During the financial crash of 2008, I read a lot of commentary comparing our financial system to casinos. The obvious idea was that people and banks were using the market to gamble. The less obvious idea was, who was acting as the casino?
My brother and former brother-in-law both received bachelor's degrees in financial analysis. One went to work for Wells Fargo Bank, analyzing various loan data. The other went to work for Station Casinos, analyzing slot machine data.
How can slot machine data be the same as loan data?
Both slot machines and loans rely on a stream of payments. The casino and the bank both know there will be losses and wins and plan accordingly so that the game is always rigged in favor of the bank or casino.
The slot machines make money because the machines are programmed to pay out only 98 percent of the money that flows through the slot. One way that banks accomplish the same thing is by selling the debt they create, eliminating the risk of loss and ensuring a profit.
A good portion of the loans issued by major financial institutions are bundled with other loans and sold as a security.
Here is an overly simple version of how it works. I loan you $100. You promise to pay me back $110, with interest. I sell the right to your payments to someone else for $102, pocketing a $2 profit and removing from me the risk that you won't pay. Same thing as the slot machine, just reversed.
If you like reading goobledygook or have a hard time sleeping, I'd recommend heading to the Securities and Exchange Commission website: www.sec.gov/edgar.shtml. Perusing the site, you can find pages and pages of securities that are described like this: Wells Fargo Mortgage Backed Securities Series 2004-P Trust CIK#0001300625.
Don't worry if you have no idea what that means.
Selling debt means that the bank has cashed out before the payments come due. The bank will retain what is called servicing rights, getting paid to collect on the debt it originally created as a bonus, but at no risk.
It will feel like you are paying the bank that gave you the loan, but you aren't. You are paying an asset-backed securities trust.
When it comes time to collect, this disconnect between the person who is paying and the person who is really owed the money creates the weird phenomenon that makes collection efforts seem nonhuman. If you owed me money and I knew I could get paid, of course I'd cooperate with you to get all my money.
Yet, any offers a debtor makes to the middleman bank for restructured payments or makeup payments will almost always be rejected. The collecting bank only cares about the money going through the slot.
If there isn't money to go through the slot, the collector doesn't care. The contractual relationship between the collecting bank and the asset-backed trust is as binding as the slot machine programming.
Trying to modify payment terms is like arguing with a slot machine to let you keep playing when you have run out of quarters.
The slot machine doesn't care.
E. Kent Winward is an Ogden-based attorney. He can be reached at 801-392-8200 or firstname.lastname@example.org.