Guest Post: Where's The Collateral?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Where's the Collateral?

A sound system of credit is built on collateral. A doomed system of debt sits precariously on phantom collateral.

The global "recovery" is based not on reducing debt but on increasing it. Nice, but where's the collateral? The basic idea of debt is that credit is extended based on collateral, i.e. something of enduring, tradable value, or an income stream that isn't reduced to zero by non-discretionary spending and taxes.

A funny thing happened to collateral like housing equity and financial assets in the past four years--it shrank by trillions of dollars. According to the latest Z1 "Balance Sheet of Households and Non-Profits" from the Federal Reserve, real estate fell by $4.9 trillion since the bubble top in 2007 and owners' equity lost $4.2 trillion.

Despite the stock market doubling since 2009 and a healthy run-up in the value of bonds, financial assets shrank by $2 trillion as well.

These are non-trivial sums when we consider that collateral is generally leveraged. If a home buyer puts down 20% cash, then that cash collateral is leveraged 4-to-1 in an 80% mortgage. If the buyer puts down 3% (as in an FHA loan), then the leverage is over 30-to-1.

Collateral matters when it comes to assessing the value of the debt. If a bank lists the mortgages in its "assets" column at full value even though the underlying collateral (the houses) has lost much of their value, then the bank is grossly over-estimating the value and security of the mortgage. The bank's "assets" are based on phantom collateral.

Take away $1 in collateral and you impair $4, $10, $20 or even $30 of debt.

Recall that the vast majority of real estate equity and financial wealth is owned by the top 20%, with the majority of that concentrated in the top 5%. That means the bottom 80% own little collateral to leverage into debt.

How about leveraging income into more debt? Since the top 10% receive almost 50% of the income, and most of the bottom 90%'s income goes to non-discretionary spending and taxes, then only the top 10% have discretionary income that can be leveraged into more debt.

Interestingly, The Wedge between Productivity and Wages by economist Mark Thoma reports that the enormous advances in productivity over the past few decades did not translate into higher wages for the bottom 90%.

I have often addressed income disparity and the evaporation of collateral, for example, Two Americas: The Gap Between the Top 5% and the Bottom 95% Widens (August 18, 2010) and The Housing Bubble Broke the Middle Class (April 27, 2011).

Regardless of the various causal factors, the fact remains that 90% of American households have limited collateral or discretionary income to leverage into more debt. That leaves around 10 million households (the top 10%) with the means to take on more debt--if they want to. Can 10% of the households prop up the entire economy with more debt and consumption? What if the wealthy decline the opportunity to leverage more debt?

We can also ask "where's the collateral?" of the banking sector. As frequent contributor Harun I. observed about the European banking sector's phantom collateral:

European banks do not have enough money for deposit redemptions (people withdrawing their cash from the banks) and the only way to get it is to have the European Central Bank (ECB) print money out of thin air thereby devaluing every euro, thereby destroying purchasing power (you get your money but it buys less).


And what collateral are the banks providing for these loans? The sovereign debt of countries that are insolvent. Why not sell the bonds to raise the capital that is rightfully owed to depositors so that they could receive their money at par? Why then bond prices would tumble and governments would be forced to borrow at much higher interest rates. But borrow from whom? Insolvent banks that must have money printed to give depositors their money back at a fraction of its worth from when they deposited it. Not due to market forces which indicate their labor is worth less but because everybody just wants what's rightfully theirs.


So to summarize this, the ECB prints money to buy the bonds of insolvent banks which are backed by the bonds of insolvent nations. The result of which is insolvent nations or in reality the people thereof are not only poorer, they are now responsible for paying back money that was their property to begin with... at interest.

Put these two factors together and you get a global economy dependent on debt borrowed against phantom collateral and an American economy in which only the top 10% have credible collateral and income to leverage into more debt. In a sane system, when the collateral vanishes, so too does the debt (writedowns, write-offs, bankruptcy, take your pick). In an insane system, then phantom collateral supports ever greater mountains of debt.

How long do you reckon the insane system we have now will last? The collateral is phantom, but the interest payments are very, very real.

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lolmao500's picture

Collateral is for the mafia, not the banks!

Dr. Richard Head's picture

Ben Bernanke shits in a bucket and securitizes it through his primary banks.  Jim Cramer gets on the boob tube and talks up this bucket of shit, while Krugman writes various essays on the quality of said shit.  Ganstas indeed.

Oh regional Indian's picture

Az soon as the 100 monkey reading this or any other such line realizes that he/she IS the collateral, something will change.

Your ass is collateral, dear reader. The War of independence was never won. Not in Idnia, not in the US, not in Jamaica, nowhere in Africa, all a big screaming scam.

I'm serious. This article above is meaningless. All .govs have massive collateral. Any wonder they try to fill up their countries as much as they can?


Dr. Richard Head's picture

Hence the social security number, social insurance number, etc. tracking.  It is our loan document number.

Oh regional Indian's picture

Yup. I'd recommend everyone take a good read of thsi slightly dense but mind-boggling book available on the net.

Everyone because we've all been had in EXACTLY the same pattern/fashion, world over.

And ignite some debate, the facts are undeniable...


What are you going to do?


Bangalore Through My Dash Cam

LowProfile's picture

ORI, I've given you some shit for posting some seriously half-baked stuff here in the past, but that link (so far) is pretty damned interesting.


Bicycle Repairman's picture

 What is the collateral backing the state's debt?  It is the state's power to tax.  This is well known and shouldn't be a surprise to anyone here.  As long as you have income or wealth, the state's debt is secure.

Oh regional Indian's picture

Take a read above B Repairman, and spread the word. 

Really, everyone should read this. It's the playbook and the basis of the big lie. Documented, foot-noted, corss-referenced.... crazy making.




Just to see how important it is to know words and their history, check this out:

collateral (adj.) 
late 14c., "accompanying," also "descended from the same stock," from O.Fr. collateral (13c.), from M.L. collateralis "accompanying," lit. "side by side," from L. com- "together" (see com-) + lateralis "of the side," from latus "a side" (see oblate (n.)). Lit. sense of "parallel, along the side of" attested in English from mid-15c. As a noun, from 16c., "colleague, associate." Meaning "thing given as security" is from 1832, Amer.Eng., from plrase collateral security (1720). Related: Collaterally.

Likstane's picture

Good stuff, Indian.   Ultimately, every citizen is indebted to his owning country(corporation).  The illusion of individual sovereignty has been propagated even by the supposed guaranteer of said condition(USA corp.)  The control of a persons life is maintained by debt to the country(corporation).  The less debt, the less control that country has.  The right/duty of citizenship(the states claim on you), can be replaced with other assets for awhile, but they are almost all eventually backed(collaterallized) by something of value.  Your life, after gold, silver, property, food and water, is really just your last(real sovereign) asset.   None of us chose this ownership, but most of us tacitly agree to it by complying with the (countries/corporations) regulations.

I am on to you's picture

Oh right Indian,the word is democracy,this is the biggest illusion ever created.

Democracy is the collateral,mening yes everyone,i dint read the book you advised,might do so!

We always were kept under control,they just gave us a litle candy!

CPL's picture

Federal is broke.

States are broke

Municipalities are broke.


Who says the debt is secure?  Considering nobody seems interested in saving money, or hindering spending.


Why would you bother even looking at helping in anyways.  Let it die.  Pull the plug and be done with it.

Bicycle Repairman's picture

I don't think the state wants to pull the plug.  And they are going to "volunteer" your help.

Debugas's picture

are you asking me (in order to stop paying taxes) to drop my job ?

francis_sawyer's picture

As I look around, I'm seeing a lot of 'Collateral Damage'... Does that count for anything?

duo's picture

Where is the collateral for $1T of student loans?  Can a brain be repossessed?

Interesting that the interest expense of $1T in student loans at 5%, 50 $billion, would be about 60% of all the tuition spent this year.  Soon the interest on student loans could finance everyone in college!

djsmps's picture

Two simultaneous headlines:
CNBAPPL: Fed's Evans Tells CNBC He Sees 'Tremendous Room' for More Easing, But Lockhart Is 'Reticent to Pull Trigger'
Reuters: Fed officials, hawk and dove, agree: no more easing

SheepDog-One's picture

Yea right, TREMENDOUS room for more easing here with oil at $106. Hey you GO FOR IT Evans! 

cossack55's picture

The collateral may be phantoms, but at least the politicians are corrupt scumbags.

CPL's picture

If looking sideways at the housing affair and include all the scavenging that has been occuring in empty homes, occupied homes and even home sites that haven't been built.


The only collateral left in all those homes is the plaster in the walls and the wood that holds them up.


Here's a google news query.  If you want to know what's happening local put your city/state/country where the LOCATIONHERE is located.

(wire|cable|copper|metal|lights|solar|scrap|oil) (stolen|steal|theft|stolen|damaged) (thieves|criminal|crime|crook|thief) (target|home|city|district|street|local) LOCATIONHERE <--***



Dapper Dan's picture


April 30, 2012

The Banks New Shell Game Reinflating a New Housing Bubble? by MIKE WHITNEY

Have housing prices hit bottom?

So, how long will the banks be able to keep their stockpile of homes out of view?

Who knows? What we keep hearing from the realtors we’ve talked to is that inventory has virtually dried up over the last year. Now some of this has to do with the robo-signing flap. Many of the banks decided it would be better to slow their foreclosures until a settlement was reached in the case, which is what they did. But that doesn’t explain why inventories have plunged as much as they have. Just take a look at this list of cities from Redfin which records the year-over-year declines in the number of homes for sale in January:

•Denver (Denver County): -47%

•San Francisco (San Francisco County): -42%

•Phoenix (Maricopa County): -40%

•San Diego (San Diego County): -38%

•Portland (Multnomah County): -37%

•Seattle (King County): -32%

•Orange County: -32%

•Washington DC: -28%

•Los Angeles (Los Angeles County): -27%

•Dallas (Dallas County): -27%

•Las Vegas (Clark County): -16%

•Atlanta (Fulton County): -13%

Does that look normal to you or does it look like the banks are deliberately withholding supply to drive up prices and create the illusion of a market turnaround?

see the rest at counterpunch

CPL's picture

It's going to be the most beautiful Financial Explosion ever.


