definitive illegality of securitisation is reconfirmed

8/4/2019 Definitive Illegality of Securitisation is Reconfirmed

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DEFINITIVE ILLEGALITY OF SECURITISATION IS RECONFIRMED

IT IS ILLEGAL TO ASSIGN AN ASSET WITHOUT THE ASSET-OWNERS'S

PRIOR WRITTEN PERMISSION. ALL ENGAGED IN THIS

RACKETEERING KNOW IT.

Sunday 18 April 2010 00:01

ANY CONTRACT ENTERED INTO FOR AN ILLEGAL PURPOSE IS NULL AND VOID

THE TEXT OF THE S.E.C.'S COMPLAINT AGAINST GOLDMAN SACHS & CO. FILED

ON 16TH APRIL 2010 IS AVAILABLE IN THE REPORT ALSO DATED 18TH APRIL. TOACCESS THE S.E.C. COMPLAINT, PLEASE PRESS 'BACK TO ARCHIVE' OR THEARCHIVE BUTTON [HOME PAGE]. THE REPORT CONTAINS A BRIEF COMMENTARYIN NOTE FORM, THE S.E.C.'S RELATED PRESS RELEASE, AND THE COMPLAINTTEXT. THIS CASE SPECIFICALLY ILLUSTRATES MANY OF THE ISSUES EXPOSED IN

THE PRESENT REPORT, WITH DEVASTATING EFFECT AND IMPACT.

Securitisation is ABSOLUTELY ILLEGAL, and all those talking heads from the City ofLondon and Wall Street who have been treating, for example, the Goldman Sachs scandal (thatwe warned you about years ago) as just 'the inevitable fall-out after a period of financial crisis',rather than the corrupt cause of the crisis, are KNOWINGLY MISLEADING THE GENERALPUBLIC EXACTLY LIKE GOLDMAN SACHS, CITIBANK, BANK OF AMERICA,WACHOVIA, WELLS FARGO and the other US and foreign financial enterprises engaged inthis racketeering. Which the IMF CONDONES.

And before you start shouting at the screen, if you're reading this from Wall Street or the City of

London, or from within the IMF and the World Bank, why don't you pay attention to the fact thatthe Notes and References, as originally published in our journalEconomic Intelligence Review,run to FIVE AND A HALF PAGES. SECURITISATION IS ABSOLUTELY ILLEGAL: ANDTHEY KNOW IT.

MISPRISION OF FELONY: U.S. CODE, TITLE 18, PART 1, CHAPTER 1, SECTION 4:Whoever, having knowledge of the actual commission of a felony cognizable by a court of theUnited States, conceals and does not as soon as possible make known the same to some Judge orother person in civil or military authority under the United States, shall be fined under this title orimprisoned not more than three years, or both.

'Seeing what's at the end of one's nose requires constant effort'. George Orwell.

Please be advised that the Editor ofInternational Currency Reviewand associated intelligenceservices cannot enter into email correspondence related to this or to any of the earlier reports.

BOOKS:Edward Harle Limitedhas so far published FIVE intelligence titles:The PerestroikaDeception, by Anatoliy Golitsyn;Red Cocaine, by Dr Joseph D. Douglass, Jr.;The European
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business as usual securitisation operations as though there had been no discontinuity.

In addition to being ILLEGAL UNDER U.S. LAW, securitisation is ILLEGAL UNDERCOMMON LAW. If the prior written permission of the mortgagor (or other type of asset-holder)has not been obtained in writing, and in such a manner that the party IS FULLY AWARE THAT

THEY HAVE GRANTED SUCH PERMISSION, the transfer and all subsequent transactions areILLEGAL.

Moreover, the legal axiom that 'the money you make from exploitaing and abusing my money

is my money' likewise applies. PLUS:

ANY CONTRACT ENTERED INTO FOR AN ILLEGAL PURPOSE IS NULL AND VOID.

Self-evidently, this study focuses on the US legal position. But the same basic principles apply inall Common Law Countries. So far, the talking heads in the so-called 'Mainstream' Media' havechosen to ignore the fact that securitisation is ILLEGAL. Reality will soon be catching up with

them, just as it is at last catching up with the likes of Goldman Sachs and other 'protected'enterprises.

REPRODUCED FROM:ECONOMIC INTELLIGENCE REVIEW, VOLUME 12, NUMBERS 7 & 8, FIRST QUARTER2010: pages 4-21.World Reports Limited, 108 Horseferry Road, Westminster, London SW1P2EF, UK.

EXECUTIVE SUMMARY [REPRODUCED FROM OUR REPORT DATED 10TH MARCH2010]:

WHY SECURITISATION IS ILLEGAL UNDER U.S. AND COMMON LAWSecuritisation is illegal under US legislationprimarily because it is fraudulent and causesspecific violations of R.I.C.O., usury, Antitrust and bankruptcy laws. And it flies in the face ofpublic policy in numerous ways, as was expounded in extensive detail in this analysis publishedin our journalEconomic Intelligence Review2009Q1 with several pages of book, article andcase references.

To begin with, securitisation violates US State usury legislation. Secondly, all true-sale,disguised loan as well as assignment securitisations are essentially tax evasion schemes, and

the penalties for tax evasion in the United States are excessively severe.

Thirdly, in all true-sale, disguised loan and assignment securitisations, the conflict ofinterest inherent in the sponsor also serving as the servicer constitutes fraud and conversion. Inthe fourth place, in all true-sale, disguised loan and assignment securitisations where theSpecial Purpose Vehicle [SPV] is a trust, the declaration of trust is void, as it exists for an illegalpurpose.
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In the fifth place, off-balance sheet treatment of asset-backed securities (both for true-sale andfor assignment transactions) constitutes fraud.

Sixth, all true-sale, disguised loan and assignment securitisations involve blatant fraudulentconveyances. In the seventh place, securitisation usurps United States bankruptcy laws and is

accordingly illegal, as well as being also demonstrably contrary to public policy.

SECURITISATION ENTAILS GROSS VIOLATIONS OF R.I.C.O. STATUTESIn true-sale, disguised loan and assignment securitisations, there are fraudulent transactionswhich serve as predicate acts under US Federal R.I.C.O. statutes.

The specific R.I.C.O. sections are: Section 1341 (mail fraud); Section 1343 (wire fraud); Section1344 (financial institution fraud); Section 1957 (engaging in monetary transactions improperlyderived from specified unlawful activity) [the money you make from the illegal exploitation ofmy money, is my money]; and Section 1952 (racketeering).

Furthermore, securitisation constitutes violations of American antitrust statutes through marketintegration, syndicate collusion, price formation, vertical foreclosure, tying, price-fixing,predatory pricing, and the rigging of allocations.

Securitisation also involves void contracts, given the lack of consideration, illusory promises, theabsence of any actual bargain, the absence of mutualityand finally illegal subject matter andthe contravention of public policy.

Securitisation is riddled with Fraudulent Transfer, Fraud in the Inducement, Fraud in Fact byDeceit, Theft by Deception (Fraudulent Concealment) and Fraudulent Conveyance: see the USsecurities regulations routinely breached in such activity, listed at the foot of this report and ofmost of these reports for THE PAST THREE++ YEARS, and other laws also routinely flouted inthis context.

NOTWITHSTANDING THAT ITS ILLEGAL, U.S. AUTHORITIESCONTINUE TO PROMOTE AND ENCOURAGE SECURITISATIONYet notwithstanding such crystal-clear indications that securitisation is 100% ILLEGAL underUS Law, as well as under Common Law generally (so that these findings are largely applicablein all Common Law countries), US authorities from the highest level downwards, financialinstitutions, intermediaries, Intelligence Power operatives and others are gearing up for what theydoubtless hope will be intensified racketeering and trading activity with (corrupt) foreigncounterparties.

This behaviour is being fine-tuned as we speak, despite the reality that the securitisationactivity being planned and implemented violates innumerable US statutes in the manner wesummarise above, and notwithstanding that such activity is contrary to public policy. TAnd theInternational Monetary Fund knows all this perfectly well, yet sits idly by, accommodating thisracketeering.

Indeed, its as though the Rule of Law did not exist. From the highest level of the US Treasury,


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the White House, the US State Department and the Central Intelligence Agency and itssubsidiaries such as the lethal Office of Naval Intelligence (ONI), the mindset, intention andperverse primary objective has all along been to resume Fraudulent Finance based onsecuritisation, as quickly and as seamlessly as possible. The IMF and World Bank are parties tothus aberrant behaviour.

SUMMARY FORENSIC ANALYSIS PROVING THE ILLEGALITY OF SECURITISATIONFrom whichever angle securitisation is considered, it is ILLEGAL. For example, the contractsare themselves VOID. This is because the process of securitisation involves several contracts thatare either signed simultaneously, or within a short timeframemany of which are rendered voidinter alia because there is no consideration in contracts used in effecting the securitisations.

