Tuesday, February 24, 2009

I Would Love to Take Credit For This

but alas... I did not write it. What follows is the work of another... a fantabulous fellow who has in the past authored a gloriously entertaining and insightful blog. He's not written in a while and thinks himself rusty. I can't say that I agree with that assesment. I'll let you decide:

What's check kiting and who does this heinous and illegal thing?

Just about everyone. It's Thursday night and you're out of diapers. You don't get paid until tomorrow but you know the check won't clear until later, so you go ahead and right a check that's hot *right now*even though you'll be good for it by time it clears your bank in a few days.

You just kited a check.

In the jargon that time between when you produced a promise to pay, and the time it will be paid is knownas the "float." And it is the float that makes it all work. It's that time that allows you to get your house in order and produce the money that you said would be there.

When you get really nifty with check kiting you don't trouble yourself with diapers. You simply write yourself checks across two different accounts and deposit them in the opposite bank. Each bank credit's your account *right now* even though the check won't clear for awhile. And that allows you to grow your money. Just keep writing ever larger checks to yourself across both accounts ahead of when the checks have begun clearing and you'll see your bank balance soar.

Just one little catch. If each account started with $100, then when you get tired of writing checks for no reason and call it quits... the accounts will end with $100. No matter if you got their balance up toa cool million or so; there's still only $100 and a boatload of accounting fraud. And if you dare to pull money out of this scheme it will collapse. It is a Ponzi scheme and it's growth is strictly self-generated. Pull any money out and the series will stall or collapse outright. Yank $40 out? Wreck your apparent net worth and come out the other side with 60 bucks.

Not withstanding that it's a auto-Ponzi, it's illegal because you may have a net worth of a $100,000 that is only $100 in reality. That doesn't prevent you from cashing out and making off with the proceeds of the accounting error. With good reason this kind of fraud is often a felony. So the next question is: Is there any way you could legitimately makemoney off this deal? Can you wind it up and utilize your net worthfor a gain without screwing you or the bank?

In fact there is. Roll that thing up nice and tight so you have a large balance going. Then finance someone else's mortgage. You buy the deed outright and collect payments for the mortgage from the new lucky homeowner. Now quick! Sell the deed to someone else to service the mortgage.

Deposit the proceeds fast enough and you can cover all the checks that haven't cleared yet. If you were quick and deadly you'll get it done in time and make some coin as a bonus. Now you're not a criminal. Now you're a bank. Unless you're not quick and deadly enough; then you're just Citibank.

No comments: