Claiming I Owe You? Show me the IOU!
One way of looking at banking, the mainstream view; which I believe we have been conditioned towards, is the belief that we go into a bank, we apply (beg) for a loan, we accept the terms and therefore we should be liable to pay. Many people I’m sure would agree with the view that we accepted the obligation, it was a voluntary action on our part and it would be dishonest not to pay it back.
This article focuses primarily on one key point. It is not going to consider the fact that the ‘money’ being loaned is not backed by anything of real tangible value, or even the possibility that our signatures somehow ‘create the credit’ when we apply for it (i.e. the banks do not suffer a loss in the first place), or even the serious problems caused by the application of interest/usury on loans.
Instead, it aims to focus on some of the common-sense logic behind the notion of ‘lending’ and ‘borrowing’, in an easy to comprehend manner, hopefully adding some clarity without the need for legal and financial jargon.
Using an example of lending and borrowing between friends in exchange for an IOU, I will hopefully demonstrate what is happening with banks and that in effect, you will not be saying that: “I don’t owe this money”, you are saying that: “I don’t owe this money to You!”. The key point I wish to highlight is in regards to the original ‘instrument of indebtedness’; that is the original document that evidences the debt and your obligation to pay it.
[I am happy to update and correct any inaccurate information people may find in this article. I encourage open discussion and wish for this to become a useful and valid resource.]
In bygone days lending or borrowing of money between friends and associates was seldom done without the exchange of an IOU. We commonly refer to IOU’s by their phonetic meaning: ‘I owe you’, although the letters are actually an abbreviation of the phrase: ‘Is owed unto’.
An IOU is different than a ‘negotiable instrument’ as it is an informal document and generally does not specify the terms of repayment (http://en.wikipedia.org/wiki/IOU). However, these details aside it still serves as a great example for lending and borrowing in general that can then be considered in relation to the banks.
What follows is some example scenarios of lending and borrowing, and the role of the IOU/debt instrument in these transactions:
I want to borrow €1,000 from you. You give me the money in exchange for a signed IOU. This IOU is my ‘promise to pay’ you the sum of €1,000, it becomes a valuable document and a medium of exchange between us. My signature on the document signifies an obligation and a promise to honour it. However, when I return the money I have borrowed you MUST present and return the IOU to me.
Let’s say we have just completed our original transaction and you’ve loaned me the money. Some weeks pass and you find yourself strapped for cash, but you know I will not have the money to pay you yet. You need cash so you use my ‘promise to pay’ as an instrument of exchange with another individual. You approach your friend Joe and say: ‘I need cash, I have this IOU for €1,000 to offer you. Would you like to buy it for €900, it will be honoured at a future date?’ Of course Joe is open to accept, reject or conditionally accept this offer, but if he does accept it and you endorse it to him (sign the back?) he will then be the holder of my IOU. Joe will be in receipt of my ‘promise to pay’ so my obligation would naturally pass to him. I no longer owe you because your debt has been satisfied. Without the IOU you would not be able to approach me demanding payment; that would be unlawful.
Now back to Joe, lets say he sells it on to someone else for an agreed value, who sells it to another and so on. At this point, I do not even know who could be holding my IOU. I want to pay it but I do not know who is holding it. Somewhere along the line I might receive demands from an individual claiming that I have an outstanding obligation with them, that they are holding my IOU and are seeking payment of the debt. Naturally I would want them to validate this before I could honourably begin to affect payment. How do I know that I owe them? They need to present the original instrument of indebtedness.
Side note: These examples are just to give an idea the logic here but the rules for these ‘private transactions’ may be different, e.g. you may not be able to sell or endorse these private instruments on to another party without the consent of the original indebted party? I would imagine consent is required because I agreed to pay you, not Joe. I don’t know for sure but it’s not really relevant to highlight what I’m trying to show and regardless of your consent, it seems by all accounts that the banks are selling the ‘instruments of indebtedness’ we give them anyway.