Many such contracts involve unilateral executory undertakings containing illusory promises. Aunilateral executory promise is not a consideration. Such promises typically include a promisemade by the Special Purpose Vehicle to pay out periodic interest, whether contingent or non-contingent on whether the collateral pays cash interest.

Collateral-substitution agreements contain a promise whereby the sponsor agrees to substituteimpaired collateral. An assignment agreement of future (not yet existing) collateral may well bedeemed a unilateral executory promise by the sponsor.

Illusory promises are not valid consideration for a contract. Such promises may be found in theSubscription/Purchase Agreement, whereby an existing asset is being exchanged for a futureasset that does not exist as of the date of the subscription/purchase agreement. To make mattersworse, none of the agreements typically signed by the investor as part of his/her purchase of theSpecial Purpose Vehicles Asset-Backed Securities expressly incorporates the (typically illusory)promises embodied in the offering prospectus.

OR: The Special Purpose Vehicles promise to pay interest and/or dividends on Asset-BackedSecurities Interest-Onlys, Preferreds and Pincipal-Onlys are essentially illusory promisesbecause the underlying collateral may not produce any cash flows at all: so there wont be anyinterest/dividend payments.

Moreover the lack of mutuality characterising such contracts renders them null and void, bydefinition. In any such contract, each party must have firm control of the subject matter of thecontract and the underlying assets (consideration), and there MUST be a direct contractualrelationship between the parties concerned.

But this is not the case, especially as the Special Purpose Vehicles corporate documents (trust

indentures or bylaws or articles of incorporation) may typically limit the right of each Asset-Backed Security investor; while there is typically no mutuality at all between the Special PurposeVehicle and the sponsor/originator, because both entities are essentially the same, and arecontrolled by the sponsor before and after the securitisation takes place.

SECURITISATION: A COVER FOR TAX EVASIONIn addition to their multiple violations of American State usury laws, all true-sale, disguised


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loan and assignment securitisations are essentially tax evasion arrangements. In the United

States, the applicable tax evasion statute is the US Internal Revenue Code Section 7201 7 whichreads: Any person who willfully attempts in any manner to evade or defeat any tax imposed by

this title or the payment thereof shall, in addition to other penalties provided by law, be guilty ofa felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the

case of a corporation), or imprisoned not more than 5 years, or both, together with the costs ofprosecution.

Under this statute and related case law, prosecutorsmust prove three elements beyond any reasonable doubt:

(1): The actus reus (the guilty conduct)which consists of an affirmative act (not merely anomission or failure to act) that constitutes evasion or an attempt to evade either: (a) theassessment of a tax or (b) the payment of a tax.

(2): The mens rea or mental element of willfulness the specific intent to violate an actually

known legal duty. In the case of true sale transactions, the tax evasion occurs because:

(a): The sponsor determines the price at which the collateral is transferred to the SPV, and hence,can arbitrarily lower/increase the price to avoid capital gains taxesit being assumed here thatthe sponsor is a profit-maximising entity and will always act to minimise its tax liability and toavoid any tax assessment;

(b): The sponsor typically retains a residual interest in the SPV in the form of IOs, POs and

junior pieces, which are typically taxed differently and on a different tax-basis compared withthe original collateral: hence, the sponsor can lower the price of the collateral upon transfer to theSPV, and convert what would have been capital gains, into a non-taxable basis in the SPVresidual;

(c): There is typically the requisite intent by the sponsor evidenced by the arrangement of thetransaction and the transfer of assets to the Special Purpose Vehicle;

(d): Before securitisation, collateral is typically reported in the sponsors financial statements at

book value (that is, lower-of-cost-or-market: under both the US and the international accountingstandards, loans and accounts receivable are typically not re-valued to market-value unless therehas been some major impairment in value) which does not reflect true Market Values, and resultsin effective tax evasion on transfer of the collateral to the SPV, as any unrealised gain is nottaxed;

(e): The actus reus is manifested by the execution of the securitisation transaction and transfer ofassets to the Special Purpose Vehicle (SPV);

(f): The mens rea or specific intent is manifested by the elaborate arrangements implicit insecuritisation transactions, the method of determination of the price of the collateral to betransferred to the SPV, the aims of securitisation, and the sponsors transfer of assets to the SPV;


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(g): The unpaid tax liability consists of foregone tax on the capital gains from the collateral (thetransaction is structured to avoid recognition of capital gains), and tax on any income from thecollateral which is converted into basis or other non-taxable forms;

(h): Income (from the collateral) that would have been taxable in the sponsors own financial

statements, is converted to a non-taxable basis in the form of the SPVs Interest-Only (IO) andPrincipal-Only (PO) securities: part of the Interest-Spread (the difference between the SPVsincome and what it pays as interest and operating costs) is paid out to PO-holders, and thistransforms interest into return-of-capital or just capital repayment, with no tax consequences.

In cases of disguised loan or assignment securitisation transactions, tax evasion occurs:

(a): Because the sponsor determines the price at which the collateral is transferred to the SPV,and hence can lower/increase the price of the collateral to avoid capital gains taxes;

(b): Because the sponsor typically retains a residual interest in the SPV which is normally taxed

differently and on a different tax-basis compared to the original collateral: hence, the sponsor canlower the price upon transfer to the SPV, and convert what would have been capital gains, to anon-taxable basis for tax purposes;

(c): Because the transfer of collateral to the SPV and the creation of Interest-Only and Principal-Only securities converts what would have been taxable capital gains into non-taxable basis;

(d): Because gain in the value of the collateral is not recognised for tax purposes, because therehas not been any sale;

(e): Where the Asset-Backed Security (ABS) is partly amortising, any capital gains are convertedinto interest payments;

(f): Because actus reus is manifested by the execution of the securitisation transaction andtransfer of assets to the SPV;

(g): Because the mens rea or specific intent is manifested by the elaborate arrangements implicitin securitisation transactions, the objectives of securitisation and the sponsors transfer of assets

to the Special Purpose Vehicle;

(h): Because the unpaid tax liability consists of tax on the capital gains from the transfer of thecollateral (the transaction is structured to avoid recognition of a sale, whereas the transfer to theSpecial Purpose Vehicle is effectively a sale), and tax on any income from the collateral which isconverted into basis or other non-taxable forms, by securitisation.

SECURITISATION VIOLATES THE U.S BANKRUPTCY CODEAND THEREFORE ALSO CONTRAVENES PUBLIC POLICYAny transfer or conveyance of the assets of a debtor that is deemed to be made for the purposesof hindering, delaying or defrauding actual or potential creditors, may be determined by Courtsto be a Fraudulent Conveyance under Section 548 of the US Bankruptcy Code or under a


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relevant theory of Constructive Fraud.

Although each US State has its own laws regarding the appropriate elements of proof ofConstructive Fraud, Section 548(a)(2) of the US Bankruptcy Code permits an inference ofConstructive Fraud if the following factors exist:

(1): The debtor received less than reasonably equivalent value for the property transferred; and:

(2): The debtor was insolvent or became insolvent as a result of the transfer, or else retainedunreasonably small capital after the transfer, or made the transfer with the intent or belief that itwould incur debts beyond its ability to pay.

The following theories of Fraudulent Conveyance within the context of securitisation may apply:

Where the sponsor/originator receives insufficient value for assets transferred.

Where there is an intent to hinder, delay or defraud creditors (representing an implicit pre-petition waiver of ones right to file for bankruptcy), with regard to the originators transfer ofassets to the SPV, or the originators transfer of assets to the SPV has clearly not been

undertaken on an arms-length basis.

Where securitisation increases the originators bankruptcy risk; and:

In all instances where securitisation usurps the United States' bankruptcy laws and is therefore

illegal on such a basis alone.

SECURITISATION VIOLATES FEDERAL R.I.C.O. STATUTESTurning now to the reality that securitisation constitutes a violation of US Federal R.I.C.O.Statutes [see Legal Notes below], we can state without equivocation that the entire securitisationprocess constitutes violations of Federal R.I.C.O. statutes, because:

(1): There is the requisite criminal or civil enterprise consisting of the sponsor/issuer, thetrustees and the intermediary bank. These three parties work closely together to effect thesecuritisation transaction.

(2): There are predicate acts of:

(a): Mail fraudusing the mails for sending out materials among themselves and to investors.

(b): Wire fraudusing wires to engage in fraud by communicating with investors.

(c): Conversionwhere there isnt proper title to collateral.

(d): Deceit: misrepresentation of issues and facts pertaining to the securitisation transaction.

(e): Securities fraud: disclosure issues.


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(f): It entails loss of profit opportunity.

(g): It involves the making of false statements and or misleading representationsabout the value of the collateral.

(h): It entails stripping the originator/issuer of the ability to pay debt claims or judgment claimsin bankruptcy courta state of affairs that may apply where the sponsor is financially distressedand the cash proceeds of the transaction are significantly less than the value of the collateral.

