Deuteronomy: Securitization for those who read scripture

by Neil Garfield

It seems like from the beginning of time most people understood that there was something intrinsically wrong with borrowing and lending, especially if it extended for more than seven years. There is complete agreement on that in both the Old Testament and the New Testament.

It is obvious that writers from thousands of years ago were concerned about the enslavement of people through the use of debt. The point was to give help or lend help without expecting anything in return — except in transitions with “foreigners.” Whether you believe the bible was a transcription from God or was just written by humans, the result is the same.

Any current casual surfing of consumer offerings on the internet will reveal almost 100% of such offerings are based on either direct offers and encouragement to borrow money or indirect offers of “payments” (as though they bear no relation to price).

The result is both obvious and inevitable. Each increment of new payment seems affordable until collectively they exceed the ability to pay them all. This in turn requires consolidation loans, mortgage loans, and even outrageous terms on payday loans, fast cash, or loan sharks, most of which we have made at least partially legal. Thus we have loans on top of loans on top of more loans.

This structure did not exist until the 1970’s credit crunch where the prime rate jumped to over 20%. Banks and credit card companies jumped at the chance to relax restrictions on usury — interest rates that were deemed too high to be conscionable.

The argument was that credit cards would become extinct if the issuers had to pay three times the interest rate that they could charge. It should be noted that America’s addiction to debt was emerging alongside of opioids and other similar addictions. So the argument was further enhanced by the argument that the destruction of the credit card business would reduce consumer purchases and thereby depress the national economy.

It seemed to make sense at the time and so legislatures across the country either changed their usury laws or virtually eliminated them. This opened the door for practically anyone to lend money at rates that were, for thousands of years, deemed poisonous to any orderly society.

When prime rates fell back to normal, the credit card rates remained at levels that would have previously placed the issuers in prison in many jurisdictions. By opposing a return to the old legislation, the banks and credit card issuers solidified their place in the national economy. It was a place where consumers were encouraged or even driven to take on ever-increasing amounts of debt — and where the sole hope of most “borrowers” was the ability to get more debt later to pay the old debt.

This influx of debt was not matched by increasing wages such that eventual repayment could be the reasonable goal of a “lender.” Quite the contrary, the availability of cash on credit essentially replaced the demand for higher wages, which then remained stagnant for more than 4 decades.

The economy thus became a virtual economy in which debt replaced the ordinary flow of income and expenses. And that is what emboldened the major Wall Street players to launch a scheme that had been imagined in the early 1970’s: the entry of Wall Street securities as a replacement for actually funding loans. Sounds like a contradiction in terms? That is exactly what appealed to those who first proposed the scheme in 1971.

Successful Wall Street players learned centuries ago that the more complex the offering the more the buyer will rely on the seller to tell the buyer what the investment is about. What they were imagining back then was something that was all smoke and mirrors and so complex that it could never completely succumb to management or accounting since there was no real activity other than collecting money from investors and paying money to some homeowners (the rest of the homeowners would merely get some settlement statement indicating that payment had been made).

By separating the loan account from reality, many layers of securities could be sold that paid off any initial funding and provided intoxicating profits to investment banks who retained control without risking anything — as long as they were at the top of the scheme. Keep in mind that any alleged payoff to a prior “lender” that was in fact standing in for the same base investment bank required no cash at all. But each such set of new paperwork gave rise to a whole new round of selling multiple layers of securities based on reports of the new virtual transaction.

By secretly retiring the loan account, it was no longer necessary to pay it off. So each new round of debt to pay off the old round of debt was pure profit. This led some mid-range well-known brands on Wall Street to go extremes in leverage. Bear Stearns was leveraged 42 times before its collapse and eventual absorption into Chase who then claimed to own all “loans” ever originated by feeders for Bear Stearns. It was the ultimate in free money. Washington Mutual presented an even larger opportunity. Rinse, repeat and so on. Most takeover deals produced the same or better results. OneWest claimed ownership of billions in nonexistent loan accounts and received 80% of claimed nonexistent losses.

All that was needed was a credible myth that would cast any opposition to this scheme as seeking a “free house.” It was as old a political ploy as any that ever existed. Anyone seeking something for nothing should be punished, not rewarded. And whoever was shouting that the loudest was clearly not the one looking for something for nothing. Except that is exactly what has been happening for more than 2 decades.

