THIS IS GUERILLA WARFARE
THIS IS NOT LEGAL ADVICE
THE PONZI MORTGAGE SCHEME
By: Paula Rush
December 4, 2007
PHANTOM PROFITS OF "PAY OPTION ARMS"
The principle behind every Ponzi scheme is to exploit lapses in judgment arising from investor naivete.
( In American Home investment statements no where was it revealed that the majority of the cash flow stated was not really cash flow at all. It was the " phantom profits" of interest recorded as paid thanks to GAAP when American Home knew the likely hood of ever collecting that interest was poor due to the poor quality of loans it originated.)
The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter.
(As long as investor money kept flowing in and credit lines were open, the negative cash flow could be hidden. When the money was cut off, the collapse happened with lightning speed. The money was cut off abruptly due to the ever increasing poorer quality of loans as reflected in Early payment defaults. )
An advertisement is placed promising extraordinary returns on an investment. The precise mechanism for this incredible return can be attributed to anything that sounds good but is not specific: "global currency arbitrage", "hedge futures trading", "High Yield Investment Programs", or Offshore investment"
(Or the PHANTOM PROFITS OF PAY OPTION ARMS.)
One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time. They then get new cash flows as investors are told they could not transfer money from the first plan to the second.
The catch is that at some point one of three things will happen: the promoters will vanish (American Home files for bankruptcy), taking all the investment money with them; the scheme will collapse of its own weight, as investment slows ( AND REAL ESTATE MARKET COLLAPSED) the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads, and more people start asking for their money, similar to a bank run); the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise, they find that much of the "assets" that should exist, do not. ( Phantom Profits)
PAY OPTION PHANTOM PROFITS and a bubble. The lenders used the Pay Option Arm loans and other risky loan products combined with lax underwriting to create a real estate bubble. A bubble relies on suspension of disbelief and an expectation of large profits. A bubble involves ever-rising (and unsustainable) prices in an open market (be that shares of a stock, housing prices, the price of tulip bulbs, or anything else). As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. Bubbles are often said to be based on "greater fool" theory.
. The lenders used the Pay Option Arm loans and other risky loan products combined with lax underwriting to create a real estate bubble. A bubble relies on suspension of disbelief and an expectation of large profits. A bubble involves As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. Bubbles are often said to be based on "greater fool" theory.In a Ponzi scheme the investors were promised unrealistically high rates of return via claims of unusual financial investments. The borrower (lender) is progressively increasing the amount of borrowing ("investing") to cover payments to initial investors
The monetary system
There is an argument to be made that debt based monetary systems are essentially sophisticated Ponzi schemes. Debt based money, or fractional reserve banking requires that interest be paid on money which was created at the same moment a loan was created. Because of these ongoing interest payments, there is always less money available in circulation than there are debts. Paying the interest and debt must therefore require ongoing, additional and larger loans from the banks. The result is an exponentially increasing system which must collapse when the imbalances between currency and debt becomes too large, with the corresponding transfer of the ownership of real assets to the owners of the debt; the private banks. Through the creation and extinguishment of debt money, real assets are effectively "harvested" by the private banks and then sold to those with the money to buy the foreclosed assets.
This "boomerang" effect in the creation and extinguishment of debt money can also create a "boom-bust" cycle in the broader economy as debt money is created (thereby increasing the money supply) and subsequently destroyed (decreasing the money supply) when an inflated price "bubble" bursts, thereby resulting in a collapse in prices and a drying up of liquidity in that market, allowing the banks to foreclose on distressed assets and recycle these assets into the market at lower "fire sale" prices.
Fast forward to 2007, large lenders like Countrywide, Option One, American Home Mortgage and some 186 others bankrupt this year, are backed by large banks like, Wells Fargo, Bank of America, UBS, Citigroup, and every large Wall Street bank. The backers sell the "scheme" to unwitting investors promising high returns via secured debt vehicles known as MBS and SLN. As time progressed increasingly more dangerous loan products emerge to qualify borrowers and secure ever increasing numbers of loans to feed the appetite of investors clamoring to take part in the promised large returns. One problem – they were "phantom profits" based on loans that weren’t worth the paper they were printed on and inflated appraisals. Worse, the loans were all based on a market manipulation created, executed, and controlled by the lenders creating an artificial boom turned bust.