There is also typically the requisite intent by members of the enterprise evident in knowledge(actual and inferable), acts, omissions, purpose (actual and inferable) and results. Intent can bereasonably inferred from:

(a): The existence of a sponsor that seeks to raise capitaland cannot raise capital on betterterms by other means;

(b): The participation of an investment bank that has very strong incentives to consummate thetransaction on any agreeable (but not necessarily reasonable) terms.

SECURITISATION ALSO VIOLATES U.S. ANTITRUST LEGISLATIONSecuritisation further constitutes violations of US Antitrust laws, because the American Asset-Backed Securities and Mortgage-Backed Securities markets are dominated by relatively fewlarge entities such as FNMA (Fannie Mae), Freddie Mac, the top five investment banks (all ofwhich have conduit programs), and the top five credit card issuers (MBNA, AMEX, Citigroup,etc.), etc.. As a consequence, the top five ABS/MBS issuers control more than 50% of the USABS/MBS market.

This constitutes illegal market concentration under US Antitrust legislation.

THE PHILIPPINES EXCEPTION BURIED IN THE CLAYTON ACTIn the Antitrust context, however, observe the following text from the Clayton Act, whichspecifically EXCLUDES transactions undertaken with The Philippines. Isnt that interesting?

It provides a blanket rationale for the massive past and ongoing US clandestine focus on ThePhilippines, the CIAsneed for black hole conditions there in connection with successive USoperations to relieve Presidents Marcos and Aquino of the stolen and hidden Yamashitas gold,

the US Fraudulent Finance operations using Philippine institutions and related operations basedin that territory, an aborted US operation to convert The Philippines into a new US State (as hadbeen planned under Clinton for Somalia), and the frequent visits of operatives known toourselves to The Philippines under cover of attending to orphanages:

1 Clayton Act, 15 U.S.C. 12 Definitions; short title:(a) Antitrust laws, as used herein, includes the Act entitled:An Act to protect trade and commerce against unlawful restraints and monopolies, approved

July second, eighteen hundred and ninety; sections seventy-three to seventy-seven, inclusive, of


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an Act entitled An Act to reduce taxation, to provide revenue for the Government, and for other

purposes, of August 27th, eighteen hundred and ninety-four; an Act entitled An Act to amendsections seventy-three and seventy-six of the Act of August twenty-seventh, eighteen hundredand ninetyfour, entitled An Act to reduce taxation, to provide revenue for the Government, and

for other purposes, approved February twelfth, nineteen hundred and thirteen; and also this Act.

Commerce, as used herein, means trade or commerce among the several States and with

foreign nations, or between the District of Columbia or any Territory of the United States andany State, Territory, or foreign nation, or between any insular possessions or other places that areunder the jurisdiction of the United States, or between any such possession or place and any USState or Territory of the United States or the District of Columbia or any foreign nation, or withinthe District of Columbia or any Territory or any insular possession or other place under thejurisdiction of the United States:

Provided, That nothing in this Act contained shall apply to the Philippine Islands. The wordperson or persons whereverused in this Act shall be deemed to include corporations and

associations existing under or authorized by the laws of either the United States, the laws of anyof the Territories, the laws of any State, or the laws of any foreign country.

FANNIE MAE, FREDDIE MAC ENGAGED IN FURTHER ILLEGAL SECURITISATION:RE-SECURITISING ALREADY SECURITISED DUD ASSETS TO DUMP BACK ON THEBANKSEven so, it became apparent in early March that Fannie Mae and Freddie Mac, both controlled bythe US Government, were planning to force financial enterprises such as the CIAs Bank ofAmerica Corporation, JP Morgan Chase & Co, Wells Fargo and Citigroup, Inc., to buy backfurther waves of newly securitised packages of mortgagesi.e., the former Government-Sponsored Enterprises are reportedly engaged again in repackaging mortgage securities alreadymarked down to true value.

In other words, they are trying to dump faulty securitised loans, as well as straight loans, back onthe participating banksunder cover of such fantasies as the double-minded statement attributedto Sharon McHale, spokesperson for Freddie Mac, located adjacent to the CIA in McLean,

Virginia, on 5th March 2010: We are trying to be good stewards of taxpayer dollars and as part

of that, its important that those dollars not go to loans that should not have been sold to us in thefirst place throwing the blame for Freddie Macs own scandalous racketeering behaviour backat the banks.

Being interpreted, what this woman was saying was: this:

We are covering ourselves with a mantle of rectitude by posing as protectors of the taxpayers

dollars in order to obfuscate our own ongoing racketeering behaviour, even as we prepare furtherFraudulent Finance securitisations in violation of the relevant US legislation: and we couldntcare less because we are owned by the Government itself, which is up to its neck in suchviolations'.

And Paul Miller, a former examiner for the Federal Reserve (hardly a guarantee of integrity,


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given the Feds own reputation for Fraudulent Finance), based in Arlington, VA, let the cat outof the bag with: If you want to originate mortgages and keep that pipeline running, you have to

deal with the push-backs. It doesnt matter how much you hate Fannie and Freddie andneither, apparently, does it matter to what extent the Rule of Law is cynically violated in orderto keep the pipeline (of Fraudulent Finance) running. It doesn't matter that securitisation is a

form of racketeering.

GARY GENSLER IS NOT AS OPPOSED TO FRAUDULENT FINANCE AS HE SEEMSThe appointment of Gary Gensler as Chairman of the Commodity Futures Trading Commissionunder President Obama was greeted with signs of relief on Wall Street. Here was a hardenedformer Goldman Sachs trader with 18 years experience with that cynical, ruthless money shop,who could be relied upon to act at all times in the interests of Wall Street, not the investor andtaxpayer.

But, as has since been reported elsewhere, over a private lunch at the Waldorf Astoria inmidtown Manhattan on 6th January 2010, the 52-year-old Gary Gensler caused indigestion

among the self-satisfied guests at the luncheonTimothy OHara, head of global credit at CrditSuisse Holdings USA, Inc.; Robert P. Kelly, CEO at Bank of New York Mellon Corporation;David B. Heller, co-head of the securities division at Goldman Sachs; and Seth Waugh, CEO ofDeutsche Bank Americas.

Because when one banker asked Gensler what or whom he saw as the biggest obstacles to reformin the securities and commodities sectors, he replied: You.

Mr Gensler has been seeking derivatives control legislation that goes beyond current proposals,including what President Obama put forward during the summer of 2009. Notwithstanding thefact that if the derivatives situation is not addressed, the forthcoming crash will be so horrific asto be likely to tip the world into open, rather than covert, warfare, a certain Dr Samuel Hayes,Professor Emeritus of Investment Banking at Harvard Business School, Boston, told Bloombergin February 2010 that Gensler is going to raise real concerns for financial firms.

Derivatives are absolutely central to what is Wall Street in the 21st century namely, a casino.Nobody wants the regulations to affect them.

GREATER TRANSPARENCY IS EVIDENTLY ALL HES AFTEROn closer examination, Mr Gensler has actually been pushing for more transparency in the

over-the-counter derivatives market, so as to lower spreads between buyers and sellers and tomake it easier for new competitors to enter the marketwhich the big banks arent keen on, asmore participants will deprive them of profit.

So, Gary Gensler is not actually in the business of tackling the underlying crisis arising from thedetermination of financial institutions to continue playing Russian roulette, using the model firstdeveloped by the US Intelligence Power as it sought what it thought were foolproof methods ofensuring its financial independence from Congress and the open-ended funding pipelines that itconsidered appropriate to buttress its usurped status as a recalcitrant State within the Stateimpervious to reform and determined to brook no interference with its stolen hegemony.


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INVESTORS MONEY USED TO REMUNERATE WALL STREETIn any case, the derivatives institutions and their back-up infrastructure have not the slightestintention of adopting any course other than business as usual and on a far larger scale than inthe past. This obtuse madness WILL lead to a global collapse, as derivatives products are usually

without real value. As a noted article in The New York Times of 7th February 2010 at last stated,investment banks trading derivatives do not own the mortgage bonds, the obligations from homeowners, notes signed by home owners or the mortgage deeds of the deeds of trust.

The structured products, consisting of bundled documents ostensibly relating to the above buthaving NO RECOURSE to underlying real value, were, however, invested with value arising

from the name of the institution marketing the asset that is to say, arbitrary 'value' arisingfrom the fact that, as a Goldman Sachs compliance officer actually admitted to the Editor of thisservice: A structured product is worth what someone is prepared to pay for it a penetratingstatement which encapsulates the possibility that it may be (is) worthless: which is indeed thecase.

THE MONEY YOU MAKE BY MISUSING MY MONEY IS MY MONEY I.E., THEHOME OWNERSThe money sloshing around between investment banks in this dirty market was investors' moneyunwittingly advanced into pools of capital which winds up being used primarily to finance thefees, profits, insurance proceeds, insurance premia, and so forthall for the benefit of WallStreet, paid to the investment banks, and not to investors who stumped up the money in the firstplace.

These fees and relationships are not and have never been disclosed to the home owner despite, inthe United States, clear legislation requiring such transparency, including the Truth in LendingAct, and Deceptive Lendingwhich require full transparency and disclosure.

