ABSTRACT: I get tired of reading about how banks lend money and take all these risks and are therefore entitled to “repayment.”  National discourse on the fact that banks do not lend their or their depositors’ money needs to begin immediately, in every mainstream media outlet, every social media outlet, everywhere.  It’s the single most important issue there is…

No, US Bancorp did not lend money to Maury Rosenberg (or anyone else), despite what US Bancorp asserts in this New York Times story (“Battling A Bank To Collect A Judgment”) that has been making the rounds on social media:

“Mr. Rosenberg is a sophisticated businessman whose company borrowed $27 million in loans,” a spokesman for U.S. Bancorp said. “After his company defaulted the first time, the bank agreed to write that obligation down to $15 million, and Mr. Rosenberg signed a personal guaranty on that commitment in exchange for the write-down. His company then defaulted again after only 21 months — and he has not paid a penny on his guaranty.”

That’s always the first and last resort of a bank–to assert that they lent money to someone who is not paying them back.  This assertion is always accompanied by the typically unspoken implication that in “lending” money, the bank took a risk and that this risk was backed by a contract (i.e., a promissory note) and that contracts are legally and morally sacrosanct.

And the banks have trained everyone, since birth, to think this way–to be the bank’s enforcers inside our own minds.  The bank lent money and it must be paid back because the bank did us a favor by taking a risk on us and we can’t let the bank down.  Judges think this way.  Attorneys think this way.  The public thinks this way.

The only problem with thinking this way, however, is that the premise that banks take a risk by lending money–or that they “lend” anything at all–is completely and utterly false.

Oh, come on–is this just another conspiracy theory?

Short answer: no, it’s not a conspiracy theory.  It’s openly admitted by the Federal Reserve–the bank of banks–in any number of publications.  Economists and legislators speak openly of the fact that money is created “out of thin air” and that it only has value because we believe it has value (which we are again, taught from birth).  The moral hazard of this situation is not at all a secret, it is just not widely known nor typically discussed in the major media.

I’ll save the “money out of thin air” discussion for another time, because the article itself gives two great indicators that US Bancorp (not picking on them, all of this information is true about every bank) neither lent money nor took risks.

First indicator

The first indicator comes in this section of the article:

“At issue is a dispute that began in the depths of the financial crisis in 2008. Mr. Rosenberg’s company, National Medical Imaging, leased radiology machines. The leases were then bundled and sold as investment packages serviced by a unit of U.S. Bancorp, Lyon Financial Services.”

As Rosenberg himself notes later in the article, this is exactly the same type of shenanigans that went on in the mortgage market–the “securitization” that created so-called “mortgage-backed securities.”

So we are to believe that the bank “securitized” the leases of Rosenberg’s company.  The bank typically would have us see this process from their end of the transaction–i.e., the bank “loans” money in exchange for being able to sell the Rosenberg leases to investors.  Sometimes this practice is justified with the argument that this is how the bank is able to mitigate its risk, because by creating securities out of expected lease payments, the bank faces much less risk of losing the money it “loaned” to Rosenberg because the bank sells these securities–which are really just interests in payments on Rosenberg’s leases–and thereby immediately makes back the money it lent to Rosenberg.

Now, as if that scenario isn’t confusing enough, ask yourself this question: if this so-called securitization of the Rosenberg leases pays the bank the money it “lent” to Rosenberg, why does Rosenberg still owe the bank anything?  Here’s a way to think of this in simpler terms:

Say the bank lent Rosenberg $100 and Rosenberg gave the bank a piece of paper worth $100 that the bank then sold to an investor for $100 (possibly more).  Hasn’t the bank been then paid back its $100?  Of course, but the genius of this arrangement from the bank’s perspective is that the bank not only gets the money from selling Rosenberg’s $100 piece of paper (which of course represents his leases) before his loan is even due, but the bank will get $100 plus interest–which is always paid before the principal is touched–when Rosenberg eventually does pay the money back.

And even if Rosenberg never pays the full amount back, the bank is in no worse shape than it was to begin with because they have the $100 plus the interest that Rosenberg has paid prior to “default.”  In other words, the bank can’t lose!

But that’s not even the point I was originally trying to make, which this: even if we accept the idea that the money wasn’t created out of thin air by the bank (which is what they want us to believe), the money “lent” to Rosenberg didn’t come from the bank, it came from the investors in his leases.  Because that’s the second usual justification for “securitization,” namely that by selling securities to investors, the bank is then replenished with money to lend to other people.  But again, that’s looking at it from the bank’s end of the transaction.  If we look at it from the correct end of the transaction, we see that all the money “lent” by the bank to Rosenberg (or to anyone) actually comes from “investors” which are, in the end, you and me.  That is to say, we who are the “borrowers” are also, collectively, the “investors” who are “replenishing” the bank!

Second indicator

The second indicator that the bank didn’t really loan any money and thereby didn’t take any risk is in a paragraph already quoted, but here it is again:

“Mr. Rosenberg is a sophisticated businessman whose company borrowed $27 million in loans,” a spokesman for U.S. Bancorp said. “After his company defaulted the first time, the bank agreed to write that obligation down to $15 million, and Mr. Rosenberg signed a personal guaranty on that commitment in exchange for the write-down. His company then defaulted again after only 21 months — and he has not paid a penny on his guaranty.”

So the bank cut Rosenberg’s principal almost in half, if he would simply agree to–more or less–pinky swear that he would pay back $15 million.  Why in the world would the bank settle for half of the money that they “lent” Rosenberg?  How is that a good business decision for them?  Even if he pinky swore to pay back that half?  Didn’t the bank risk its own money?  In short, the question comes down to this: how can the bank possibly afford to cut such a big loan in half?

Simple–the bank knows full well it didn’t loan Rosenberg any money.  The bank knows full well it took no risks.  The bank knows full well that it had already been “repaid” by selling the leases and that any amount–whether it’s principal/interest on $27 million or $15 million, or even $1 thousand–Rosenberg “repaid” is nothing but profit for the bank.

Everything. Is. Rigged.

Peace.