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LIAR LOANS AND THE THIEVES THAT MAKE THEM

 

By Marilyn M. Barnewall
May 9, 2010
NewsWithViews.com

The Federal Reserve System (Fed) is not now and has never been a legitimate central bank. It is not part of the U.S. government. It is a private corporation owned by member banks. Private investors own the member banks. A majority of the owners in recent years are European by birth and residence.

Like OPEC, which is a cartel of oil-producing countries, the Fed is a cartel of commercial and investment bankers who coordinate the production, pricing and marketing of money in the United States. Though it’s not a government entity, this particular cartel also utilizes the police power of the federal government to enforce its agreements.

Our founding fathers were very specific about the creation (or production) of money. Article 1, Section 8 of our Constitution charges the Congress with "the power to coin money and regulate the value thereof." Many people argue it violates the Constitution to turn these powers over to a non-governmental, privately owned corporation that is a highly profitable outside third party like the Federal Reserve. I agree with them.

What the Federal Reserve System does is this: It creates money out of nothing and charges interest for it. The Fed creates the money via the distribution system of America’s privately owned, federally-chartered banks through a process called fractional-reserve banking. The U.S. Treasury, which is a government entity supported by taxpayer dollars, pays for the paper and ink and printing presses and employee costs for printing our currency.

The Federal Reserve has three primary components:

1. The Board of Governors determines the system's monetary policy. The Board consists of seven members, appointed by the President and confirmed by the Senate. Each term lasts 14-years and each is staggered so no single U.S. President can dominate the Fed's policy. Looked at another way, there is little control of the Federal Reserve by elected government officials.

2. Regional Reserve Banks hold the system’s cash reserves. They supply currency to member banks, clear checks, and act as fiscal agents for the government. Member banks elect directors to the regional Reserve Banks in each of their 12 regions. Larger banks -- Bank of America headquartered in North Carolina, Citibank and Chase Manhattan headquartered in New York, for example -- hold more shares than smaller banks. However, they have only one vote in the selection of Regional Reserve Bank directors.

Three Class A Directors represent the banking industry; three Class B directors represent the general public. Three Class C directors are appointed by the National Board. The Chairman and Vice Chairman of each regional Reserve Bank must be Class C directors. You can find the current Directors here.

3. The Federal Reserve Open-Market Committee (FOMC) implements monetary policy set by the National Board. However, it controls most of its own policy. It manipulates our money supply and interest rates by purchasing or selling government securities. It may do this via the purchase or sale of foreign currencies and securities of other governments – like Greece. Money is created and interest rates go down when the Fed purchases. When the Fed sells government securities, the money supply is reduced and interest rates go up.

The FOMC is made up of the national Board of Governors plus five of the twelve regional Federal Reserve Presidents. Twenty-four bond dealers handle all sales of government securities. Government agencies may not exchange with each other without paying dealers' commissions on each transaction (talk about a sweet deal for bond dealers!).

The Fed’s monetary policy decisions may be made at FOMC secret meetings. We, the public, get a brief report a few weeks after decisions are made. Transcripts of deliberations are destroyed... a policy which started when, in 1970, the Freedom of Information Act was passed. Even the CIA cannot get away with this kind of secrecy!

The federal government does not own any stock in the Federal Reserve System. The Fed’s member banks may not sell or pledge their Federal Reserve stock nor does it carry voting rights. No matter how many shares of stock a bank owns, it gets only one vote. In essence, then, owning stock in the Federal Reserve doesn't imply ownership. It just shows how much operating capital each bank has in the system. Except for a brief period of time, the U.S. operated without a central bank from the time the nation was founded under the Constitution in 1789 until 1913. Unless my math is off, that's 124 years. We have operated under the concept of a central bank (Federal Reserve System) for less than 100 years.

The Congress could abolish the Federal Reserve System by a simple majority vote. If the vote is vetoed by the Executive Branch of government (the President), a two-thirds majority vote would be required to override the veto. If the System is abolished, all bank-clearing functions can easily be transferred to the Treasury. The power to "coin money and regulate the value thereof" could once again fall under the oversight of the Congress, where our Constitution says it should be.


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The current economic crisis in America was wrought by irresponsible behavior within the financial services community, including the Federal Reserve System, the Federal Reserve Bank of New York while presided over by current Secretary of the Treasury, Timothy Geithner, the Federal Deposit Insurance Corporation (FDIC), and the Securities and Exchange Commission (SEC), and others.