Further legislation applicable to the securities sector in the United States is re-listed belowinthe list that we have republished at the foot of our website reports for the past three years.

The list of applicable securities regulations and laws is augmented by a legal tutorial which,again, we have published for the past three years at the foot of these reports,

It would appear that, notwithstanding such reminders, Wall Street and its compliantinfrastructure, as well as its co-conspiring portfolio of dubious foreign trading counterpartyinstitutions, has every intention of continuing to violate the relevant US rules and legislationwhile at the same time continuing to abuse, in the mortgage sector, the home owner with thesame cynicism as in the past.

Given the legal principle that the money you make from misusing my money is my money, it is

quite clear that undisclosed fees, profits, kickbacks and other financial abuses perpetrated bythese big speculative financial entities which produce no real wealth at all, but simply movemoney around between themselves, are payable to the home owner who signed the loan papers

in the first place.


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THE ILLEGALITY OF SECURITIZATIONA legal analysis by MICHAEL NWOGUGU,

Certified Public Accountant (Maryland, USA); B.Arch.(City College of New York). MBA (Columbia University).Attended Suffolk Law School (Boston, USA).

Abstract:Under US laws, securitization is illegal, primarily because it is fraudulent and causes veryspecific violations of R.I.C.O., usury, and antitrust laws. Securitization of many types of assets(loans, credit cards, auto receivables, intellectual property, etc.) has become and remainsprevalent, particularly for financially distressed companies and companies with low or mid-tiercredit ratings. This analysis focuses on securitization as it pertains to asset-backed securities andmortgage-backed securities, and analyzes critical legal and corporate governance issues.

Editors Note: This analysis does not elaborate that the illegal securitization model wasdeveloped and hijacked by the criminalised Intelligence Power, which is our contribution to theissue; but that is the sum of the matter, to be kept in mind at all times.

Keywords:Securitization; antitrust; R.I.C.O.; constitutional law; capital markets; complexity; fraud.[Some American English spelling has been retained].

Main abbreviations:ABS = Asset-Backed Securities; SPV = Special Purpose Vehicle.

EDITOR'S INTRODUCTIONUnder US legislation, securitization is illegal. Indeed many authors have illustrated thedeficiencies in securitization (1). This analysis focuses on securitization as it pertains to asset-backed securities and mortgage-backed securities (2), (3).

The existing literature on legal and corporate governance issues pertaining to securitization isextensive, but has several gaps that have not been addressed at all or sufficiently:

Whether securitization is legal. Whether securitization causes usury. The standards for usurious loans/forbearance. The specific components of cost-of-capital, for purposes of assessing usury violations. Antitrust liability in securitization transactions. Federal/State R.I.C.O. liability in securitization transactions. The constitutionality of securitization transactions. The validity of contracts used in effecting securitization transactions. Whether securitization usurps the purposes of the US Bankruptcy Code.


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This analysis seeks to fill these significant gaps in the literature [and to answer questions vexingthe US and international financial markets, for the definitive elimination of doubtin support ofour long-standing demonstration that securitization and the creation and marketing of structuredproducts represents serious fraudEd.].

Although the following analysis is supported with US case law, the principles derived areapplicable to securitization transactions in both common-law countries and civil-law countrieswhich means that they are applicable in, for instance, the United Kingdom. In analyzing thelegality of securitization, the following criteria are relevant:

Origins and history of securitization legislative history, evolution of securitization processes,and current practices. Carlson (1998), Janger (2002) and Lupica (2000) (4) trace the knownhistory of US securitization to direct and specific efforts/collaborations to avoid the impact of USbankruptcy laws. Klee & Butler and other authors have traced the history of securitization toattempts to handle the problem of non-performing debt.

Types of contracts used in securitization:

The primary criteria for enforceability.

Purposes, wording and scope of applicable laws state contract laws, State trusts laws, USBankruptcy Code, and State/Federal securities laws. The legislative intent of the US Congress indrafting and revising the US Bankruptcy Code.

How the applicable laws are applied in securitization processes by market participants,regulators and lawyers that represent investors.

The people, markets, and entities and organizations affected by securitization.

The usefulness of existing (if any), possible and proposed (if any) deterrence measures

designed to reduce fraud/crime/misconduct [such as has been extensively reported by thisservice, and inInternational Currency ReviewEd.].

Transaction costs.

The results and consequences of the application (or non-application) of relevant laws.

A: SECURITIZATION VIOLATES STATE USURY LAWSSecuritization violates State usury laws, because the resulting effective interest rate typicallyexceeds legally allowable rates (set by State usury laws) (5). There is substantial disagreement(conflicts in case-law holdings) among various US court jurisdictions, and also within somejudicial jurisdictions, about some issues; and these conflicts have not been resolved by the USSupreme Court 6. On these issues, even the cases for which the US Supreme Court deniedcertiorari, vary substantially in their holdings. The pertinent issues are as follows:

1: What constitutes usury.
http://www.worldreports.org/worldreports/international_currency_reviewhttp://www.worldreports.org/worldreports/international_currency_reviewhttp://www.worldreports.org/worldreports/international_currency_reviewhttp://www.worldreports.org/worldreports/international_currency_review


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2: What costs should be included when calculating the effective cost-of-funds.3. What types of forbearance qualify for applicability of usury laws.4: Conditions for pre-emption of state usury laws. Where the securitization is deemed anassignment of collateral, the effective cost-of-funds for the securitization transaction is not theadvertised interest cost (investors coupon rate) of the ABS securities, but rather the sum of the

following elements:

The greater of the sponsors/originators annual cost-of-equity (in percentages) or thepercentage annual cash yield from the collateral (in a situation where the SPVs corporate

documents expressly state that the Excess Spread should be paid to the sponsor, the ExcessSpread should be subtracted from the resulting percentage). The Excess Spread is defined as theGross Cash Yield From The Collateral, minus the interest paid to investors, minus the ServicingExpense (paid to the servicer), minus Charge-offs (impaired collateral).

The Amortized Value Difference:

The difference prevailing between the Market Value of the collateral, and the amount raised

from the ABS offering (before bankers fees), which is then amortized over the average life ofthe ABS bonds (at a discount rate equal to the US Treasury Bond rate of same maturity) and thenexpressed as percentage of the market value of the collateral. This difference can range from 10-30% of the Market Value of the collateral, and is highest where there is a senior/junior structure,and the junior/first-loss piece serves only as credit enhancement.

Amortized Total Periodic Transaction Cost:

The Pre-offering Transaction Costs are amortized over the average life of the ABS, a rate equalto the interest rate on an equivalent-term US Treasury bond. The Periodic Transaction Costs arethen added to the Amortized Pre-offering Transaction Costs to obtain Total Periodic TransactionCost which is expressed as a percentage of the value of the pledged collateral.

The Pre-offering Transaction Costs include external costs (underwriters commissions/fees,filing fees, administrative costs (escrow, transfer agent, etc.), marketing costs, accountants fees,legal fees, etc.) and internal costs incurred solely because of the securitization transaction(namely, costs incurred internally by the sponsor/originator, viz. direct administrative costs,printing, etc.). Periodic Transaction Costs = admin. costs, servicing fees, charge-off expenses,escrow costs.

Foregone Capital Appreciation:The foregone average annual appreciation/depreciation of the value of the collateral minus theinterest rate on demand deposits, with the difference expressed as a percentage of the MarketValue of the collateral.

The sum of these four elements is typically greater than state-law usury benchmark rates.

Where the securitization is deemed a true-sale, there is an implicit financing cost which istypically usurious, because it is equal to the sum of the following:

Base Cost of Capital:


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The greater of the sponsors or originators annual weighted-average-cost-of-capital, or theannual percentage yield from the collateral.

The Amortized Total Periodic Transaction Cost:The Pre-Securitization Transaction Costs paid by the sponsor or originator and directly

attributable to the offering is amortized over the life of the ABS, at a rate equivalent to theinterest rate on an equivalent-term US Treasury bond, and the result (the Amortized Pre-Securitization Costs) is then added to the Periodic Transaction Costs for only one period in orderto obtain the Total Periodic Transaction Cost, which is then expressed as a percentage of themarket value of the collateral. This is the Amortized Total Periodic Transaction Cost.

The Pre-Securitization Transaction Costs include external costs (underwriters commissions/fees,filing fees, administrative costs (escrow, transfer agent, etc.), marketing costs, accountants fees,

legal fees, etc.) and internal costs incurred solely because of the securitization transaction (viz.costs incurred internally by the sponsor/originator, namely direct administrative costs, printing).Periodic Transaction Costs = admin. costs, servicing fees, charge-off expenses, escrow costs.

The Value Difference:This is the difference between the Market Value of the collateral, and the amount raised from theABS offering (before bankers fees), is amortized over the average life of the ABS bonds and the

result is then expressed as percentage of the Market Value of the collateral.