Then just when you thought it couldn’t get any worse, the perpetrators, when they could no longer hide the reality of the phantom worth of assets and phantom uncollected profits of uncollected mortgage interest on Pay Option Arms, they folded and left everyone holding the bag. Then the next phase began for the larger banks. Hide the damage as long as you can, blame others whenever possible, and finally take down the pawns (homeowners) you used in the game as you try to salvage what you can of what’s left for your investors. Foreclose on as many homes as possible and collect on the up to 35% heavily insured loans, collect from your credit default swap partners, and regain as much liquidity as possible.
Now the real fun begins. The credit enhancers, credit default swap partners, and credit insurers are in as much deep do-do as you are. So they start to bulk and refuse to pay. Same goes for the credit default swap partners. Then a few very smart OHIO Federal judges figure out the illegal foreclosures and that no one has standing to sue. The complex securitized trusts where mortgages were supposed to be locked up in a pie, it turns out own nothing. Meanwhile for months now our government puts on a dog and pony show asking lenders, please stop what you’re doing. The lenders promise they are working with borrowers. Foreclosures continue to soar, yet the government believes the same people who caused the mess will fix it. They are treated with kit gloves while homeowners are thrown out of their houses. This scheme works for a while, but then, no one is buying the foreclosed houses at any price. To many flood the market. Lenders are being crushed under the weight of carrying the empty houses. Credit is tightened, and the market is at a standstill. Now cities are suing lenders as properties are abandoned and taxes go unpaid. The cost to cities, neighborhoods and the overall economy begins to emerge. Still the perpetrators are in control. Still our government can’t seem to see the truth. What will it take? In America crime pays, at least white collar crime pays. Unless and until the government will accept this for what it is and hold the right parties responsible, disaster looms large. The funny thing is the only thing that will turn it around is the only thing everyone is so reluctant to do, modify loans and stop the madness.
The credit enhancers, credit default swap partners, and credit insurers are in as much deep do-do as you are. So they start to bulk and refuse to pay. Same goes for the credit default swap partners. Then a few very smart OHIO Federal judges figure out the illegal foreclosures and that no one has standing to sue. The complex securitized trusts where mortgages were supposed to be locked up in a pie, it turns out own nothing. Meanwhile for months now our government puts on a dog and pony show asking lenders, please stop what you’re doing. The lenders promise they are working with borrowers. Foreclosures continue to soar, yet the government believes the same people who caused the mess will fix it. They are treated with kit gloves while homeowners are thrown out of their houses. This scheme works for a while, but then, no one is buying the foreclosed houses at any price. To many flood the market. Lenders are being crushed under the weight of carrying the empty houses. Credit is tightened, and the market is at a standstill. Now cities are suing lenders as properties are abandoned and taxes go unpaid. The cost to cities, neighborhoods and the overall economy begins to emerge. Still the perpetrators are in control. Still our government can’t seem to see the truth. What will it take? In America crime pays, at least white collar crime pays. Unless and until the government will accept this for what it is and hold the right parties responsible, disaster looms large. The funny thing is the only thing that will turn it around is the only thing everyone is so reluctant to do, modify loans and stop the madness.Aggressive lending practices and Madison Ave style loan advertisements to mislead borrowers into taking loans they could ill afford. The industry took the most important financial decision many people make in their lifetime, packaged it and sold it in the same way Madison Ave would sell a toothpaste. They can take horse droppings and call it manure, but at the end of the day, it is still crap. The financial advice was irresponsible. Borrower as much as you can based on an adjustable rate, instead of the more prudent advice, buy what you can afford. Prudent underwriting standards would have made this scenario impossible. So brokers pitched and packaged the story, lenders underwrote the paper, and Wall Street bought the end product. The borrower was nothing but a pawn in a game of extreme profits for the industry. But the industry destroyed the very market they depended on for their sustenance. Every player in the transaction made huge profits and all they needed to get the ball rolling was a body to give a loan to.
and Madison Ave style loan advertisements to mislead borrowers into taking loans they could ill afford. The industry took the most important financial decision many people make in their lifetime, packaged it and sold it in the same way Madison Ave would sell a toothpaste. The financial advice was irresponsible. Borrower as much as you can based on an adjustable rate, instead of the more prudent advice, buy what you can afford. Prudent underwriting standards would have made this scenario impossible. So brokers pitched and packaged the story, lenders underwrote the paper, and Wall Street bought the end product. The borrower was nothing but a pawn in a game of extreme profits for the industry. But the industry destroyed the very market they depended on for their sustenance. Every player in the transaction made huge profits and all they needed to get the ball rolling was a body to give a loan to.