Simply understanding this one accounting mistake will automatically jump start the economy. Applying Leverage Debt Reduction
Part 1 & 2 of 7
Multiple Parties Backed by Same Asset
(Taken from Raghu-nomics Volume 7)
“LEDER simply points out that we have this large cross section of duplicate copies of debt and liabilities against this same one asset – the car (or home). Once any one of those 7 areas of debt or liability are paid upon, it reduces the liabilities on all these other holders as well.”
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‘There is no real estate crisis. The whole thing is just one big accounting mistake.’ This is the explosive claim by Raghu-nomics in their video/article called Leverage Debt Reduction or LEDER. LEDER explains how banks and insurance companies have been writing off the same real estate asset without realizing it. As such, each ‘write-off’ has paid off multiple counter parts. Simply put, every home mortgage in America may have already been paid-off. This was covered in previous articles and most recently in ‘Leverage Debt Reduction.’ We now go on to demonstrate how this double pay down is likely true for much of our other debts as well. Once this is understood, it should help us unravel the $350 Trillion Dollar Derivatives Market into an affordable debt reduction programs as we discover a growing number of pockets of equity and other values.
Let’s begin with our opening example of the rental car insurance used throughout our other presentations. Many of us get the $12 a day insurance premium when renting a car. If you use your American Express Card to rent the car, Am Ex automatically covers the insurance for you. If you have a commercial driver’s license, it too will cover you in case of an accident. The car rental company also has its own insurance policy.
This totals 4 insurance policies on that same car:
1) Your $12 insurance premium.
2) Your Am Ex Card insurance.
3) Your Commercial Driver’s License Insurance.
4) The auto rental companies insurance policy.
Here’s the point we make with Leverage Debt Reduction. If just one of these policies pays-off the car, the other policies are automatically paid-off too. Here’s the best part. The car is also entirely paid off as well. This is what we have today. Wall Street tracked all the liability recorded in each of these auto insurance policies without tracking how the asset, the car itself, was already paid off by one of these insurance companies.
What happened in the real estate market is a little different. A better example would be if each of those auto insurance companies took a 25% write-down on their liability for the car. Even though each only wrote-off 25%, once combined, it equals 100% of the cars value. This is what happened with the real estate securities market due to the gov’ts ‘Mark-to-Market’ accounting requirements, but we will get to that later.
We will add in one more layer of ‘debt’ to better exemplify the true nature of today’s so-called trillions of debt. There is an additional ‘claim’ on that car. This claim is by the bank and is on top of all this coverage by insurance companies.
For our auto example here, let’s say the bank has an outstanding liability of $10,000 in loans on the car to the rental company. The bank also takes out an additional insurance policy on that loan. This insurance policy is to cover the rental company should they default and not pay for the car. This gives us 5 insurance policies on that same car. Four of these policies are by the insurance companies. The last policy is taken by the bank.
Real estate securities have a similar counter-part that offers insurance policies for home loans. They are called Credit Default Swaps. At one point, there were an average of 5 Credit Fault Swaps = CDS, for every home mortgage in America. One of those CDS was taken out by the bank when the homeowner took the loan (in the event the owner defaults). Many of these CDS were written down by the insurance companies. The bank would take another write-off on that same asset as well. Most of these were done as direct write-offs due to accounting rules while others happened via bankruptcy.
In the housing market, the driver of our example is the homeowner and that homeowner is still paying on that home mortgage. In other words, we still have a performing asset with this (car) home. By refinancing the homeowner, the bank is refunded on all the equity paid by these other four policies that were written-down by the insurance companies. Refinancing homeowners into market priced mortgages would hand the banks trillions in refunds. Let’s wrap up the example and demonstrate our point about this Leverage Debt Reduction.
Say that each of these 5 insurance policies are for a $10,000 payout on the car. Once combined, Wall Street registers these 5 policies as a ‘liability’ for $50,000. This is on top of two more ‘debts.’