This difference can range from 10 to 30%, and is highest where the senior/junior structure is

used and the junior piece serves only as credit enhancement.

Amortized Unrealized Losses:Any unrealized loss in the carrying amount of the collateral, is amortized over the estimatedaverage life of the ABS, and the result for one period is expressed as a percentage of the bookvalue of the collateral. Most Asset-Backed Securities collateral data are recorded in financialstatements at the lower-of-cost-or-market.

Foregone Capital Appreciation:foregone average annual appreciation/depreciation of the value of the collateral minus theinterest rate on demand deposits, with the difference expressed as a percentage of the MarketValue of the collateral. The sum of these elements is typically greater than state-law usurybenchmark rates.

B: ALL TRUE-SALE, DISGUISED LOAN AND ASSIGNMENTSECURITIZATIONS ARE ESSENTIALLY TAX-EVASION SCHEMESIn the United States, the applicable tax evasion statute is the US Internal Revenue Code Section7201 7 which reads as follows: .Any person who willfully attempts in any manner to evade

or defeat any tax imposed by this title or the payment thereof shall, in addition to other penaltiesprovided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than$100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both,together with the costs of prosecution.


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Under this statute and related case law, prosecutorsmust prove three elements beyond a reasonable doubt:

(1): The actus reus (the guilty conduct)which consists of an affirmative act (and not merely anomission or failure to act) that constitutes evasion or an attempt to evade either: (a) the

assessment of a tax or (b) the payment of a tax.

(2): The mens rea or mental element of willfulness the specific intent to violate an actually known legal duty.

In the case of true sale transactions, the tax evasion (8) occurs because:

(a): The sponsor determines the price at which the collateral is transferred to the Special PurposeVehicle and hence, can arbitrarily lower/increase the price to avoid capital gains taxesit beingassumed here that the sponsor is a profit-maximizing entity and will always act to minimize itstax liability and to avoid any tax assessment;

(b): The sponsor typically retains a residual interest in the SPV in the form of IOs, POs and

junior pieces, which are typically taxed differently and on a different tax-basis compared withthe original collateral: hence, the sponsor can lower the price of the collateral upon transfer to theSPV, and convert what would have been capital gains, into a non-taxable basis in the SPVresidual;

(c): There is typically the requisite intent by the sponsor evidenced by the arrangement of thetransaction and the transfer of assets to the Special Purpose Vehicle;

(d): Before securitization, collateral is typically reported in the sponsors financial statements atbook value (lower-of-cost-or-market: under both American and international accountingstandards, loans and accounts receivable are typically not re-valued to market-value unless therehas been some major impairment in value) which does not reflect true Market Values, and resultsin effective tax evasion upon transfer of the collateral to the SPV because any unrealized gain isnot taxed;

(e): The actus reus is manifested by the execution of the securitization transaction and transfer ofassets to the Special Purpose Vehicle;

(f): The mens rea or specific intent is manifested by the elaborate arrangements implicit insecuritization transactions, the method of determination of the price of the collateral to betransferred to the Special Purpose Vehicle, the objectives of securitization, and the sponsorstransfer of assets to the Special Purpose Vehicle;

(g): The unpaid tax liability consists of foregone tax on the capital gains from the collateral (thetransaction is structured to avoid recognition of capital gains), and tax on any income from thecollateral which is converted into basis or other non-taxable forms;

(h): Income (from the collateral) that would have been taxable in the sponsors financial


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statements, is converted into non-taxable basis in the form of the SPVs Interest-Only (IO) andPrincipal-Only (PO) securities: part of the Interest-Spread (the difference between the SPVsincome and what it pays as interest and operating costs) is paid out to PO-holders, and thistransforms interest into return-of-capital or just capital repayment, with no tax consequences.

In the case of disguised loan or assignment securitization transactions,the tax evasion occurs because:

(a): The sponsor determines the price at which the collateral is transferred to the SPV, and hencecan lower/increase the price of the collateral to avoid capital gains taxes;

(b): The sponsor typically retains a residual interest in the SPV which is typically taxed

differently and on a different tax-basis compared to the original collateral: hence, the sponsor canlower the price upon transfer to the SPV, and convert what would have been capital gains, intonon-taxable basis for tax purposes;

(c): The transfer of collateral to the SPV and the creation of interest-only and principal-onlysecurities essentially converts what would have been taxable capital gains into non-taxable basis;

(d): Any gain in the value of the collateral is not recognized for tax purposes, because there hasnot been any sale;

(e): Where the ABS is partly amortizing, any capital gains are converted into interest payments;(f): The actus reus is manifested by the execution of the securitization transaction and transfer ofassets to the Special Purpose Vehicle;

(g): The mens rea or specific intent is manifested by the elaborate arrangements implicit insecuritization transactions, the objectives of securitization and the sponsors transfer of assets to

the Special Purpose Vehicle;

(h): The unpaid tax liability consists of tax on the capital gains from the transfer of the collateral(the transaction is structured to avoid recognition of a sale, whereas the transfer to the SpecialPurpose Vehicle is effectively a sale), and tax liability on any income from the collateral whichis converted into basis or other non-taxable forms (Interest-Onlys and Principal-Onlys), bysecuritization.

C1: IN ALL TRUE-SALE, DISGUISED LOAN AND ASSIGNMENTSECURITIZATIONS, THECONFLICT OF INTEREST INHERENT IN THE SPONSOR ALSO SERVING AS THESERVICER,CONSTITUTES FRAUD AND CONVERSION: SEE OUR STANDARD LEGAL NOTESBELOW.In most securitization transactions, the sponsor eventually serves as the servicer of the SpecialPurpose Vehicle asset pool.

As servicer, the sponsor: (a) determines when there has been impairment of collateral; (b) selects


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collateral for replacement; and (c) monitors collateral performance.

To prove fraud, prosecutors must prove several elements beyond a reasonable doubt:

(1): The actus reus (the guilty conduct)which consists of an affirmative act (and not merely an

omission or failure to act) of misrepresentation of material facts. In securitizations, the sponsortypically makes material misrepresentations:

(a) The sponsor/servicer selects the assets to be transferred to the SPV, and the terms of theoffering Prospectus typically misrepresent the level of objectivity and fairness of theservicer/sponsor;

(b) The sponsor/servicer selects collateral for substitution where there are problemsthe pastand present disclosure statements and ABS offering documents materially misrepresent thesponsor/servicers objectivity/fairness.

(2): The mens rea or mental element of willfulness the specific intent to misrepresent thesponsor/servicers acts, truthfulness and objectivity/fairness, is manifested by the dual rle ofsponsor/servicer which constitutes a conflict-of-interest. Mens rea is also clearly inferable fromthe facts and circumstances: the sponsor/servicer clearly has significant economic, psychologicaland legal incentives to maximize its profits by:

(a): Delaying substitution of collateral for as long as possible;

(b): Delaying recognition of collateral impairment, and:

(c): Substituting impaired collateral with sub-standard collateral; all of which make the sponsorhighly unsuitable for the rle of servicer;

(3): The reliance element: ABS investors rely heavily on the structure/arrangements, contractsand disclosure statements in securitizations, which are always relatively complex. These form theprimary source of knowledge and valuation terms for the investor;

(4): The victim(s) suffer(s) loss as a result of the misrepresentations (whether of direct orproximate causation). Investors suffer losses because of the sponsors/servicers

misrepresentations of its obligations, fairness, objectivity and fiduciary duties:

Specifically:

(a) Investors estimates of the values of Asset-Backed Securities are inaccurate and too high dueto the servicers/sponsors misrepresentations;

(b) Investors incur unnecessary trading costs to re-balance their portfolios as the Asset-BackedSecurity becomes riskier;

(c) Investors and the sponsor/servicer incur additional monitoring costs whenever there is any


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report of impairment of collateral or substitution. Furthermore, in the ABS sales process, theunderwriter makes certain representations concerning the effectiveness and predictability of thecollection process. Under certain conditions, investors relying on such representations may havea securities fraud claim if the servicer fails to perform, such as in bankruptcy.

C-2: IN ALL TRUE-SALE, DISGUISED LOAN AND ASSIGNMENTSECURITIZATIONS WHERETHE SPECIAL PURPOSE VEHICLE IS A TRUST, THE DECLARATION OF TRUST ISVOID AS IT EXISTS FOR AN ILLEGAL PURPOSE. [ALL CONTRACTS STRUCK FOR ANILLEGAL PURPOSE ARE NULL AND VOID, SOMETHING THE CRIMINALENTERPRISES DON'T WANT YOU TO KNOW].The declaration of trust relating to the SPV is void because the intent and purpose of the SPV isillegal and unconstitutional as described in this analysis and in Nwogugu (2006).

D: OFF-BALANCE SHEET TREATMENT OF ASSET-BACKED SECURITIES (BOTHFOR TRUE-SALE AND FOR ASSIGNMENT TRANSACTIONS) CONSTITUTES

FRAUDUnder prevailing accounting rules in the United States and most countries, if certain criteria weremet, the debt raised by the Special Purpose Vehicle in securitization can be treated as off-balancesheet debt. However this requires compliance with three criteria:

(i) The Special Purpose Vehicle should be truly independent from the sponsor and the directors,fiduciary administrative duties notwithstanding.

