I think it is time to fork – leaving “Money as Debt” to discuss the potential consequences to money in general from Fractional Reserve Banking.  In this thread, I’d like to concentrate on the forms of securitised debt that back the UK’s mortgage markets; the nature of risk in the relevant corporate bonds and regulatory issues which have lead to the easy availability of high risk, low cost mortgages.

The first helpful article I’ve found is this:

http://www.financialpolicy.org/fpfprimermbs.htm

Unfortunately, it relates to the American market – though, I still found it very enlightening.  I’d love to find something equivalent that relates to the UK market.

Poor old Joe Public is forced to take on more debt than he can handle just to live in a half decent house.

His mortgage account is packaged and sold by the lending bank to Joe's pension fund in exchange for Joe's hard earned pension contributions.

Interest rates are raised, Joe defaults on his mortgage repayments and loses his house. His house has dropped in value since he bought it and he is now homeless but, because of negative equity, he is still in debt.

Because it is now stuffed with high risk CDOs whose market values have plummeted, Joe's pension fund is worth only a fraction of what he paid in. The pension that it can buy for Joe is tiny, less even than his enforced debt repayments.

Joe is completely impoverished and he is a slave of the financial system. He has lost his house and his pension and he has to work under the government's "Dignity Through Work" program until he dies. He lives in a dingy council refuge for the dispossessed.

His bank has the cash that Joe paid into his pension fund. His pension fund manager has moved on to another well-paid job misinvesting other people's money for fat commissions. His house was snapped up for peanuts at the repossession auction by a wealthy BTL landlord. 

The continuing story of poor Joe Public …

Joe finds out that the pension fund management company that screwed up his pension is in fact a subsidiary of the bank which sold Joe’s mortgage to it.

Within the same financial umbrella group, Joe’s pension fund contributions were moved from where Joe might benefit from them (in his pension pot) to where he could not. The risk that Joe might default on his mortgage, as later he did, was moved from the lending bank over to Joe’s pension pot.

Joe finds out that the BTL landlord who bought his house at the repossession auction is also a director of the bank. The auctioneer tells Joe how impressively well-informed the BTL landlord always appears to be when he attends the auctions.

Joe’s council refuge is privatised and is bought cheaply from the council by a company partly owned by the very same BTL landlord. The company is called “Security and Comfort for Senior Citizens Plc”. Joe discovers that the BTL landlord is also a local authority councillor.

Joe’s only son, 40 years old, is now required by law to take out a government loan to subsidise Joe’s increased rent. This is done under the government’s new “Inter-generational Responsibility and Social Fairness” scheme.

Does it occur to anyone else how amazingly profitable CDOs are for the initial lenders?

Suppose that a bank issues a mortgage of say £100K, co-creating both the £100K lent to the mortgagee and the £100K loan account to be repaid with interest over time.

It then sells the loan account to some pension fund or investment trust, say for £110K, as part of a package of similar debt wrapped up as a CDO. We suppose that it’s a high quality, low risk loan and that the good price reflects this.

The bank now has £110K, almost all pure profit, made very quickly from doing almost nothing! The money is free and clear, the risk of default has been offloaded with the sale of the loan.

I am astounded that such incredibly lucrative paper shuffling is legal.  It is, almost literally, a pure profit making enterprise. Hard working career criminals must be green with envy.

In the words of Gershwin - nice work if you can get it.

My point is precisely that the whole £110K is profit. It is literally money in the bank which did not cost the bank any of its own pre-existent money to obtain. There was no outlay of £100K by the bank to conduct this business.

Michael Rowbotham explains in The Grip of Death (written before CDOs were prevalent) how debt repayments to the lending bank annihilate the debt but are not themselves co-annihilated. The returning money remains on the books of the bank as an asset. Even more of an outrage than I first understood.

CDOs are a way for the bank to realize this asset pronto and to offload the risk of default at the same time. The craziness and danger of private banks legally creating money is now made even more obvious with CDOs. Most people however still do not see it. We will pay for our ignorance and blindness with our pensions and investments.

Asteve, are we at crossed purposes?

I am imagining two distinct events, separated by an interval of time, possibly a short interval:

First, the bank makes a loan. As we both know, the money which is lent to the borrower and the corresponding loan account are co-created by the bank from nothing. The borrower has £100K and the bank has a loan account which (let us say) should receive £8K per year from the borrower for the next 25 years. This loan account has a market value. Whoever owns it has an income stream.

Later the loan account, now up and running, is packaged up in a CDO. This package is then sold, maybe for more than £100K, maybe for less. The buyer of the CDO is (let us say) a pension fund. The bank receives payment for the sale of the CDO and ownership of the loan, and therefore of the income stream, changes hands. The bank now has a lump sum of money that it didn’t have before. This money comes from wherever the pension fund was keeping it before buying the CDO with it. It certainly does not have to be “already in the bank”.

The lump sum of money now held by the bank is, less expenses, all profit.

SquatNow, may I suggest that you write to the following “loonies” and inform them of the error of their ways.

The Money Reform Party

Michael Rowbotham, author of The Grip of Death

Aaron Russo, director of Freedom to Fascism

Bill Still, director of The Money Masters

Paul Grignon, maker of the Money as Debt animation

John Tomlinson, author of Honest Money

Bill Bonner, author of Empire of Debt

Vincent R. LoCascio, author of The Monetary Elite vs Gold’s Honest Discipline

etc., etc., …

I thank you for giving me the opportunity to list these useful references and I hope that one day you will understand what they (and many others) are trying to tell us.