- Easy money breeds fraud…
- When you combine the fraud of democracy with the fraud of easy money…
- Can you imagine stock market wins 138 times bigger than Nvidia? If you’re like most people, probably not. But then again, most people haven’t seen this report.
Dear Reader,
Yesterday a headline focused my wandering attention — “Easy Money Breeds Fraud,” by title.
Appealing as it did to my inherent biases and prejudices… I was compelled to investigate the article.
Upon opening I was informed that:
- It is an axiom of asset bubbles that — under the bustling surface — widespread malfeasance takes place. This is especially true near the end of asset bubbles, where participants fear missing out on the supposed riches produced therein, but — failing to achieve them — ultimately resort to chicanery and fraud to achieve their ends.
The author — a certain Artis Shepherd — documented the example of a recent bankruptcy.
That bankruptcy was Tricolor Holdings. This outfit centered upon the automobile market.
Subprime Fraud: The Sequel
Do you recall the subprime housing fraud beneath the Great Financial Crisis?
Tricolor Holdings applied the fraudulent business model to automobile loans:
- Most of Tricolor’s customers were subprime borrowers, as the company explicitly targeted the—mainly Hispanic — immigrant community, often the illegal immigrant community.
- As reported by the Financial Times earlier this year, a Tricolor bond prospectus published in June showed that 68 percent of Tricolor’s borrowers did not have a credit score. Not a low score, but no score at all. More than half didn’t have driver’s licenses. Of the 32 percent of borrowers that did have a credit score, the average was 614.
What sort of lending institution issues auto loans to individuals lacking credit scores… or even licenses to operate automobiles?
The answer is a lending institution unmoored from sound lending practices.
Fraud in Action
Mr. Shepherd:
- These subprime auto loans would… be packaged into securities and sold into the capital markets, to be acquired by individual and institutional investors. Those proceeds would then be used to pay back the wholesale lenders, with participants taking fees along the way.
- A recent federal investigation into the company — kicked off by credible allegations of fraud — has resulted in Tricolor’s recent bankruptcy filing… Among other things, authorities are trying to determine whether Tricolor double-pledged — using the same set of subprime loans as collateral against multiple warehouse loans.
- This would be akin to a homeowner with a $500K mortgage on a $600K house taking a second mortgage for $500K without notifying — in fact, intentionally withholding relevant information from — the lender about the first mortgage…
- Looking under the hood, any analyst worth his salt would immediately ask how the biggest banks in the world were taken in by [an]absolutely awful business…
How, indeed. Every lending institution I have ever encountered manifested what I can only label a profound… stinginess… with its money.
They would sooner have their teeth pried from their mouth before having their money pried from their vault.
Yet here they are lending money to recipients lacking even a credit score.
The Root of the Fraud
Yet what is the true origin of the fraud? Here Mr. Shepherd lowers his axe upon the fraud’s root.
It may not surprise you — if you regularly read this publication — to learn that the Federal Reserve is itself the fraud’s root:
- As money is printed by the central bank and pumped into the economy through the transmission belt of the big banks’ lending system, that money needs somewhere to land.
- In an economy that is highly financialized, real and productive business opportunities are limited. Catching the eye of lenders and investors therefore becomes less about a compelling business case and more about financial engineering…
- This type of malinvestment has a root cause in artificial credit expansion combined with limited real economic growth. A pervasive environment of low interest rates catalyzes this milieu by limiting the universe of opportunities yielding acceptable returns, thus causing investors to “stretch for yield” in the market — taking outsized risks to earn a suitable return.
And that:
- Risk awareness and due diligence fall by the wayside as the discipline of capital allocation is replaced by the fever of speculation.
In conclusion:
- The existence of zombie companies like [this] is due primarily to artificial credit expansion and the dumb money that evolves therefrom. [Its] collapse is confirmation that easy money carries with it massive amounts of waste and fraud, mostly hidden under the surface.
Consuetudo Fraudium
It is true. Easy money… and the financialization that attends it… authors all varieties of fraud and abuse.
It invites in what the ancient Romans labelled consuetudo fraudium — habitual cheating.
This habitual cheating corroded Rome, as oxidation corrodes iron, as the virtues of the Roman Republic yielded to the vices of the Roman Empire.
The later Roman Empire debased its currency. Its silver denarius shed 99.98% of its value in the five centuries before Rome’s sacking.
Yet the devalued denarius is gold itself against the devalued dollar.
Five centuries passed before the denarius lost 99.98% of its value.
The United States dollar has lost a similar percentage of its value — some 98% — in a mere 112 years.
How do you like it?
I have argued that fraud is a central feature of democracy. In particular, of American democracy.
Now take the fraud that envelops American democracy… and twin it with the fraud endemic to America’s easy money system.
Imagine — if you are capable of it — the intergalactic scale of such double-barreled fraud.
Yet you need not imagine it.
You need merely open your eyes.
Regards,
Brian Maher
for Freedom Financial News