(ii) The sponsors transfer of the assets to the SPV should be a true sale and the sponsor should

not have any ongoing economic interest in the assets.

(iii) The form and substance should transparently be identical, and the structure should notappear to be illusory or deceptive.

Nevertheless, these off-balance-sheet treatment criteria have been recently reformed by changesin accounting standards. The British-based International Accounting Standards Board and the USFASB are moving towards stricter reporting standards. Specifically:

FIN 46 (FASB): Effective in 2003, FIN 46 applies only to companies subject to regulation by

the FASB. Its objective is to substantially tighten the criteria necessary to obtain off-balance-sheet treatment for Special Purpose Vehicles, and its main thrust is capital adequacy.

FIN 46 also imposes an obligation on originators to consolidate the accounts of an SPV

(denying off-balance-sheet treatment) unless the total equity at risk is regarded as sufficient toenable the SPV to finance its own activities.

IAS 32, IAS 39, and IFRS 7: International Accounting Standards (IAS) 32 covers the

disclosure and presentation of financial instruments, but from 2007 onwards the disclosureaspects were replaced by the introduction of International Financial Reporting Standard (IFRS)(7). IAS 39 deals with the recognition and measurement of financial instruments, and has been


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challenged in two aspects:

(1): Introducing the concept of fair value accounting for financial instruments and (2): whether

SPVs should be consolidated back into the balance sheet of the originator. Like Fin 46, IAS 32may result in consolidation of most SPVs on-balance-sheet of the sponsors.

Basel II: The Basel II disciplines are aimed at the global banking industry and call for a more

scientific measurement of risk and of capital requirements for banks in order to support that risk.Since the general expectation has been that, in overall terms, the proposals could require thebanking industry to maintain a higher rather than lower capital base, the proposals have metresistance from many banks. The Basel Committees rules/codes are not binding because the

Committee is not a regulator: a situation exploited by the racketeering institutions.

But off-balance sheet treatment of ABS (Asset-Backed Securities) debt in securitizations,constitutes fraud because:

(1): The mens rea or mental element of willfulness the specific intent to misrepresent the trueTrust nature of the Special Purpose Vehicle debt is manifested by the elaborate arrangementsand structure of the securitization transaction.

(2): The actus reus (the guilty conduct): This consists of the affirmative act of misrepresentationof materials facts by not consolidating the Special Purpose Vehicle on the sponsors Balance

Sheet.

In securitization, consolidation of the Special Purpose Vehicle onto the sponsors financial

statements is warranted because the sponsor:

(a) Typically retains a residual economic interest in the Special Purpose Vehicle;

(b) Functions as servicer of the Special Purpose Vehicle asset poolwhich grants the sponsorsignificant control over the assets and the SPVs operations;

(c) Determines recognition of impairment of collateral, and selects and provides assets forsubstitution of collateral; and:

(d) Typically misrepresents the level of objectivity and fairness of the servicer/sponsor indisclosure statements.

Taken together, these factors and all the aforementioned new accounting standards constitutesufficient actus reus.

(3): The reliance element:The sponsors current and his prospective shareholders and other investors rely heavily on the

structure/arrangements of securitizations, associated disclosure statements and assurances of off-balance sheet treatment of SPV debt in securitizations, which are relatively complex. These formthe primary source of knowledge and valuation terms for the investor.


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(4): The victim suffers loss as a result of the misrepresentation (direct or proximate causation):Investors suffer loss because of the sponsor/servicers misrepresentations of its obligations:

(a) Investors estimates of the values of the sponsors equity are inaccurate and excessively high

due to the servicers/sponsors misrepresentations of the SPV debt;

(b) Investors incur unnecessary trading costs to re-balance their portfolios as the sponsor isdeemed more risky;

(c) The investor and the sponsor/servicer incurs additional monitoring costs whenever there isany report of impairment of collateral or substitution.

E: ALL TRUE-SALE, DISGUISED LOAN AND ASSIGNMENTSECURITIZATIONS INVOLVE FRAUDULENT CONVEYANCES

Any transfer or conveyance of the assets of a debtor that is deemed to be made for the purposesof hindering, delaying or defrauding actual or potential creditors, may be determined to be aFraudulent Conveyance (9).

In the United States, three sets of laws cover potential Fraudulent Conveyances:

(a) Section 548 of the US Bankruptcy Code (the Code); or

(b) Most States have adopted the Uniform Fraudulent Transfer Act (UFTA) (10) or else the olderUniform Fraudulent Conveyance Act (UFCA); or

(c) Fraudulent Transfers claims can also be made under a theory of constructive fraud, in whichcircumstantial evidence may warrant a finding that Fraudulent Transfers were made with theprimary purpose of shielding assets from current or future creditors. Although each US State hasits own laws regarding the appropriate elements of proof of constructive fraud, Section 548(a)(2)of the US Bankruptcy Code permits an inference of constructive fraud if the following factorsexist:

(1): The debtor received less than reasonably equivalent value for the property transferred; and:

(2): The debtor either: was insolvent or became insolvent as a result of the transfer, retainedunreasonably small capital after the transfer, or made the transfer with the intent or belief that itwould incur debts beyond its ability to pay.

The following are the various theories of Fraudulent Conveyancewithin the context of securitization.

E-1: Sponsor/Originator receives insufficient value for assets transferred:

All true sale as well as assignment securitizations involve Fraudulent Conveyances (as


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defined within the US Bankruptcy Code and the Uniform Fraudulent Transfer Act) because theoriginator receives insufficient value for assets that it transfers to the Special Purpose Vehicle(11), (12):

(i): Horizon mismatch:

In the case of receivables and fixed income assets, since the originator/sponsor sells these assetsbefore their maturities, their effective yields and values are much lower than their stated yields,and hence, the originator receives less-than-normal value for assets transferred.

(ii): The originator always incurs substantial cash and non-cash transaction costs in suchtransfers, which reduces the net-value it receives from the transfer to the Special PurposeVehicle. These costs include all legal fees, accounting fees, underwriting fees, monitoring costs,administrative costs, regulatory compliance costs, capital-budgeting costs (because the decisionto securitize has inherent negotiation costs), conflict costs and resource allocation costs, etc.;

(iii): In these asset transfers, the originator loses all the future appreciation of the transferred

assets: the transfers are done at book values or stated adjusted costs. The asset valuations for thetransfers dont consider future increases in asset value, and hence are an implicit undervaluation.

(iv): Where the assets transferred have residual values (as in computer leases and equipmentleases), the originator often cannot accurately calculate such residual values and does notincorporate them in asset valuation, and loses such residual value; and hence, receives less thannormal value for the assets transferred;

(v): In some securitizations, the originators transfer of assets to the SPV is backed by recourse

(to the originators assets) and such recourse has economic value that reduces the net-value thatthe originator receives from the transfer. [Higgin & Mason (2004), Pantaleo et al. (1996) andPlank (1991) (13) describe the basis for the value of such recourse].

(vi): Where the originator and sponsor is financially distressed, securitization is often the chosenform of financing, and under Fraudulent Conveyance laws, securitizations are illegal because:

(1): Securitizations increase the bankruptcy risk of the originator/sponsor;

(2): The distressed companys assets are typically valued at higher interest rates (which yieldlower asset values) and hence, the originator loses value in the transfers.

(vii): The originators/sponsors net-cash proceeds from the securitization transaction is oftensignificantly less than either the pre-transaction carrying value of the collateral, or the netrealizable value of the collateral (liquidation value in a supervised open auction)primarilybecause of transaction costs, over-collateralization, etc..

E-2: Intent to hinder, delay or defraud creditors:Implicit pre-petition waiver of right to file for bankruptcy:

All true sale as well as assignment securitizations involve Fraudulent Conveyances (as


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defined in the US Bankruptcy Code and the Uniform Fraudulent Transfer Act) because asdescribed in this analysis, such securitizations are the equivalent of illegal pre-petition waivers ofthe right to file bankruptcy, and the waiver of the bankruptcy stayall of which are sufficientevidence of intent to hinder, delay, or defraud any creditor of the debtor, which is the major

element of Fraudulent Conveyance under the UFTA and the US Bankruptcy Code.

E-3: Intent to hinder, delay or defraud creditors:originators transfer of assets to the Special Purpose Vehicle:

All true sale and assignment securitizations involve Fraudulent Conveyances (as defined inthe US Bankruptcy Code and the Uniform Fraudulent Transfer Act) because theoriginators/sponsors mere act of transferring assets to an SPecial Purpsoe Vehicle reduces thevalues of any of its unsecured creditors claims i.e. trade creditors, holders of any unsecuredloans, holders of certain preferred stock, etc.. (14).