The first debt is by the bank who loaned the money to the rental company and the second debt is recorded by the auto rental company itself. This shows up on Wall Street as two companies with $20,000 worth of loans on a $10,000 asset, the car.
Now add in the $50,000 in insurance liabilities recorded by the insurance companies. This gives us a combined $70,000 worth of ‘debt’ and ‘liabilities.’ This entire $70,000 of ‘liability’ is backed by nothing more than this same $10,000 asset – the car you are about to rent and drive.
LEDER simply points out that we have this large cross section of duplicate copies of debt and liabilities against this same one asset – the car (or home). Once any one of those 7 areas of debt or liability are paid upon, it reduces the liabilities on all these other holders as well. Such write-downs were done in a number of ways. Banks banks and investment companies took direct write-offs on their holdings or in other cases, they went bankrupt and so it was dismissed. Sometimes, insurance companies paid on their policies meaning that the homes backed by those policies were then paid off in full. The short of all this means there is less debt and more equity in the real estate securities market then is realized when viewed by each individual company.
We can tap all this equity by simply refinancing the homeowner. Refinancing the home at market based prices would refund the bank all this ‘hidden’ equity. Our initial assessment indicates that most of the real estate liability has already been paid off through these multiple write-offs. We will offer more examples of this for other areas of debt as well. For now, let’s take a minute to re-frame the discussion as presented by today’s growing Experts of Doom.
Today’s economic preachers of gloom come in and hold up this $70,000 worth of liabilities against this $10,000 auto asset (in our example above). This is their ‘proof’ that our entire system is a fraud built upon a Ponzi scheme of none existent paper money of no value. And yet, somehow, things continue on for another day, another year and now with this financial crisis, almost another half decade.
These ‘experts’ have found all the liability, but they have no insight about the corresponding players and value. As such, they have no ability to find or tap such value that offsets most of this liability. Our examples here show the step by step process on how to identify and tap such corresponding values, players and assets. This provides a host of advantages over the experts of doom.
LEDER can out-perform Wall Street’s experts too. These company experts have been confined to view things from their own ‘company’s’ immediate bottom line rather than seeing the broader market trends that hide these assets. It’s like the insurance companies of our example, each knows their own liability, but fail to track the pay-outs of the others. To identify these values, we should first understand how and why the US lost track of them.
As we walk through these ‘accounting’ mistakes, the hidden values become more obvious and the ‘solutions’ more simple to harness. Most of all, we will finally see that this entire economic crisis was built upon mis-indexing a host of assets from every major sector. It’s a stunning revelation to see here that the corruption of the housing industry was only a small part against the loses created by these accounting mistakes. The bulk of our economic problems was not from the war, housing fall or tax cuts, but was primarily caused by this series of accounting mistakes. Now is the time for you to disagree with me because once you read the following examples, you will understand the full scale of this claim.
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Part 2 of 75 Causes of Accounting Mistakes:
(Taken from Raghu-nomics Volume 7)
Raghu-nomics suggest that the entire real estate crisis is just one big accounting mistake. Five of them actually. There are five factors that converged to create the greatest mis-indexing of the country’s liabilities and values ever recorded. Four of these ‘accounting’ issues were never before part of the financial system and hence, the over sight could be somewhat justified. There was no text book to require our accounting institutions to take a second look at the different areas of these ‘new’ systems. Unfortunately, these 5 issues combined to multiply the market miscalculations artificially and exponentially. The great news is that because of these accounting mistake, we likely paid off every home in the country. No, of course banks would never let homeowners off scot free, so it means banks and other institutions holding these securities can have 40% to 80% refund against these homes worth by simply refinancing all homes to market levels (about 35% on average).
Here are the 5 areas of accounting mistakes. They are:
- Securitized Mortgages
- Automated security trades
- Credit Default Swaps
- Mark-to-Market Accounting
- Overstated Market Bubble
Part 1 & 2 of 7Completed
Part 3 of 7
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Part 7 of 7: