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Does Anyone Know What Happened to all of the Money?

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By George W. Mantor

RISMEDIA, October 6, 2009—Poor men want to be rich. Going back to when gold was currency, many a would-be alchemist tried unsuccessfully to turn some other less valuable material into the yellow alloy. 

With the invention of paper money, so too came the counterfeiters. And, of course, there is a long and varied history of stock and securities fraud. 

In most cases, fraud is committed by those in the best position to do so–insiders. 

So, I was thinking about my battered retirement nest egg and I started to wonder, where did it go? Not just yours and mine but everyone’s money. That has to be a big chunk of change and must have had an impact somewhere. It didn’t build any bridges or schools, and it didn’t create any jobs so it had to go somewhere. Americans’ net worth, which rose last quarter by $2 trillion, is still down $12.2 trillion since 2007. 

We had it; now it’s gone. Sure, I know what you are thinking, “It’s the bubble, stupid.” I just don’t understand how that explains where the money went.

Somewhere, buried in the vocabulary of “securitization,” “derivatives,” “Collateralized Debt Obligations,” “Credit Default Swaps,” and “arbitrage,” there may be an answer.

But, when I hear the various explanations for what went wrong, I get this uneasy feeling that something funny has been going on. It’s like listening to someone tell the most convoluted and complicated lie. It sounds implausible, but it has so many tentacles it’s hard to be sure.

In my case, I tend to wild speculation. Unanswered questions lead to more unanswered questions and the hunch just won’t go away.

Take for example the securitization of trust deeds, and lenders arbitrarily deciding to cease the age-old practice of filing assignments with the county. See last week’s column, 60 Million Mortgages May Have Fatal Flaws

Did that lead to the collapse of our economy?

And, where exactly are all of these missing notes?

First they cease the public recordings, and then the notes disappear? How could that happen? Are they not registered securities? Isn’t the buyer supposed to receive the security with an endorsement on the back? Would that alone be a securities violation?

Oh, I’ve got a lot of questions.

While looking for answers, I came upon the case of a woman whose note had been sold over 600 times since 2007. Why would a note be sold over 600 times in two years? That’s almost every day. Is that really profitable? And, to accommodate all of the endorsements on the rear, wouldn’t it have to look like a role of toilet paper?

And, what would reselling that note almost every day add in value that someone else would want it tomorrow? Isn’t that like trying to turn lead into gold? Are there commissions paid on the reselling?

Or, does it become more valuable every time it changes hands? I don’t get it.

Or, if it really is 60 million mortgages and only three million are actually foreclosed and resold, is that enough to destroy the economy? And, AIG insured the investors against defaults. If we bailed out AIG and still paid all of those bonuses to their senior people, who actually lost money? Where did it go?

In the absence of any plausible explanation for any of this, I wonder if there isn’t an even bigger story. What if, in absence of the promissory notes actually being delivered to the investors, they were sold again to another buyer, and another?

Maybe the Broadway play “The Producers” isn’t really fiction but a formula for modern-day finance. Max Bialystock and Leo Bloom sold and resold the rights to a musical so bad that it was destined to fail. But, when it defied logic and became a success, they couldn’t pay back the investors.

Only in the case of mortgage-backed securities, it was the other way around. As long as nobody defaulted, no one would ask to see the note. If they were only issuing copies of the note, they could sell it over and over.

So, if I have this right, the solution to the banks defrauding their investors was for Henry Paulson, formerly of Goldman Sachs, a major player in mortgage backed securities, to bailout AIG, which insured the securities. So, why did we also have to bailout the banks, too? They already had sold the notes and gotten their money back long before the collapse.

As time goes by and we learn more about how the financial industry operates, we may eventually be able to cut through the jargon and get to the truth about what happened to our money.

Until then, I’ve still got a lot of questions.

George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.

Mantor can be reached at GWMantor@aol.com.

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