulations are put on banks --- especially those who claim ownership over transactions in which they acted only as intermediaries --- or they must say that the regulations would be harmful because the truth is they didn’t really make the money that they reported as net income.

This doesn’t come as news to the Federal Reserve who knows that it is purchasing worthless bonds. But the Federal Reserve cannot say that the bonds are worthless because it would then be seen as quantitative easing which is inflationary. The whole reason the money supply was expanded so much without inflation going wild is that the Federal Reserve was merely “buying bonds” and not just giving out money. But the bonds were completely worthless. So the truth is that the Federal Reserve was and still is giving out money in quantitative easing.

This chain of events served to undercut the middle class portion of the economy completely, denuding them of jobs, houses and even prospects, creating blighted neighborhoods, declining tax revenues for municipalities and this bankruptcies like the City of Detroit. If the law was applied as it is applied to everyone except the big banks, then they would be charged with mortgage fraud, securities fraud (because the exemption does not apply if you don't follow the rules of issuance of a mortgage bond) and compensatory damages would be due to the following people with percentages of the total money advanced for each $1 of mortgage:

1. Investors: 125%
2. Insurers: 85%
3. Credit default swaps: 400%
4. Miscellaneous hedge products: 25%
5. Borrowers: 15% (100% of the payments and down payment)
6. Taxpayers: 5%
7. Federal reserve: 100%

Thus the situation was likened by my source to an old joke about lawyers, the punch line of which is that the dog screws everyone in the room and runs away with the steak.But the real problem is that by participating in this deceptive scheme, the Federal Reserve, put the burden of the loss on homeowners whose mortgages were paid in whole or in part by the financial sector including the Federal Reserve.

It isn’t just that the ownership of the loan has become completely convoluted; the real issue is money, to wit: the credit transaction with borrower has been long since extinguished by these devices used by the banks and the Federal Reserve, and vehicles like the Maiden Lane entities.

The amount of money owed on those mortgages is in reality far less than the the amount demanded by the banks --- which means that modification is possible for nearly every loan, whether delinquent or not, because the principal has already been reduced by payment. THIS IS WHY I SAY FOLLOW THE MONEY TRAIL BEFORE YOU FOLLOW THE PAPER TRAIL. THE PAPER TRAIL IS ONLY RELEVANT IF IT MATCHES THE MONEY TRAIL. OTHERWISE IT IS IRRELEVANT.

In the marketplace where loans are being refinanced and where mortgages are being foreclosed, these facts are carefully kept out of the mainstream conversation. But more and more judges are starting to ask questions because the behavior of the banks is just not consistent with a creditor who wants their money.

They seem to want the foreclosure judgment or sale but they are not so interested in the property. AND THAT is because the foreclosure puts the seal of approval from the state on a bunch of lies that were proffered to the courts and to the recording offices. It is the foreclosure judgment and sale that starts the clock ticking on wrongful foreclosures. Once time has run out on those actions, the banks are home free and the Federal Reserve, the unwitting or witting accomplice goes on their merry way while more than ten million families lose their homes, jobs and prospects.

If the Courts start finding that the mortgages are invalid, that their enforcement is defective or impossible, and that the debt is in doubt because there is no proof of the account receivable and the loss must belong to SOMEBODY, the current plan collapses. As I stated in 2007 based upon my own direct knowledge and the knowledge of industry sources who were active in the bundling, selling and trading activity associated with mortgage loans, the entire crisis would have been averted if the banks were held to account because the accounts due from the borrowers had been reduced without their knowing it just as the account due to the investors had been reduced without them knowing it.

This brings us back to what seems like a quaint solution now. I said we should forget blame and just let bring everyone to the table and share the losses and risks. People get to stay in their homes, the investors get a return on their investment, the banks earn fees, and companies like AIG won't be in danger of toppling. But then, the catastrophic shift in wealth inequality would also never have happened. And the super rich would have been revealed, if they were bankers, as common thieves with keys to the vault.