Nothing will be left will it?

Bicycle Repairman's picture

No collateral left in those homes?  Take another look at "mark to model".  The banks and FASB dare to differ.

CPL's picture

Sadly yes. 


Goddamn FASB.  Never seen an ace played so fast in a game of poker to win a 2 dollar pot.

LawsofPhysics's picture

As MF-Global (and numerous versions of such organizations before it) has most recently shown.  Possession is the law.  You want collateral, come and get it, bitchez.

History rythmes, especially when it comes to paper promises, same as it ever was.

DoChenRollingBearing's picture

+ 1

Keep your collateral OUT of the financial system.  Else it gets hypothecated by thieves.

Dr. Engali's picture


"How long do you reckon the insane system we have now will last? The collateral is phantom, but the interest payments are very, very real".

It will last as long as the sheeple blissfully sleep. They have been sufficiently dumbed down to the point where they except the system as a legitimate long term economy. The sheep  don't understand the fact that they are living an illusion and they are pulling forward generations worth of economic activity so they can have their iPads now.

Wannabee's picture

Mark-to-market does not apply to "inniovative financial products". Greenspan told me.

GMadScientist's picture

"What interest payment?" - G7 "home-owner"


asteroids's picture

Mr. Smith makes an interesting point. Do US banks have enough cash on hand to handle a run on the banks?

SheepDog-One's picture

I took out $5,000 cash from the bank a week ago, you'd think from the flustered look on everyones faces running around that a robbery was taking place! Took me over an hour.

Dr. Richard Head's picture

My $12K withdrawal - nice commission last month - required them to scan my license and fill out a report which included questions such as;

What is your profession? Answer - Sales

What kind of sales sir? Answer - Services

Any reason why you are being so sparse in your answers? Answer - It's none of your god damned business.

Sir, if you have nothing to hide? Ansswer - When did non-disclosure of one's intention for federal reserve notes constitute a crime?

Are you going to buy somethign nice with this money? Answer - I sure am.

Parting blow was the comment about stupid people in America giving up every ounce of their privacy to their government was a sad state of affairs.

Fucking automatron seacow.

CPL's picture

Just get a cashiers check and use it like cash.  Sign on the back and you are done.

DoChenRollingBearing's picture

Not quite as anonymous if you are buying gold at the coin shop though.

Some paper > than other paper.

John Law Lives's picture

"Parting blow was the comment about stupid people in America giving up every ounce of their privacy to their government was a sad state of affairs."

It is even more amazing how many daft people willingly fill up "personal networking" sites like Facebook with their personal information.  I don't have a Facebook account, but I am amazed by how much information some people I know have put in their profile (they showed their profiles to me).  Amazing... and not a good idea.


Matt's picture

Easy solution, just create 10 dummy accounts for every real person and fill them with fake info. Drown the observation system with fake info. I'm sure the giant NSA database will have each person, but it will require actual human beings to sort out which are real profiles.

metaforge's picture

Small amounts over time - avoid the interrogation.

Dr. Engali's picture

The peasants are too stupid to make a run on the banks. They think the banks are "safe". The name Corzine means nothing to them.

SheepDog-One's picture

'The money is safe in a bank' LOL what was the latest from FDIC, they have about $50 million dollars? LOL

Matt's picture

This is why the steady move away from paper money. Once you have purely digital currency,a bank run can never really happen since the central banks can refill the digits as fast as people can take them away.

SheepDog-One's picture

The peasants dont have any collateral? Wow!

John Law Lives's picture

"Despite the stock market doubling since 2009..."

The Great Chairsatan knows he can not fix the moribund housing market or the job market, so he pumps the stock market to promote the illusion of recovery.

100% FUBAR.

SheepDog-One's picture

Yep, all meaningless as the INDEXES float on up to match the past record bubble highs, I'd like to see it cashed out. Cant happen, its just fake illusion.

Umh's picture

The stock market boom is a by product of keeping the should have failed banks going and the governments interest payments down. When those two objectives are obtained or no longer needed you need to watch out.

The Alarmist's picture

Where's the collateral? Where's Jon Corzine?

LongSoupLine's picture



The collateral is in the bank accts of the middle class.  If that's empty, it's whatever they own or are wearing.

SheepDog-One's picture

My bank account I keep empty, except for a few hundred bucks in case I need a check. 

John Law Lives's picture

I also don't keep much money in the bank.  It doesn't seem to make much sense to earn almost zero interest on a bank account and then get gigged by various fees seemingly at the bank's whim.

dbTX's picture

We aint got no collateral, we don't need no stinking collateral.

Caviar Emptor's picture

Here's the imminent problem: inflation is once again breaking out all over the rest of the world. 

Today's alarm bell is Indonesia with food infaltion fears rising again:

And here is the feckless attitude that explains the problem: