In a recent post about the new movie The Big Short, I argued that it’s not actually necessary to decipher the abstruse jargon of the 2008 financial crisis — i.e., credit default swaps, mezzanine tranches, synthetic collateralized debt obligations, etc. — in order to understand what happened. What the big banks did during the housing bubble of the mid-2000s was in essence straightforward counterfeiting. The difference between what they did and regular counterfeiting was simply the kind of fake paper; regular counterfeiters print fake, valueless cash, while the banks were printing fake, valueless bonds.
However, I then made a very serious mistake — I claimed there was a “small difference” between regular counterfeiters and the ones on Wall Street:
Regular counterfeiters generally want to spend all their bad paper themselves, whereas Wall Street just took a percentage for running the presses. Then they often, though not always, passed their bad paper along to others.
If in 2005 a bank packaged worthless mortgages together into a bond with a face value of, say, $100 million, it would generally collect fees of about 1.5 percent, or $1.5 million. The $100 million face value wasn’t real, but the fees definitely were.
What I didn’t understand, and commenter Larry Headlund pointed out, is that counterfeiting cash actually does work the same way. That is, counterfeiters would not print up $100 million in cash and then spend it all themselves. Instead, they sell their fake cash to others for a percentage of the face value.
Ben Tarnoff explains the process in his book Moneymakers: The Wicked Lives and Surprising Adventures of Three Notorious Counterfeiters:
Counterfeiting cash in large quantities posed a problem. Spending it was risky, particularly among people who had reason to doubt you earned it honestly.
The solution was to let others pass it for you either by selling them the counterfeits in batches or … lending the notes on consignment. At the top of the counterfeiting scheme was the engraver. … Next came the printer. … At the bottom were the passers, who exchanged the fake bills for real money, thus generating the profit that fueled the venture.
Another book, A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States, quotes an observer about how similar counterfeiting can be to “honest” business:
One contemporary, marveling at the growing complexity of the market in counterfeits … observed that “this counterfeiting traffic … as with honest mercantile business, has all its branches, and descends from the wholesale to the retail vendors, and generally ends in the hands of the poorest and most simple individuals.”
So there you have it: I was wrong, and apologize to Wall Street for drawing too stark a distinction between them and regular counterfeiters.
(And seriously, thank you to Larry Headlund for enlightening me.)
Top photo: Executives from the financial institutions who received TARP funds, (L-R) Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase & Co. CEO and Chairman Jamie Dimon, The Bank of New York Mellon CEO Robert P. Kelly, Bank of America CEO Ken Lewis, State Street Corporation CEO and Chairman Ronald Logue, Morgan Stanley Chairman and CEO John Mack, Citigroup CEO Vikram Pandit, Wells Fargo President and CEO John Stumpf testify before the House Financial Services Committee on Feb. 11, 2009, in Washington, D.C.
Quick America! Defend your economic genius! You are the only country in the world that has enlightened economic policies that can lead the world forward from its problems and dirth of ideas.
Oh, hold on…
…No, sorry, it seems you are the idiots that caused the mess.
Quick China! Defend your econ…
In summer camp that was called “hot potato.”
Counterfeiting is a bad analogy, so let me offer a (possibly) better one.
Suppose a clever surgeon named G. Sachs discovered that by using a chainsaw instead of a scalpel, they could double the number of operations performed in a day. Other surgeons, seeing that this would double their income quickly followed suit. It seemed a simple technological innovation had unlocked hidden value and surgeons loudly congratulated themselves for doing God’s work. But then someone looked at the patient statistics and pointed out that no one was surviving the surgery and the grand experiment came crashing to a halt.
The surgeons maintained that no one could have reasonably predicted this outcome, and there were no laws on the books prohibiting the use of chainsaws to perform surgery. Everyone agreed the surgeons couldn’t be held responsible, and it was a case of systemic failure, rather than misconduct attributable to any one individual.
Counterfeiting money is a bad analogy to banks printing money? WTF are you talking about? Put the chainsaw in your arse and do us all a favour.
Counterfeiting is a poor analogy because the products the banks sold (repackaged mortgages) were what they claimed to be selling.
Historically, banks were careful when lending money, since they suffered if the borrower defaulted. But once they were given the opportunity to pass mortgages off to third parties who repackaged them as investments on the securities market, they abandoned all due diligence and started giving out mortgages to anyone who asked for them. The resulting increased demand for real estate pushed the housing market, prices kept going up and everyone made money. Everybody knew the bubble would burst with devastating consequences, but no one wanted to pass up the opportunity to make more money.
