The $30 Trillion Con

I don’t know about you, but I get this strange feeling that our government is deliberately covering up the biggest con of all time.

Let’s do the math. I am going to use round numbers here, so please don’t quibble with me about minutia.

U.S. Home equity is about $10 trillion. American homeowners have about $10 trillion in mortgages. Total home value is about $20 trillion.

Somehow, Wall Street found a way to sell $50 trillion to $60 trillion in securities (no one knows exactly how much was truly sold, but this is a general consensus), all based upon $10 trillion of U.S. equity.

Where did the money come from to buy all this stuff, you wonder? Most of it was borrowed. Where did the underlying value come from to justify the purchase of these securities? It was manufactured on paper. The value was never there; it was a ghost.

This should have been an easy problem to fix. Six months after the fall of Countrywide, one of our nation’s best teams of economists (University of Chicago) issued a white paper predicting that the total loss would be about $500 billion. This should have been the case―certainly not the $10 trillion to $20 trillion that has been lost to date.

Let me explain. Let’s say that a nightmare scenario occurred to cause 10% of all mortgages to default. 10% of $10 trillion is $1 trillion. The market could have absorbed this. Congress could have written a check. Even with no intervention, investors may have lost a few hundred billion. End of story.

Even as the Obama administration commits to stabilizing home values and subsidizing mortgages to make thing right, the world is going into economic free-fall.

What has happened is something so far removed from this that it can only be the result of massive ignorance, deceit or outright fraud. Subsidizing defaulted mortgages should have fixed the problem. This is the underlying asset (collateral) of the CDO (collateralized debt obligations) market. But this has done nothing. Nothing. When these securities were sold to investors, insurance companies, banks, etc., they were assigned bloated, inconceivably high values that could never be achieved.

In all my reading, I have not seen this mentioned as the cause. So, either I am stupid, the world is ignorant, or there is a massive cover-up underway. (I vote for the ignorant world).

The only way that fixing the underlying asset would not have corrected this problem would be that the values attributed to the securities sold were wildly overpriced. Wall Street took $20 trillion in securities. They broke them up into small pieces. Then they sold the pieces at a markup. If the SEC does the forensic accounting (provided these records have not been destroyed) I believe they will find that Wall Street took in more than $50 trillion on $20 trillion of value.

Using this math, $30 trillion in borrowed money has no collateral. And that, Martha, is why we are in this mess.

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