In the last video I just
gone over an individual balance sheet and what illiquidity
or what bankruptcy suggests. And if you understood that,
I believe we” re now ready to tackle what an annual report of
a few of these potentially troubled financial institutions might
look like. And I” m not going to go into the details. Yet I” m mosting likely to give you the broad view and I think that” s basically what matters. Essentially, these banks have a number of properties. And I” m mosting likely to discuss financial institutions extremely normally now, both industrial and financial investment banks. In a future video clip I” ll inform you the difference in between both and what guideline indicates and what leverage means and all that Possibly I” ll touch on that.
in this video. Allow” s simply kind of think about a common equilibrium sheet for a financial institution. Its assets. I” m simply
mosting likely to make up some points. Let ‘ s claim that it has$ 1 billion in government bonds, U.S.Government bonds. I ‘ m just throwing that therein equally as filler simply to reveal you that there might be a lot of different kinds of assets in there. Let” s say that it has another $10 billion in AAA corporate bonds. You recognize these are finances to actually solvent or really creditworthy companies. Companies that have really excellent capital. There” s extremely little chance of them back-pedaling their loans.And what is
a bond? A bond is simply a car loan to another entity. If you lend me cash, I could give you an IOU stating that Sal owes you $10. Which IOU, you could call that a Sal bond. So $1 billion of government bonds, that” s a possession that says the government owes me a billion dollars. And in the meanwhile, it” s going to pay me passion. In a similar way, company bonds, that” s stating that these companies, any place these bonds are provided by, they owe me jointly $10 billion and in the meantime they” re mosting likely to pay me interest. That” s all it is And all an asset is, is. something that has some future financial value.’And that ‘ s what these are.
Plus at some point, they” re. Or possibly it” s something. The $10 is the interest.
may be $9.9 billion. I” m making up numbers. That ‘ s not the issue below.
The core of the’problem. is that there ‘ s this odiferous property right here.
Really, allow me attract a couple. Allow ‘ s say I have
anotherAn additional Allow ‘ s state it ‘ s
$ 10 billion.
So this is, basically, I provide. cash to companies to get land or develop land or purchase. structures that they” re going to go rent to. various other individuals. So once more, it ‘ s simply. a lending to somebody else. And a funding to somebody else that.
I” ve given is an asset. Since they owe me passion and.
eventually they” re mosting likely to pay the money back to me.And after that finally, and I” m not. being detailed right here, I” m mosting likely to throw in the essence.
of the problem right here. Allow me see, I have 21 right currently,.
Let” s say that I have. $4 billion, so it all includes up to 25.
household CDOs, collateralized financial debt.
obligations. And I” ve done a video clip on CDOs,.
Simply to kind of have review, CDOs are a by-product.
tool. I understand that sounds complicated,.
however that simply indicates they are originated from.
an additional tool. Which probably is an indicator that.
the have an odor is beginning to emerge from this part of.
the annual report. What does it suggest, derivative? Well, you take a number.
of mortgages. So I” ll simply attract.
it down here. These are home home loans. Perhaps you take a million.
of them. You organize them all together.And you end up with a
home mortgage. backed safety.
All a home mortgage backed protection. is a financing to a big team of people and you put them all.
together to ensure that you can kind of have the ability to statistically.
offer it homes. If you lend to any kind of one, because.
person, that” s hard to trade. , if you provide to a lot of.
.
people, it starts to end up being something that you could trade.
with other individuals. Due to the fact that they can.
recognize it. And in aggregate, you can claim.
8% of individuals are going to default and all of that. Anyhow, this isn” t the. crux of it either. I have an entire video clip on home mortgage. backed safety and securities.
CDOs, collateralized debt. commitments, are stemmed from home mortgage backed safeties. And that ‘ s why they are called.
derivative tools. What CDOs are, you take these.
home mortgage backed safeties, they” re loans to some individuals in. some area of the nation,’or maybe they ‘ re diversified. across regions, after that you cut and dice them.So what you do
is, you cut.
them and right into tranches. And I enter into a lot a lot more.
detail on this in the other video clips. And you claim, this team.