Without such transfers, the unsecured creditors would have had access to such assets. This is

sufficient evidence of intent to hinder, delay or defraud existing creditors.

[It follows that the Rule of Law has been comprehensively flouted,with the rot starting and condoned at the highest levelsEd.].

E-4: Intent to hinder, delay or defraud creditors:Originators transfer of assets to the SPV has not been undertaken on an arms-length basis:

The originators transfer of assets to the SPV via a true sale or assignment is typically not

done by means of arms-length transactions. Most originators have substantial influence/controlover the valuation of collateral, the selection of the appraiser and valuers, the choice of appraisedcollateral, the corporate form and life of the SPV, and the selection of the officers/trustees of theSPV. Hence, the originator can manipulate the values of collateral for accounting and economicpurposes. The originator typically creates, funds and staffs the SPVhires the SPVs officersand directors and determines the SPVs corporate governance policies. The combination of suchexcessive control, and the originators transfer of assets to the SPV is prima facie evidence of

intent to hinder, delay or defraud the originators existing and future creditors.

E-5: Securitization increases the originators bankruptcy risk:Securitization can increase the bankruptcy risk of an originator (15), where:

(a) The cash proceeds from the securitization transaction are significantly less than either thecarrying value of the collateral, or the net realizable value of the collateral (liquidation value in asupervised auction); or:

(b) Management reinvests the cash proceeds of securitization in projects that yield returns thatare less than what the collateral would have yielded, or less than the companys cost of debt.Securitization via assignments or else disguised loans increases the risk to be borne by theoriginator/sponsor, and also increases its post-transaction cost of capital primarily because:


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(a) The amount raised is less than the assets pledged;

(b) The pledge of assets to the SPV reduces the originators borrowingcapacity and financial flexibility;

(c) The pledge of assets to the Special Purpose Vehicle reduces the originators ability to repayother debt. Hence, the originator/sponsor loses value in the transfer of assets to the SPV.

F: SECURITIZATION USURPS UNITED STATES BANKRUPTCY LAWS AND HENCE ISILLEGALSecuritization undermines US Federal bankruptcy policy, because it is used (in lieu of securedfinancing) as a means of avoiding certain bankruptcy-law restrictions (16). Indeed, the origins ofsecuritization in the United States can be traced directly to attempts by banks and financialinstitutions to avoid bankruptcy law restrictions.

An analysis of the legislative intent of the US Congress with regard to the US Bankruptcy Code

confirms that securitization contravenes most policies of the US Bankruptcy Code (17).

IT ALSO CONTRAVENES PUBLIC POLICY, WHICH EMBRACES:

(a): Recognition of financial distress;(b): Stay of bankruptcy proceedings;(c): Determination of claims and priorities of security interests;(d): Fair division of value;(e): The continuance or liquidation decision;(f): Efficient reorganization.

In most cases, insolvency often occurs before management decides to file for bankruptcy. Manyfirms that are either financially distressed and or technically insolvent continue to operate as ifthey are normal companies, and enter into securitization transactions. often, securitizationenables them to reduce the effect of actual and or perceived low credit ratings. Securitization isoften a major strategic choice for financially distressed corporations (18). Under the US InternalRevenue Tax Code, securitization qualifies as a reorganization. The underlying issues are asfollows.

F-1: Implicit waiver of right to file for bankruptcy and/or Stay of Bankruptcy:

Securitization involves an implicit (and often an express) waiver of the debtors, originators,sponsors right to file for voluntary bankruptcy. This is achieved by using a bankruptcy-remoteSpecial Purpose Vehicle and segregating the assets that otherwise would have been part of thebankruptcy estate (19), (20). Securitization involves an implicit (and very often an express)waiver of the creditor/Asset-Backed Securities-investors right to file for involuntary bankruptcy(21), (22).

US Courts have repeatedly held that such waivers are void as against public policy. In theabsence of securitization, these same investors/creditors would have been creditors/ a.k.a. lenders


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to the sponsor/originator. This implicit waiver is achieved by employing a Special PurposeVehicle and segregating the assets that otherwise would have been part of the bankruptcy estate;and by various forms of credit enhancement.

Without the automatic stay of the Bankruptcy Code, the debtor/sponsor would not need to

transfer assets to an SPV. Carlson (1998) traces the history of securitization to direct and specificefforts/collaborations to avoid the impact of US bankruptcy laws (23).

Furthermore, there is a distinct difference of opinion among US courts about the enforceabilityof pre-petition waivers (of rights to file for voluntary or involuntary bankruptcy) which has notbeen resolved by the US Supreme Court (24). However, the standard securitization processesdiverge substantially from the conditions in cases where the courts held that pre-petition waivers(or rights to file for bankruptcy) were unenforceable.

F-2: The U.S. Bankruptcy Code expressly invalidates certain pre-filing transfers:

Sections of the US Bankruptcy Code expressly invalidate certain types of pre-filing transfers,payments and transactions (that occur within a specific time period before the filing ofbankruptcy). Most securitizations fall under the classes of voidable pre-filing transfers.

Hence, under these foregoing circumstances/conditions, bankruptcy laws and associated

principles are implicated and apply where the firm has not filed for bankruptcy.

Therefore, any pre-bankruptcy filing transactions that invalidate or contravene the principles ofBankruptcy Codes are illegal. The bankruptcy-remoteness characteristic of securitizationsprevents the efficient functioning of US bankruptcy law, and jeopardises the law.

G: NEW THEORIES ON THE EFFECTS OF SECURITIZATION ON BANKRUPTCYEFFICIENCYThe following are new theories that explain how securitizationcontravenes the basic principles of US bankruptcy laws:

G-1: The illegal wealth-transfer theory:

Securitization can result in Fraudulent Conveyance and in illegal transfer of wealth where thetransaction effectively renders the originator/issuer company technically insolvent; orfraudulently transfers value to the SPV (in the form of low collateral values) and then to theABS/MBS [Mortgage-Backed Securities] bond holders (in the form of low bond prices, and orhigh interest rates) (25). Courts have held that stripping a company of the ability to pay judgmentclaims is a predicate act that is actionable under Federal R.I.C.O. statutes (26). Securitization

can also result in illegal wealth transfers to the intermediary bank where it retains a residualinterest in the Trust/SPV (residual securities) or is over-compensated (excessive cash fees,trustee positions, underwriter is granted a percentage of securities offered, etc.).

G-2: The Priority-changing theory:


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To the extent that bankruptcy laws are designed to facilitate rehabilitation of troubled companies,and increase efficient allocation of debtor assets to creditors, securitization enables the debtor todefeat the Absolute-Priority principle; and effectively to re-arrange priorities of claims,particularly where the debtor/originator does not have any secured claims (but has onlyunsecured claims). This is achieved by securitizing unencumbered assets and applying credit

enhancement to provide higher-quality securities (which is the equivalent of higher priority) toother creditors.

G-3: The Facilitation of inefficient-continuance theory:

Securitization enables the debtor/originator to change the progression of financial distress, bysupplying cash that typically lasts for short periods of time, and often at a high effective cost offunds. This implicates the principles of inefficient continuance (where an otherwise non-viablecompany that should be liquidated, sold/merged or substantially reorganized, continues tooperate solely as a result of short-term solutions and or bankruptcy court orders), and hence, thesections of the Sarbanes-Oxley Act (SOX) - which require certification of solvency of the

company and adequacy of internal controls, and also carry criminal penalties for non-compliance(27).

The question of whether inefficient continuance has occurred is a matter of law that should be

decided by judges. Thus, all else remaining constant, where the necessary elements occur, (asecuritization and inefficient continuance and managements certification of solvency and

adequate internal controls), management and the company become criminally liable.

G-4: The information-content effect theory:

Securitization changes and distorts the perceived financial position of the originator/sponsor,because various forms of credit enhancement (senior/junior pieces, loan insurance, etc.) are usedto achieve a high credit rating for the Special Purpose Vehiclewhich may be misconstrued bystock-market investors as evidence of good prospects for the originator-company. To the extentthat all securities offerings have relevant information content and associated signalling, thensecuritization by financially distressed companies effectively conveys the wrong signals tocapital markets and hence, changes the expectations of creditors and shareholders (and in thecase of bankruptcy, makes it more difficult to form consensus efficiently on a plan ofreorganization once the bankruptcy petition is filed). In this realm, investor and creditorexpectations are critical and have utility value and typically form the basis forinvestment/disinvestment and for negotiations about restructuring or any plan of reorganization.

US Courts have held that persons that create false impressions about the financial condition of acompany are potentially liable under Federal R.I.C.O. statutes (28).