The desired PR event happened when the news networks all carried a short segment from the floor of the stock exchange in which a trader (Dyland Ratigan) passionately said he wasn’t going to support a free house for homeowners. He later was catapulted into stardom with his own radio and TV show. Whether he believed what he was saying or not, it worked. Now he has receded into history. But his coining of the phrase “free house” lives on in the hearts and minds of virtually everyone including homeowners and investors.

Hence virtually all consumers are now seen as prospective borrowers. And this remains true even though they are not given loans. Nonetheless, because the transaction resembles a loan, everyone thinks it should be enforceable as a loan even if there is nobody who can claim injury from nonpayment — contrary to the most basic rules contained in the U.S. Constitution and the constitutions of most states.

It is therefore easy to see and understand why Wall Street began looking for ways in which it could manifest such deals — especially since they could sell the deals multiple times without any accountability. So students who know virtually nothing about finance are encouraged to take on debt they will never be able to repay. the “loan adviser” always reminds them to take on more debt for expenses and anything else that can be packed into the “loan.” The investment banks don’t really care whether the loan is repaid, as long as they continue selling certificates.

And the answer to your question is yes, this is entirely a PONZI scheme even though it incorporates attributes of lending and the old system of sharing lending risks. Few, if any loans are originated without the concurrent sale of unregulated securities that have no attributes of owning any debt, note or mortgage from borrowers. No investment bank would even suggest it would make quarterly or monthly payments to investors if they were held to merely to passing on payments illegally collected from homeowners. There is no profit in that.

It is only if certificates continue to be sold that lending continues under this scheme. And each new step is a new layer. And each new layer brings us further and further from economic reality. To value investors like me this means only one thing: at some point, there will be a crash in which fundamental economic values are used to form the basis for the valuation of assets. Houses will reflect median income. Stocks will reflect medium-range net income. Bonds will reflect the likelihood of repayment without refinancing.

For value investors, we see companies whose stocks are trading at vast multiples of earnings (or no earnings at all) as unsustainable and even silly in many cases. Lest you need reminding all such predictions were uniformly rejected before each crash. I think it is because people are irrational and crave excitement. I could be wrong about that.

For the investment banks, It is not only ok but actually preferable for large swaths of people labeled as borrowers to stop making scheduled payments — since the investment banks are placing bets on that happening. It is OK since nobody will get hurt when they don’t pay, and that is OK since anyone can enforce the debt despite the absence of anyone who got hurt — other than the student or homeowner who is saddled for life with debts that their parents and grandparents would think are unthinkable. A very small group of people are transferring the wealth that would have been accumulated by each student from the students (and their families) to themselves without any corresponding spending in a consumer-driven economy.

As Ross Perot once remarked, that sucking sound is getting louder and louder. Wall Street has sucked tens of trillions of dollars out of the U.S. economy without any corresponding long-term benefit to anyone other than themselves. It has been at the expense of everyone.

All human beings or at least partly driven by primitive tendencies. If there is a pile of money on the table, most people would at least have the impulse to take it without regard to the consequences. And if the situation is one in which taking the money did not involve theft, the inhibitions against removing the money would be substantially reduced.

In both the Old Testament and the New Testament the concept of borrowing and lending arises from the order of God to help thy neighbor. And to the extent that one helps the neighbor and expects something in return, the deal should not include the payment of interest and is subject to cancellation after seven years. Most of our laws concerning bankruptcy are derived from both the Old Testament and the New Testament.

The Scriptures are somewhat ambiguous as it relates to lending to “foreigners.” But the general attitude that has been accepted, memorialized into laws since laws were first written, is that lending should not be a business and that lending should be the result of some plan that benefits society as a whole and not a vehicle for concentrating wealth away from society as a whole. Personally, I don’t completely agree with that viewpoint. But the current movement into virtual loans with virtual creditors and virtual servicers has opened the largest risk of moral hazard ever encountered by any human civilization.

We don’t need to shut that door. The new innovative scheme has merits if it is fair. It is only fair if all affected parties have sufficient information and opportunity to consent to a bargain in which the risks and rewards are known and shared. That can only be accomplished through disclosure and competition. Right now, we have neither — and that is not the capitalist system. It is a monopolistic system whose primary drive is deceit and theft. And until the “securitized” transactions are reformed by court order into truly securitized transactions foreclosures and enforcement must stop — if we are ever able to stop the wholesale plunder of the American consumer and evisceration of the foundation of our real economy.


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