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RISMEDIA, November 3, 2009—When considering the implications of the current foreclosure situation, I believe we are being misinformed about the forces behind the high rate of mortgage defaults. 

I also believe there is more to learn about the lack of success in getting mortgages modified. 

Or, as recently published reports on certain court cases have shown, why foreclosing entities either cannot or will not produce a valid chain of title in foreclosure proceedings even though it may cost them the case or sanctions by the courts. 

Just as baffling, why would a lender make a loan and then lose the means by which to repossess the asset? There are, as it turns out, other ways for financial institutions to make money and when they can, they do. 

That goes to the very heart of what happened to our prosperity. By reclassifying liabilities as assets, Wall Street was able to sell debt as an investment. 

Any kind of debt will do because the debt doesn’t matter. No risk is too great because there is no risk. They sell the loan and then make a bet that it will default. It’s called a Credit Default Swap (CDS). 

A CDS is the most widely traded type of derivative, and these investments represent the biggest financial market in the world. CDS resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes

According, to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007; that is over 500 per cent in five years.

The BIS recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. 

This is curious when you realize that the gross domestic product of all the countries in the world is only about 60 trillion dollars. 

The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in. There is no regulation of these instruments and they do not show as liabilities on the balance sheets of the institutions. 

A Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. 

Nor, did mortgage defaults cause the crisis. Mortgage securities made up only $7 trillion of the huge derivative market. 

To the extent that any information is available on what brought us to this point, it is mostly bloggers. 

Most of the blogging perceives the foreclosure problem as the result of sub-prime loans, irresponsible borrowers, and mortgage resets. 

Such a superficial view reveals a complete lack of understanding of how the securitization of mortgages makes Wall Street all of that money out of nothing at all. You have to follow the money. 

An important distinction is that the consumer was not the driving force behind this money binge, but the profits Wall Streets was making on Derivatives. 

When you break it all down, it looks to me like Wall Street possibly took a lesson from Broadway. The Producers is about a Broadway producer and his accountant who realize they can make more money with a musical that was guaranteed to fail than one that would succeed. But, the musical’s sure-to-fail hit song, “Springtime for Hitler” surprisingly turned out to be an astonishing success. When the investors came for their profits, there were too many investors to pay back. 

Wall Street, where life imitates art.

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