G-5: The information-content effect theory:

To the extent that securitzation defers or eliminates a potential creditors rights to file forinvoluntary bankruptcy, then securitization can be deemed to be fraudulent, and gives rise tocriminal causes of action such as deceit, conversion, etc. The creditors right to file for a debtors


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involuntary bankruptcy is a valid property right that arises from State property law, Statecontract law, State constitutional laws, and Federal bankruptcy laws (29). Deprivation of, orinterference with, this property right is a violation of the US Constitution. Securitization candefer or eliminate this property right, and hence violate the US Constitution where thetransaction:

(a): Effectively rearranges priority of claims; or:

(b): Reduces the debtor-companys borrowing capacity (value of unencumbered/unpledgedcollateral) to the detriment of secured and or unsecured creditors; or:

(c): Uses the proceeds of the transaction to pay-off some (but not all) members of a potentialclass of creditors that can file an involuntary bankruptcy petition.

H: SECURITIZATION CONSTITUTES A VIOLATION OF FEDERAL R.I.C.O. STATUTESIn true-sale, disguised loan or assignment securitizations, there are fraudulent transactions

which serve as predicate acts under Federal R.I.C.O. statutes (30).

The specific R.I.C.O. sections implicated are: Section 1341 (mail fraud) Section 1343 (wire fraud) Section 1344 (financial institution fraud) Section 1957 (engaging in monetary transactions in property

derived from specified unlawful activity). Section 1952 (racketeering).

The prices of the collateral are determined in negotiations between the sponsor/issuer and theintermediary bank and on occasion, the SPVs trustees. This presents opportunities for predicate

acts (ie. fraud, conversion, etc.) because:

(1): The collateral could be under-valued or over-valued. There are no State or Federal laws thatrequire independent valuation of collateral or appointment of independent/certified trustees insecuritization transactions. The parties involved are often business acquaintances.

The originatorsponsor controls the entire process.

(2): The trustees can be, and are influenced by the sponsor/originator and or intermediaryinvestment-bank.

(3): The required disclosure of collateral is sometimes insufficient. Specifically:

(a): It does not include historical performance of collateral pools;(b): It does not include criteria for selection of collateral and for substitution of collateral;(c) Criteria for replacement of impaired collateral are sometimes not reasonable;

(4): Mail and wire are used extensively in communications with investors and participants


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in the transaction; and:

(5): There is compulsionbecause the intermediary or investment bank has very substantialincentives to under-price the securities, and to inflate/deflate the value of the collateral in orderto consummate the transaction and earn fees.

The entire securitization process constitutes violations of Federal R.I.C.O. (31) statutes because:

(1): There is the requisite criminal or civil enterprise consisting of the sponsor/issuer, thetrustees and the intermediary bank. These three parties work closely together to effect thesecuritization transaction.

(2): There are predicate acts (32) of:

(a): Mail fraudusing the mails for sending out materials among themselves and to investors.(b): Wire fraudusing wires to engage in fraud by communicating with investors.

(c): Conversionwhere there isnt proper title to collateral.(d): Deceit: Misrepresentation of issues and facts pertaining to the securitization transaction.(e): Securities fraud: disclosure issues.(f): Loss of profit opportunity.(g): Making false statements and or misleading representations about the value of the collateral.(h): Stripping the originator/issuer of the ability to pay debt claims or judgment claims inbankruptcy courta state of affairs that may apply where the sponsor is financially distressedand the cash proceeds of the transaction are significantly less than the value of the collateral.

(3): There is typically the requisite intent by members of the enterprise evident in knowledge(actual and inferable), acts, omissions, purpose (actual and inferable) and results. Intent can bereasonably inferred from:

(a): The existence of a sponsor that seeks to raise capitaland cannot raise capital on betterterms by other means;(b) The participation of an investment bank that has very strong incentives to consummate thetransaction on any agreeable (but not necessarily reasonable) terms.

I: SECURITIZATION CONSTITUTES VIOLATIONS OF U.S. ANTITRUST LAWSThe various processes in securitization constitute egregious violationsof the US Antitrust statutes (33), (34), (35). Specifically:

I-1: Market concentration:

The American Asset-Backed Securities and Mortgage-Backed Securities markets are dominatedby relatively few large entities such as FNMA, Freddie Mac, the top five investment banks (all ofwhich have conduit programs), and the top five credit card issuers (MBNA, AMEX, Citigroup,etc.), etc.. As a consequence, the top five ABS/MBS issuers control more than 50% of the USABS/MBS market.This constitutes illegal market concentration under US Antitrust legislation


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I-2: Market integration:

The American Asset-Backed Securities and Mortgage-Backed Securities markets are essentiallyboth national and international (that is to say, geographically-diverse entitiesand individuals

participate in each transaction). Each Asset-Backed Securities (ABS) transaction/offeringtypically involves a roadshow which consists of presentations to investors in various cities.

The cost of the roadshow is often paid by the underwriter(s) before its fees are paid by thesponsor. In addition, there are printing, mailing, traveling and administrative costs that increasewith the greater geographical dispersion of investors. This has two main effects:

(a): It reduces competitive pressure on dominant investment banks and groups of investmentbanks (to the detriment of smaller investment banks); and:(b): It raises market-entry barriers by making it more expensive to conduct roadshows for newofferings. Hence, the market integration created by the industry practices of securities

underwriters is anti-competitive and violates the Sherman Act, and the FTC Antitrust statutes.

I-3: Syndicate collusion:

The syndicates (of investment banks) used in distributing Asset-Backed Securities andMortgage-Backed Securities (ABS/MBS) essentially collude to determine:(a): The price at which each ABS tranche is sold;(b): Which investors can purchase different tranches.

Collusion occurs because:

(a): In the typical Asset-Backed Securities (ABS) offering, the price determination process is nottransparent or democratic because the lead underwriters typically negotiate the offering pricewith the originator/sponsor and the prospective investors (although some underwriters useauctions).

The lead underwriters purchase most of the new-issue ABS, and the balance is typically sold tojunior syndicate members (who presumably can arrange to buy more Asset-Backed Securitiesfrom the lead underwriters than were allocated to them).

In essence, the true price-demand characteristics and negotiability of junior underwriting-syndicate members are hidden simply because of the structure of the underwriting/biddingprocess. Hence, the existing syndicate-based ABS distribution system for new issue Asset-Backed Securities distorts the true demand for the ABS, clearly reduces competition, andfacilitates and results in collusion, and therefore constitutes violations of the Sherman Act andthe Federal Trade Commission (FTC) Antitrust statutes.

(b) Similarly, the ABS allocation process is not transparent. The lead underwriter and juniorunderwriters allocate new-issue ABS to investors based on subjectively determined suitabilityand also in-house criteria. There are no established or generally accepted important guidelines


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for such in-house criteria and associated allocation.

The lead and junior underwriters can typically collude to determine that only certain investorsdeemed appropriate are allocated the Asset-Backed Securities in question. Hence, the antitrustviolation (collusion) occurs solely because of the underwriters discretionary choice of investors

to whom ABS are allocated. This is more evident where the poll of investors consists mostly ofinstitutional investorsso that final offering prices are more sensitive to choice of investors, andprices can change significantly simply by changes in allocation to investors. In suchcircumstances, the collusion is reasonably inferable here, so long as there are no statutory orgenerally accepted allocation criteria that have been approved by the NASD or other tradeassociations.

I-4: Price formation:The prices of ABS securities may often be linked to the prices/yields of US Treasury bondsthecredit risk of ABS/MBS being priced relative to the risks of US Treasury bonds.

This system distorts the true demand and supply balance for the ABS/MBS, and erroneouslyincorporates the demand/supply relationships of the US Treasury Bond market, into theABS/MBS markets. The key question then, is whether there are conditions under which the USTreasury Bond market is completely de-coupled from the ABS market: or, phrased differently,whether there is sufficient justification for actual or perceived de-coupling of the US TreasuryBond market and the US ABS market. These conditions are as follows:

(1): The credit fundamentals of the US Treasury market differ substantially from those of theABS market. (The Treasury market is much more sensitive to US Federal Reserve actions,currency fluctuations, consumer spending, Federal/State fiscal policies, etc.). The ABS markettends to be more sensitive to industry-specific and sometimes company-specific risks/factors.

(2): The use of various credit enhancement techniques and products further exacerbates thedifferences in the credit trends and/or quality in the US Treasury and ABS markets. In Asset-Backed Securities transactions, most forms of credit enhancement create a floor, but do not limitor affect other industry exposures or company exposures. In the US Treasury market, investorsare subject to a greater variety of risks.

(3): Investors objectives in the US Treasury Bond markets differ from those of investors in

Asset-Backed Securities markets. Hence, investors are very likely to view these two markets andthe underlying risks differently, and should value the securities differently.

I-5: Vertical foreclosure:

In the ABS/MBS markets, some investment banks and commercial banks are active in almost allphases of the securitization process: origination (through in-house conduits); due diligence;disclosure and pricing; new issue securities offerings; and also in secondary-market trading.Similarly, non-bank entities can use their own asset portfolios (the origination of credit cardreceivables or mortgage receivables), shelf-registration and marketing procedures and/orRegulation-D/Rule 144A procedures (pricing and new-issue offerings) and in-house trading

8/4/2019 Definitive Illeg

definitive illegality of securitisation is reconfirmed

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