Syndicate
Missing Money and Collateral Fraud
1. Where Is the Collateral?
The challenge that U.S. Treasury Secretary Hank Paulson faces when working out the problems with Fannie Mae or Freddie Mac is that a significant number of mortgages that serve as collateral for U.S. mortgage-backed securities markets are not real. They do not exist.
The problem is not that the people who bought the house and borrowed the money cannot afford to pay it back or that the house they bought has dropped in value. If these were the problems, we would not be watching the debt the U.S. government is responsible for increase by $5 trillion dollars. We would not be watching the National Bank of Australia announce a 50% loss rate on their mortgage-backed securities.
When my company served as lead financial adviser to the Federal Housing Administration (FHA), we surveyed industry loss rates to compare them to FHA's high rate of 35%. The highest we found in the industry was 25%, and this was at the end of the last housing bubble bust, when loss rates would be expected to be high. As we due diligenced the FHA nonperforming and foreclosed portfolios, trying to understand a 35% loss rate, we started to find symptoms of fraudulent collateral practices. Indeed, we found portfolios with 50% loss rates, and the losses had nothing to do with income levels or housing prices.
Here is a story that I have told many times before:
"In 1994, after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and had mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government’s published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure. I assumed that the guy was crazy. If what he said were true, then the U.S. Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud."
See: The Myth of the Rule Of Law. See also: (1) (2) (3) (4)
After I began researching HUD fraud in the late 1990s, I would be contacted by people with experience with HUD fraud. They insisted that the same home was being used to create ten or more mortgages that were placed into different pools. They alleged that Chase as the lead HUD servicer and the other big banks were implementing such systems. This was why we would see the same house default two, three, or four times in a year, they claimed. FHA mortgages had to be churned through multiple defaults to generate the cash to keep all these fraudulent pools afloat. This, they insisted, was all going to finance various secret government operations and private agendas.
This issue of collateral fraud was repeated in other markets. As I started to learn more about precious metals and the commodities markets, I would hear story after story about precious metals arrangements in which what investors really had was a bank credit—there was no bullion behind the arrangement.
I have come to believe that the allegations of mortgage collateral fraud are true—not just for FHA and Ginnie Mae at HUD but across the board throughout the mortgage markets as well.
What this means is that Freddie Mac's and Fannie Mae's obligations must be converted to what is essentially government debt. Such conversion means that investors simply don't care if the mortgages have a lien on anything real or not (at least for the time being). Otherwise, there would need to be a process by which all the defaulted mortgages can be sorted through to determine which of the mortgages are legitimate and which are not.
Creating and managing such a process would indeed crash the global financial system. It is hard for a multi-trillion-dollar financial system to maintain liquidity when contracts and laws are meaningless.
There are two great financial mysteries in America:
- Where is all the missing money and how do we get it back?
- How big is the missing collateral black hole and how will it be resolved?
These two mysteries are essentially part of one mystery at the heart of the matter: Who is in charge of—and what are—the real financial flows and assets of the central banking/warfare complex that increasingly governs the resources on our planet?
Since all financial frauds—the manipulation of the precious metals markets, the engineering of the mortgage and housing bubble, ongoing naked short selling, Enron, and the pump and dump of the Internet and telecom stocks—come back to the same cast of characters, our ability to protect our families and assets necessitates an integrated understanding of “the real deal”—who is really in charge and how the economy is really managed. Hence, it is useful to have a basic understanding of the missing money and missing collateral mysteries.
Let's start with the first mystery, the missing money.
In fiscal 1999, the Department of Housing and Urban Development (HUD), under the leadership of Secretary Andrew Cuomo, reported $17 billion missing from its opening balance and $59 billion of undocumentable adjustments to close its books and refused to produce audited financial statements as required by law. In fiscal 2000, HUD refused to disclose the amount of its undocumentable transactions. To get a sense of the magnitude of even the reported discrepancies, this means that the amount of undocumentable transactions occurring at HUD in 1999 was $1.13 billion a week, $227 million each work day and $28 million an hour.
The contractors that ran HUD’s auditing and payment systems also were large contractors at the Department of Defense (DOD), which reported $2.3 trillion of undocumentable transactions in fiscal 1999 and $1.1 trillion in fiscal 2000. DOD declined to report the number for fiscal 2001, and in all years subsequent to the legal requirement to do so, declined to produce audited financial statements, ensuring that the U.S. Treasury could also not do so.
A handful of efforts to get to the bottom of what was going on met with little or no cooperation. Efforts by reporters and one brave congresswoman, Cynthia McKinney, to identify the contractors responsible for managing the accounting and payments systems missing all this money were not successful. Investigative reporter Kelly O’Meara got David Walker, head of the General Accountability Office (GAO), the Congressional auditor, to commit during an interview that he would make this government contractor information public. However, GAO never did. One Tennessee congressman on the House Budget and Defense Appropriations Subcommittee confirmed to me that these billions were missing, but said that he was helpless to do anything about it. [See Letter to Congressman Van Hilleary (R-Tenn.).]
Things seemed to be coming to a head on September 10, 2001, when Donald Rumsfeld conceded in a press conference that DOD was missing trillions. However, that fact was not to attract much attention given 9-11 events the following day. Rather, the tragedy was used to justify the loss of financial records at the Pentagon (we are apparently to presume that the Pentagon is incapable of making or keeping backups) and the inability of the Army to produce financial statements in 2001.