So the bankers behaved recklessly, made a pile of money as a result, then when things turned sour got themselves bailed out by the federal government while everyone else paid the price. All of this has very little similarity to counterfeiting – as several commenters have pointed out.
There is one currency that the banks hate and for one reason only, it is decentralised. Bitcoin/blockchain. This is the future and has the potential to stop these cartels.
The Tall and Short of ‘The Big Short’ ~ The Lighthouse: http://www.independent.org/publications/the_lighthouse/detail.asp?id=3631#4
If you get a chance check out Future Money, by James Robertson. If I remember rightly, he makes a like point about how we allow money to be created.
Well, that’s nice and all, but one of the many fraudulent schemes that never got a full airing was the MERS system. They needed MERS to make the junk bonds. They still need MERS to make less junky bonds.
I don’t think many people realize their mortgages were likely transferred illegally and the implications of that depending on their local law.
Ah yes (MERS), Leo’s progeny, iirc.
Also worthy to note that local Accessor’s offices filing fees were by-passed via MERS…but who’s really counting the loses at the community level?
Even worse: All government debts are void and evidence of fraud.
Why? Because if one person cannot sign another person into debt then how can a political representative do the same? Especially when the debt is attached to a massive group that includes children and others who do not have the proper legal capacity to assume debt.
Keep pulling on this string, Jon, it’s high time this dog sweater was unraveled. World Wide New/Old Order is at least 16 years over due for a jubilee reset. Desperation has gone viral with TTP, TTIP, TISA ‘free trade’, counterfeiters, gas and oil war gears grinding, ‘war against terror’, NSA spying on all . . . Happy 2016! It will be interesting to say the very, very least. Courage, man, this is Gravity , work with it, no powers-that-be can stop it’s pull. Go Intercept!
The Fed – private – and only money creator/printer protected by the U.S. ‘justice” system and a “New Secular Order” … Also, heartily appreciated is “Annuit Coeptis” which translates as “He winks enterprise”…. Anyone can print money and make it up out of thin air – and the Fed dominates the racket. They, The Fed, have been getting a guaranteed 6% per year return for 102 years now. So, if yer granddaddy or daddy had ten grand printed up for him or her as a Fed member at its inception, that be worth like how much today?… hint: close to $4 Million
even worst because you have exponential curves due to compound interest, the gap between revenues and costs increasing exponentially, dilution of all currencies and no taxes on this creation ex nihilo etc…
The Question should be why these criminals are not in prison ? ? ? The justice system has one again failed the American public ! ! !
Because the class of people doing the stealing work and live by different rules. In this case, they spent years modifying the mortgage system to set up the securitization scheme.
Did the individuals responsible for the securitization system imagine it would be used to crash the American economy? Doubtful. Did they see a real opportunity to make billions? Yes.
It’s who you know.
What the fuck is going on at TI? All they seem to be able to do is come up with half baked half movie review articles about one of the biggest issues in the world today. TI is not equipped, even with all its talent, to cover the huge (global) economic story. It’s purpose of reporting on “security” and the survelance state is all but evaporated away, now we just get stories which have been written over and over about political hypocrisy possibly the most overused trope to fill space.
Then there is the occasional Snowden document when GG feels he needs another pay check while breaking every principle he claims to stand for by censoring the vast majority of the Snowden archive.
I think of TI as the Serious Salon, but keep up with the movie reviews and articles about poison in shampoo and they maybe you can merge as I doubt TI has the traffic to survive stand alone anyway.
It’s a pity.
CNN.com is still accepting visitors if your heart fancy.
Good Show! Right On! Well Put! That is exactly what it is.
Call it counterfeiting, call it fraud, call it what you like. The social truth is that it was not illegal, because nobody went to jail, and they are still at it. But most people are confused about the connection between legality and morality, or with ethics. What Messrs. Blankfein, Dimon et. al. did was legal, just as the 1935 Nürnberg laws were legal, just as the incarceration of Japanese Americans was legal, just as Jim Crow laws are legal.
Now, the focus should be on those who enable the aforementioned individuals. It starts with your friendly local real estate agent who is more than happy to advise you as to how to fudge the numbers to get into that dream house, the banker who makes the loan and quickly sells the paper, the local chamber of commerce that happily supports the local Congressional representative on the condition that he or she be “business friendly”, up through the heads of the Wall Street investment banks with their revolving door relationship with regulatory agencies, Congress, the Treasury Department, and finally that least morally centered individual of all, the President of the United Snakes. Who, incidentally, was identified as the most admired man in America according to the latest Gallop Poll.