Any kind of settlements immediately go
. And after that the following settlements.
most likely to this. And after that this top tranche, you.
could call it one of the most jr tranche, it” s occasionally called.
the equity tranche. This tranche, they” re going
to. obtain whatever is left over. If everyone pays, they obtain.
made whole, yet if a great deal of people default, all.
the defaults are mosting likely to strike this tranche. And to type of make up for the
. fact that this is the riskiest tranche, or essentially these.
individuals are handling every one of the danger, or essentially these.
And a tranche is just a.
layer, just simply slicePiece I put on” t want to utilize.
of the danger, he or she is going to get a.
greater yield. So while this person might be.
obtaining 6%, this individual could be obtaining 7% on their cash,.
maybe he or she gets 12% on their money.This is an additional intriguing. point.
Due to the fact that he or she is the.
most protected, the ratings company, which I” ll most likely.
do an additional entire series of video clips on. They might provide it.
a AAA rating. And possibly they offer this.
tranche, and I” m comprising points, but perhaps they.
offer it a AA score. This equity tranche, it.
will get a junkier ranking. And because it” s a junkier. ranking, no one is going to intend to purchase it. The individual who built.
this whole collateralized financial debt obligation and who offered.
these tranches to the general public markets.And this process incidentally is. called securitization
, due to the fact that you ‘ re developing safeties out. of these properties that you market to
everybody, maybe the Chinese,. or whoever, sovereign wide range funds. People just want to.
purchase these tranches. So the financial institutions need to figure.
out what to do with this tranche, which is the smelly.
equity tranche. So a lot of them simply maintained it.
on their annual report. They said, oh it looks like.
real estate never drops, we obtain a really high yield on this,.
We are going to maintain this tranche for ourselves. And that” s what these. domestic CDOs are, that are the core of the issue.But anyway, that was.
simply an apart. And so I intended to show you this.
because these aren” t simply any kind of residential CDOs. These aren” t the AAAs. They could be, a few of them.
Just for the’sake of. argument, allow ‘ s state that these are shoddy ones or stinky. So anyhow, that” s my example
. bank, the asset side of its balance sheet. Allow” s think of. its liabilities.
Well let ‘ s simply state it.
Allow ‘ s state it has finance. Let me actually throw.
some cash money in right here. Let ‘ s say it has a billion. dollars of cash.A bank constantly needs to.
Just in case a person asks for
. That ‘ s in the context of.
a commercial back. Anyhow, let ‘ s state it has. some cash just for immediate liquidity demands.
It owes someone $10 billion. It has financing B, it ‘ s another. And let ‘ s claim it has finance C. Loan C is, just to make it.
fascinating, allow” s state it ‘ s for$ 3 billion.
So in this instance today,. if we thought that all of these property values are correct.
and all of these liability values are appropriate, what.
is this financial institution” s equity? And in this instance,
it ‘ s a. publicly traded company, what is its shareholders ‘ equity? Allow ‘ s figure it out.
Well, its possessions are$ 21, $25,.
$ 26 billion in possessions. Its liabilities are.
Let” s state this is a publicly. Let ‘ s call this Yachovia Financial institution. Allow ‘ s call this Financial institution A. And let ‘ s state that Bank A has,.
claimed the number of shares are impressive? It has 500 million shares. Each share cost, or the.
publication worth of each share price, basically need to be.
this $3 billion of equity based on the annual report. Which” s why they call.
it book equity. Due to the fact that the annual report.
is often called the business” s books. So this is this $3 billion.
of equity separated by the variety of shares.So each share need to deserve,. allow ‘ s see,$
3 billion divided by 500 million, it must be $6.
of publication equity per share. Which” s something crucial.
to realize. Due to the fact that a great deal of people believe.
that if a stock price mosts likely to zero, that means that.
you” re obtaining the firm for nothing. No, that” s not real. That simply indicates that the.
equity deserves zero. And I simply understood that.
I” m out of time. I” m mosting likely to continue this.
in the following video clip. And we” ll discover this.
a little a lot more. See you soon.
Let ‘ s say I have
another. Let ‘ s claim it ‘ s
$ 10 billion. And in this situation,
it ‘ s a. publicly openly companyFirm what is its shareholders Investors equity? Allow ‘ s call this Financial institution A. And let ‘ s say that Financial institution A has,. No, that” s not true.