So where did the money go? Indeed, $4 trillion is a lot of money for us to lose. Especially when you add it to the money that was pulled out of pension funds and investors’ accounts with the pump and dump of the Internet and telecom stocks, the manipulation of the precious metals markets and movement of gold stores at below-market prices, and the bubbling of mortgage markets and other financial frauds. And, as beautifully described in Vanity Fair’s recent piece by Barrett and Steele, “Billions over Baghdad,” money has continued to go missing from DOD at astonishing rates. Wars in Afghanistan and Iraq have created countless new opportunities for pork and pilfering.
Add it all up, and my guess is that more than $10 trillion of private and public funds has been pulled out of America by fraudulent means. That is an interesting number, given that this amount was sufficient to pay off the direct national debt before the housing bill added Fannie‘s and Freddie’s debts to our burden.
In short, our problem is not that our national debt is out of control. Our problem is a financial coup d’ etat. The reason we have debt is that the federal accounts have a private back door that is feeding an insatiable parasite. The money we need to address our financial, social, and retirement obligations has disappeared, and we need to get it back. The housing bill does not do this. Quite the contrary: It represents a step in the opposite direction. Instead of getting the money back, the housing bill ensures that our contingent liabilities increase astronomically and puts in place additional mechanisms for engineering more missing money and draining small business and communities as a result of further centralization of mortgage credit into Washington and Wall Street.
So where did the money go? Ten trillion dollars is too much money to all be sitting in the accounts of swindlers, politicians, and correspondent banks in the Cayman Islands or Dubai.
Unlike the missing money, collateral fraud is a topic that I have found traditionally to be quite dangerous.
My first experience with serious media censorship was in 1989. A reporter from the New York Times had to resign to keep the Washington bureau chief from tampering with a story about me when I was Assistant Secretary of Housing - FHA Commissioner. I did not understand what was happening. Many years later, I came to believe that the problem related to my efforts to bring financial transparency to the FHA and Ginnie Mae operations at HUD and the risks that transparency posed to what I now believe was the operation of collateral fraud and related securities fraud at FHA-HUD.
Seven years later, I ran into a serious problem with the Washington Post. A front-page story about me was spiked and the reporter would not return my calls. It related to the seizure of my company’s digital databases by the HUD and the Department of Justice. We were creating software programs and databases that could reconcile outstanding mortgage-backed securities data to street-level housing data. The prospect of such reconciliation had sent official Washington into a state of complete panic. One of my systems administrators was informed by government investigators that under no circumstances were we to be allowed to keep a copy of our digital records. When asked for detail or a legal basis for why a company should not be allowed access to its own databases, he could not explain.
Looking back, I now believe that these events related to a need to cover up very significant collateral fraud.
More recently, my “Community Business” segment on Flashpoints on KPFA radio was censored by order of station management during the same week that the housing bill was being voted on by Congress. I had just finished raising $45,000 for KPFA and was about to do another fundraising show. There was no warning, and the management refuses to speak to me or return my calls and letters. I am censored, and there is no explanation as to why.
Collateral fraud occurs when the stuff that you use to secure a loan is just not there. So, as an example, ten mortgages are created on one house and put into ten different mortgage-backed security pools.
I am sometimes asked how HUD could have had more in undocumentable transactions in fiscal 1999 than the size of its entire budget for the year. My answer, in a nutshell, is securities fraud.
As an example, let me hypothesize one of many different ways that this could be achieved. The government could issue mortgage-backed securities without recording them on the official books. Here is how it might work.
As depository and government contractor, you shift $100MM out of a government account, such as the FHA Mutual Mortgage Insurance Fund reserves, using a debit entry. You use that money to purchase Ginnie Mae securities that are not recorded on the Ginnie Mae books. The cash received through the sale of the Ginnie Mae securities replenishes the reserves. You sell these Ginnie Mae securities offshore—in China, Japan, Dubai, or the Cayman Islands.
Now you have $100MM. You do it again. And again. And again.
By the end of the year, Ginnie Mae has issued $59 billion of securities backed by the full faith and credit of the U.S. government that are not reported on the official HUD books. You pay the debt service by defaulting fraudulent mortgages in the Ginnie Mae pools and putting them back into the FHA fund as a claim on FHA’s insurance.
Because FHA mortgage insurance originations are growing thanks to the mortgage bubble, FHA is taking in lots of premiums, so you can skim from these reserves. This is—in essence—stealing from the premium holders. However, they have no way of knowing. Accomplishing this requires manipulating the actuarial studies. Given what your accountants and auditors are already going along with, cooking the actuarial studies is certainly not a problem.
Again, this is only a hypothetical methodology. In theory, there are hundreds of ways of doing it, including with the full range of Treasury and agencies securities.
By the summer of 2001, to finance trillions of undocumentable transactions, the U.S. government would have built up quite a discrepancy between outstanding securities and those reported on the U.S. government books, and another discrepancy between agency securities collateralized with things such as mortgages and actual valid liens on real things in the material world.
Which leads us back to the interesting fact that the first plane that headed into the World Trade Center North Tower on September 11, 2001 took out Cantor Fitzgerald, the leading government bond dealer. All 658 employees present that day died, along with the system Cantor Fitzgerald used for settling transactions. This was not the only financial data destroyed that day. DOD has claimed that the attack on the Pentagon that day destroyed financial records. In addition, the destruction of WTC 7 resulted in loss of SEC and other federal agency enforcement records.
The increase in defense appropriations after 9-11, ongoing missing money since that time, and the excusing of DOD from many mandated financial reporting requirements could all have helped the system dig out of or simply maintain a collateral black hole.
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