So, let’s take it for now that you have sold the instrument on to Joe, unbeknownst to me. You have just received €900 cash from Joe for the IOU, yet you now decide to pursue me for the €1,000 as well; a most dishonest act. I become suspicious or concerned and write to you saying:
“Hello,
I am more than happy to settle any debts I might lawfully owe to you. Please verify the obligation by providing proof of claim that you are still the holder of my IOU/ the original instrument of indebtedness. I will begin to affect payment as soon as the debt has been lawfully verified as being owed to you. Please send me a copy of the unaltered (?) instrument or alternatively meet me at an agreed upon time and place so that I can view the original.
I wish to deal with this matter promptly so please reply within ten days from the above date. Failure to reply to the contents will lead me to assume that you are no longer in receipt of the debt instrument, that you cannot validate your claims, and that there is no amount lawfully owed to you by me.
Kind regards,
Kev”
It makes natural sense to infer from all this that: You should be able to validate the debt, that this is a reasonable request, and, if you cannot validate the obligation by producing the IOU, I don’t owe you! I might owe someone else but I certainly don’t owe you, and, if you do validate the debt by showing that you still hold the IOU then I should go ahead and pay it.
So why not do the same with the banks? Why not ask them to prove that they still hold the unaltered instrument of indebtedness and that they have not sold it on. My understanding of internal banking operations is admittedly limited so I may be wrong on this next assertion, but I believe that the banks sell our ‘debt instruments’ on and on and on to generate as much revenue as they can off of them in a shorter time. We know that not everyone can afford to honour their debts, so ultimately someone is suffering in this process, by that I mean someone is not getting paid. They’re stuck with ‘promises to pay’ that will never be honoured. The banks lump all these together and sell them on as risky share option to unsuspecting Corporate entities and Governments such as Iceland, and this is (loosely) where ‘toxic debts’ originate. In the meantime however, the banks continue to demand payment, which seems to amount to a demand for double payment of the same debt. (?)
In any case, what harm can it be to ask the bank to validate that your obligation to them still stands and that it has not been sold on? If they can prove it, well you’re in the same position you started off in. If they can’t prove it you can safely, lawfully and honourably say:
“I’m not saying I don’t owe this money, but I certainly do not owe it to you!”
[...] Claiming I owe you? Show me the IOU! [...]
I was lucky enough to take the banks for a ride before they took me for one. I am not a developer, just an ordinary citizen but saw the writing on the wall. Unfortunately, I have had to leave the finest woman on god’s planet due to the incompetence of TWO governments and a bunchof wanker bankers who have together decimated my industry. “One of these days”
Intersting idea, but i must comment on some assumptions you have made. If you borrowed money from a bank, and they then sold on the debt, you now are indebted to the purchaser of said debt, they both can’t collect on the debt. If you then say, well you sold my debt so I don’t owe you the money, you would be correct, however, you would not be excused from the debt, you would have a new creditor that would now be owed the money.
The originating bank may still be under contract as the collector of the debt though, for instance, I borrow €1000 from you, you are paying back €100 per year plus interest, I run into a cash flow problem so I sell the debt to a thirdparty for €800 and agree to collect the debt and give the payments to the third party. No one is getting paid twice as you imply.
when the banks sell on the debt , there is a little matter of ‘ Novation ‘ , to be considered
n contract law and business law, novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an assignment, which is valid so long as the obligee (person receiving the benefit of the bargain) is given notice, a novation is valid only with the consent of all parties to the original agreement: the obligee must consent to the replacement of the original obligor with the new obligor.[1] A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.
For example, if there exists a contract where Dan will give a TV to Alex, and another contract where Alex will give a TV to Becky, then, it is possible to novate both contracts and replace them with a single contract wherein Dan agrees to give a TV to Becky. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract, but it is usually assumed to be the discharge of the former contract.
But as we all know the banks sell on our debt without notifying us, and furthermore the new owners do not give us any consideration for our continued performance on the debt, so on the grounds of Novation , I believe the original contract is null and void as is the debt.
Now there is a lot of information about Novation out there, and what I published above is just the bare bones of it , but it gives you a good idea what its about, but as always I tell people dont take my word for it, do some research yourself .
But if one of the terms of the loan agreement that I sign with the lender specifically states that I accept that the lender can assign or transfer my loan to a third party but that I will continue to be bound to make scheduled repayments to the lender – am I not still bound to continue paying to the original lender if it assigns my loan to a third party and becomes a mere collecting agency for that third party? Have I not agreed to that by signing the loan agreement?