It is going to take a very large broom to sweep away all the scum responsible for this debacle. As someone who is still down 35% on my retirement savings, I can only hope to see the day when all these motherfuckers hang from lamp posts.
Fraud is illegal.
FRaud is only illegal if you or I do it. Banks have paid off politicians to make their fraud “legal.” Did you know that all money is created out of thin air when bankers issue loans? They charge interest for money they never had. When borrowers can’t repay, lives and families are ruined. Our monetary system is a legalized-counterfeiting, debt-enslavement scam.
Fraud is not illegal in the fake USA because it is
central to the church of (so-called) Free Market Capitalism,
to which the democrats and republicans are devout members.
The laws within their church are applied based upon
privatized profits above all else.
The more money you have, the more rights
in the state church of the fake USA (and its allies).
how interesting that has’nt been fallowed up on.
It wasn’t counterfeiting.
In some cases, it was intentional obfuscation and complexity which led to people misvaluing and not understanding the risks they were taking. In these cases, people were actually paying for something, which was the right to receive cash flows in the future given a certain level of default risk. Many of them received said cash flows. The fact that everything about what they purchased was misrepresented is fraud, but not counterfeit. There were actual mortgages being issued with payments being made on them.
In terms of swaps, the simplest way to think of this is if an insurance company issued too many fire insurance policies and then an entire city burnt down. They would not be able to pay. Again, you would call this malfeasance or fraud, but it is not counterfeiting.
I think the distinction is important and that it is actually necessary to understand some of the technical details. For one thing, counterfeiting entails attempting to pass off a fake version of a currency.
Securitization on the other hand is a way to create additional mediums of exchange that are not hard currency, but can be treating like currency in that they have some expected value to the holder. It is cases like this that often lead to bubbles and panics when holders realize what they have is not worth what they expected.
@ T
I’d agree with you having litigated against the banks extensively in this arena. It was closer to fraud due to non-disclosure of the true value of the underlying mortgage obligations and predicted ability of borrowers to maintain the cash flows that the bondholders expected to derive from any given tranche.
Counterfeiting was involved but in a novel way–the proper documentation of real property deeds of trust and other documents regularly recorded in country real property records. That counterfeiting took place in one of two ways–making images of the origin deeds of trust and promissory notes (and many other relevant documents i.e. assignments) and attempting to pass them off in courts all over this country as originals and in the case of promissory notes as “negotiable paper” (which generally can only be originals with the proper endorsements on the originals or endorsements on allonges). There is literally a currently operating industry working in tandem with banks and mortgage lenders and document custodians to manufacture these documents and pass them off as originals. They aren’t. The second way was in all the robo-signed foreclosure documents and affidavits that the affiants had no personal first hand knowledge of and never actual possession of original documents from which to make their sworn statements from personal first hand knowledge as required.
All very boring and technical legal stuff, but very important to establishing ownership of the underlying promissory note obligations, tax status for the REITs and other trusts that nominally held the underlying negotiable paper, and the legal standing to sue for foreclosure as the actual “beneficiary” or other legally empowered agent of the true beneficiary.
If people truly understood how the mortgage industry worked in this country they’d never take out a home loan unless they were supremely confident they’d never be in a position to default no matter how briefly.
That’s not even bringing up the inherent conflict of interest between loan servicing industry and of the bond holders and/or promissory note beneficiaries.
“county” not “. . . country real property records . . . .”
@rrheard – Are you saying that the same mortgage was used in multiple deals using duplicates of that the paper work or that the documentation itself was counterfeit because it was not the original?
“If people truly understood how the mortgage industry worked in this country they’d never take out a home loan unless they were supremely confident they’d never be in a position to default no matter how briefly.”
As a novice, I would greatly appreciate it if you could expand on this.
In the middle of all this Bear Stearns was naked short sold into failure. To the tune of 9 million shares. Naked short selling is counterfeiting. So while credit default swaps and other mortgage fraud may not be counterfeiting there was plenty of it going on.
Hmmm
And no where has naked shorting been more prevalent than in the commodities and currency markets. Why? because this bank charade couldn’t have been sustained without it. If you really want to unravel that banks start with their recent admissions in court that they rigged interest rates, currency rates, gold and silver prices etc. and work backward from there.
i actually learned some of this from an episode of archer. they get ripped off selling coke for fake bills then end up selling it to the yakuza for pennies on the “dollar” to settle a meth debt. fun and educational.
also not sure how what the fed does is (objectively) different; “we need cash…let’s print it and give it away with negative interest too!”
