Live Well Financial found a great way to make money. Mark up your assets, gets loans on the inflated values, buy more assets, mark them up, gets loans on the inflated values, buy more assets, and so on and so on. But it’s only great until a lender wants its money back.
Live Well Financial, Inc., is (was?) a reverse mortgage originator and the owner of an investment portfolio of bonds. It’s CEO came up with scheme that he called, in his own words: “a self-generating money machine.”
The Securities and Exchange Commission didn’t like the scheme and brought charges. Live Well is disputing the charges. I’m taking the SEC’s charges at face value so that I (and also you) can see what the SEC doesn’t like.
Live Well used a lot of leverage, 80%-90% of the value of its bond holdings. With so much leverage, its banks would issue margin calls when the values decreased. Those values were determined by an unnamed third party pricing service who determined them independently.
To give some financial stability and to avoid margin calls, Live Well somehow convinced the Pricing Service to use the prices Live Well supplied to them. Of course, that stopped the pricing fluctuations and margin calls. It seems the lender were not informed of this change in pricing determination.
According to the SEC, Live Well abused that new pricing relationship by inflating the valuations. At times Live Well was able to obtain financing that exceeded the market value of the bonds. Live Well’s lenders thought that the Pricing Service independently determined the values of the bonds, and that the lenders were not aware that the Pricing Service had become a mere pass-through for Live Well’s purported valuations.
After Live Well began submitting its valuations to the pricing service, Live Well’s reported value of its portfolio grew from $71 million to $324 million after eight months, and then $570 million two months later. This growth was in part the result of new bond purchases that Live Well had made with loan proceeds without contributing its own capital.
It all came to a crashing end when Live Well’s lenders wanted to get repaid.
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