Monday, November 16, 2009

Counterfeit Mortgage-Backed Bonds?

After so many years, it is nice to go back and read the histories you have read before. The history of money and banking from colonial times to the present, I am no stranger to, yet this new book has certainly jogged my memory and given me new ways to look at the present financial situation.

In early times counterfeiting was a big piece of the story of money and banking in the American colonies and later in the young nation known as the United States. But, first let us review just what counterfeiting is. A counterfeit is an imitation made with the intent of fraudulently passing as genuine. Counterfeit products are produced with the intent to take advantage of the established worth of the imitated product. We all are familiar with brands that have knock-offs made cheaply to ride on the reputation of the real thing. So, let us establish that money, coin and paper currency, are not the only things that can be counterfeited.

Now let us move to the present and the investment bankers of Wall Street and mid-town Manhattan. Between the underwriters, the investment bankers, and their accomplishes, the credit rating agencies, Wall Street created collateralized mortgage obligations (CMOs) that were in essence counterfeit. In the 19TH century there were counterfeiters that printed paper money that was not backed by bonds on deposit with the state, or was exchangeable into gold, silver or copper coins. Wall Street in the 21ST century continued a practice of making money the way money was made before the Federal Government printed all of our currency. Now, Wall Street not being able to print their own counterfeit money, issue bonds that take the place of counterfeit money. The methods have changed over the years, but the result is all the same, taking money from people by deception.

In an era where bonds are issued in book entry form, rather than registered or bearer form, the counterfeiters do not need to even counterfeit a piece of paper to resemble the real thing. Today, the deception is created in a more sophisticated way. Working in tandem, the underwriters (investment bankers) and the credit rating agencies work together to create the "legal" counterfeit bonds. The triple-A rating is as bogus as a three dollar bill, but that is all that is required to carry this deception forward.

Taking advantage of investors, both individual and institutional, is what Wall Street and the credit rating agencies have done through the counterfeiting of a "brand" much the same way a brand is counterfeited in so many other products. The deception is achieved by giving the buyer the belief that what is being purchased is not imitation. The bond market had a meltdown because it was overrun with imitations of mortgage bonds carrying the highest credit rating given. This is just one more argument why the issuance of the triple-A credit rating should reside with the Federal Reserve Bank, and out of the hands of the credit rating agencies that are compensated for their work by the investment bankers underwriting those very bonds.

In my opinion, somewhere an Attorney General needs to be looking into prosecuting this conspiracy to create counterfeit mortgage-backed bonds.

Stay Tuned.


LceeL said...

Oh, that that would happen ... but I think it's wishful thinking, to be sure. Any AG that would go after the financial community would be, in essence, going after the hand that feeds him.

How many people have heard the saying "If it seems to good to be true, it is." And yet those same wise, intelligent and greedy people ignored that insight they most certainly had, and they invested in Bernie Madoff's scheme, reaping 'too good to be true' profits for 40 years, until the curtain was ripped away and OZ was revealed as a crook.

Politicians (and AG's are politicians) are NOT going to bite the hands that feeds them. It's just too much to expect. Unfortunately.

Julie Schuler said...

That's very interesting. As I stand on the sidelines while my husband is trying to renegotiate our mortgage right now, sometimes it's nice to step back and take the long view. I hope to learn more about it- perhaps when I leave the cardboard box and go down to the public library to use the computers, as my panhandling schedule will permit.... but I digress :)

Summer Smith said...

Oh, my, Mr. Moneythoughts! I do declare, Suh -- but you are evuh so genteel in the manner by which you explain the low-down, dirty, rotten, scoundrels who shafted the American Public and everybody else they could!!!

But then, we do get tired of calling them CROOKS, CHEATS, THIEVES, etc. You've given us a very civilized respite from the usual name-calling and for that you have earned another round of well-deserved applause!

Thank you, Mr. Moneythoughts, for being such a Gentleman!


moneythoughts said...

I can't write now. Watching Sarah Palin on Oprah.

moneythoughts said...

With little or no change in the credit rating agencies and the way they do business, do not look for a speedy recovery in the economy. Unless, investors forget more easily that I think they do, it will be years before the CRAs earn the right to be trusted. I would trust an "A" rating over a triple-A on a new bond issue.

Butch said...

Aw, just wait. Dodd's going to make everything okay. He did such a good job before the meltdown, he and Barnie.

Keep the faith, they will heal you if they can just touch your wallet, I mean, your forehead.