This is all fine, but it doesn’t end there. The federal reserve also counterfeits, but is generally spared blame.
Thank you for a reasonable analogy of the biggest rip off in history. The American people got fleeced for a trillion or so dollars and yet no charges or prison sentences were forthcoming. Glen Greenwald in his book Liberty and Justice for Some, calls it a financial coup and this is a counterfeit scheme. Very good, now how do we, as citizens go after these corrupt bastards? Are we just going to wait until it happens again? It seems like the govt is schilling for the financial industry and they control how wealth is generated, usually to the very top, as they are “skimming” a percentage every time the assets change hands. I don’t see how the little guy has a chance, probably how “it’s” supposed to be.
I worked in wood flooring for 13 years. Saw all slow down and then laid off at 1300 hrs on a Friday the 13th. These bastards made money on bad loans for housing and then I lose my job! Damn right I am bitter abrr this miscarriage of justice in letting them not sink and all drown!
Take it a step further.
Counterfeiting is the real core of the Fake USA.
It isn’t just counterfeit money,
though the driving force is and has always been money.
The whole “culture” and its most prominent personalities
are counterfeit.
All of that “Your attitude must be optimistic” which is
central to ignoring the abundance of counterfeiting schemes
helps keep people from seeing the truth and,
if you don’t want the truth,
you are a counterfeiter.
The truth is that those “Disney” parks and
the “american way of life” are based upon
NOT seeing how they are dependent
upon global criminality against “other” people and nature.
It’s too funny that careers like banking and finance seem to capture all of the students that want something “practical” as opposed to the idealism of liberal arts kids, but they engage in pseudo intellectual novelty on scales of magnitude that makes continental philosophy sound pedestrian.
The flights of psychological fantasy and linguistic novelty necessary to run a corrupt world…
How are these criminal masterminds, just like America’s known war criminals, not in prison?
There’s no “rule of law” here, it doesn’t exist. It’s only pretense protecting sy$temic corruption and some absolutely insane idea only the wealthiest on OUR world will determine its fate – for everyone.
mmmm, I’d say more snark than substance here. The counterfeiters get a much larger percentage, so far as I know, and they fake their bonds to look like something with “full faith and credit” etc. These banks could say that, while they were trying to make their worthless mortgages look more valuable, they were pitching them to buyers who ought to know that buying a debt and collecting it are two different things.
I understand the appeal of your comparison, and don’t suggest it is altogether invalid, but you’re missing a larger point here. The rich in this society make their money by magic. What determines when an ugly dress is worth $10,000, when a Million Dollar Homepage becomes worth $10 a pixel, when a diamond becomes more than a plain, colorless rock, when some crap daubed on canvas is worth a million, when a “Bitcoin” goes from somebody’s daydream into value, or when a fiat currency is something people kill and die for? It’s all deception. If the ordinary people could ever manage to find a way to really perceive this sorcery as a whole for what it is, there is no telling what would happen.
What determines value of things like diamonds or gold is supply and demand. If people stopped thinking those things were valuable, they’d lose their value immediately. They have little intrinsic value, though gold is an excellent conductor and diamonds can be used to cut glass.
Things like paintings and dresses are different. They can be promoted by corporate media, but if the general public rejects them they have little or no value. This is pretty subjective stuff, no logic to it really.
As to money, that’s just a symbol of wealth. Money replaced direct trade of bartering. The money itself has no value, but what it represents does.
There are things that are objectively valuable economically, such as food and clothing, because they’re necessities. But most stuff that people buy is only valuable because enough people like it to make it so.
You’re right- all value is subjective. However, the bankers control or highly influence our minds by the messages and imagery they present in mainstream media, hollywood, television, radio, academia, public schools, etc. They’ve tricked us into wasting most of our lives laboring to pay interest, inflation, and taxes, all of which were incurred during our quest for disposable trinkets. We’ve been tricked and brainwashed into valuing the worthless while discarding the most precious and valuable.
I would recommend taking this to the next level and applying it to other fields. How does our (USA) government differs from a Empire or CIA from a terrorist group or IRS from a Mafia.
If we want to stay on the topic of money then “How does money work” or where does $ comes from would be good topics to pursue for the purpose of educating the masses and ourselves. Tip: What is Federal Reserve