The U.S. Congress is currently considering what legislation it will enact so as to improve the financial services industry. The regulatory controls the Congress seeks to pass are eerily similar in nature to those passed in the early 1980s, just prior to the failure of the savings and loan industry (see my article, for more in-depth information re regulatory reform legislation).

Read the history of how banking regulations put in place after the Great Depression during the 1930s to protect American consumers from bank errors and how those protections have been changed.

As I pointed out in the first article linked above, politicians gain power for government by passing new regulations, and as a means of creating the need for new regulations, they ignore the enforcement of existing regulations. That is precisely what has been done and is what precipitated the current crisis.

The testimony of University of Missouri Professor William K. Black presented to the House of Representatives Financial Services Committee, chaired by Congressman Barney Frank.

Professor Black points to abdication of official responsibilities on the part of the Mortgage Bankers Association, the Securities Exchange Commission, the Federal Reserve Bank of New York, the Federal Reserve System, and various brokerage houses (more commonly known as investment banks) as the cause of the subprime mortgage problems that caused the fall in the housing market which resulted in the failure of many independent banks in communities throughout America. A general American economic crisis resulted.

In essence, Professor Black says existing regulations were ignored by everyone who knew about the subprime mortgage fraud – the FBI reported the problem to the Congress in 2004 and nothing was done about it. The result: the current drive for new regulatory control because the “old regulations didn’t protect us from this disaster.” The statement is a lie and, in and of its self, becomes a part of the fraud. Regulations on the books, had they been enforced, clearly would have prevented the crisis had those regulations been enforced.

You may not find the definition of “liar loans” palatable – who would? – but since they may be the basic reason why the American Dream is slowly being obliterated (though it’s certainly happening faster these days), you owe it to yourself to know what they are. As you read the definition, keep in mind that according to Professor Black “the average dollar lent on liar loans creates a loss ranging from 50 to 85 cents.”

A liar loan is when stated income provided by the borrower is not verified by the lending bank. A false figure is can be inserted and not detected. An unemployed person may say, “I make $200,000 per year.” No one checks to make sure the borrower is telling the truth. Often, the borrower is told ahead of time there will be no verification of stated income.

In 2007, Lehman Brothers, an investment brokerage house that was creating mortgage-backed derivatives from liar loans mixed with “prime” (or quality) mortgage loans, became one of the nation’s biggest providers of mortgages via three subsidiaries in various locations around the county who specialized in making liar’s loans. Did Lehman Brothers know? Of course they did.

Congress has supported beyond reason two government-sponsored entities called Fannie Mae and Freddie Mac, purportedly to make home ownership possible for people otherwise unable to share the American Dream. If what we’re being told is true, please explain why Fannie and Freddie have only increased home ownership by 4 percent over the past 30 years. By contrast, between 1991 and 2008 (17 years) in the Netherlands and Italy, home ownership increased by 12 percent Lenders who worked for the liar loan mortgage companies often felt they were doing a service to the community by making home ownership available to those who couldn’t financially qualify for a mortgage.

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Liberals, it seems, will never learn that avoiding the truth causes huge problems. If people can’t qualify for a mortgage – if they cannot make required payments – lenders have absolutely no reason to give them a mortgage loan. If borrowers cannot afford the payment, they will eventually lose the property. Many people, not just the borrower, get hurt.

Liberals, it seems – will never learn there is no such thing as a free lunch – except perhaps at the Federal Reserve.

2010 Marilyn M. Barnewall - All Rights Reserved

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Marilyn MacGruder Barnewall began her career in 1956 as a journalist with the Wyoming Eagle in Cheyenne. During her 20 years (plus) as a banker and bank consultant, she wrote extensively for The American Banker, Bank Marketing Magazine, Trust Marketing Magazine, and other major industry publications. The American Bankers Association published Barnewall’s Profitable Private Banking, the first book written about private banks, in 1987. She taught private banking at Colorado University for the American Bankers Association and trained private bankers in Singapore in 1991. She has authored seven banking books, one dog book, and one work of fiction (about banking, of course). She has served on numerous Boards in her community.

Barnewall received her degree in Banking from the University of Colorado Graduate School of Business in 1978 and was named one of America's top 100 businesswomen. She was a founding member of the Committee of 200, the official organization of America's top businesswomen. She can be found in Who's:Who in America (2005-08), Who's Who of American Women (2006-08), Who's Who in Finance and Business (2006-08), and Who's Who in the World (2008).

Web site:

E-Mail: marilynmacg@juno.com


 

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