In the last video clip I just
discussed a personal annual report and what illiquidity
or what bankruptcy suggests. And if you understood that,
I believe we” re now prepared to tackle what an annual report of
a few of these potentially distressed banks might
resemble. And I” m not mosting likely to go into the details. But I” m going to give you the large picture and I think that” s basically what matters. So essentially, these financial institutions have a lot of assets. And I” m going to discuss financial institutions very usually now, both business and financial investment banks. In a future video clip I” ll tell you the distinction in between both and what regulation indicates and what utilize implies and all that Possibly I” ll discuss that.
Its possessions.$ 10 billion in AAA company bonds. And that ‘ s what these are.
Plus ultimately, they” re. Or maybe it” s something. The $10 is the rate of interest.
may be $9.9 billion. I” m comprising numbers. However that ‘ s not the issue here.
The core of the’problem. is that there ‘ s this smelly property right here.
Actually, let me draw a couple. extra possessions here simply to reveal you this is the stinkiest. of them all. So let ‘ s say I have
one more. group of assets. Let ‘ s claim it ‘ s
$ 10 billion. of industrial home mortgages.
This is, essentially, I lend. Once again, it ‘ s simply. And a funding to somebody else that.
I” ve offered is an asset. Due to the fact that they owe me passion and.
at some point they” re going to pay the cash back to me. And after that ultimately, and I” m not. being thorough here, I” m mosting likely to include the core.
of the problem here.Let me see
, I have 21 now,.
let me simply make it an also number. Allow” s claim that I have. $4 billion, so it all adds up to 25. I have $4 billion in.
residential CDOs, collateralized financial debt.
commitments. And I” ve done a video clip on CDOs,.
yet just to type of have review, CDOs are a derivative.
instrument. I know that sounds challenging,.
but that simply indicates they are stemmed from.
another tool. Which most likely is a sign that.
the stink is beginning to arise from this component of.
the balance sheet. What does it indicate, by-product? Well, you take a lot.
of mortgages. So I” ll simply attract.
it down right here. These are residence mortgages. Perhaps you take a million.
of them. You group them all together. And you wind up with a mortgage.
backed protection. All a home loan backed protection.
is a financing to a big group of individuals and you put them all.
with each other to ensure that you can kind of have the ability to statistically.
give it properties.Because if you offer to
any kind of one. individual, that ‘ s hard to trade. , if you lend to a bunch of.
.
people, it starts to end up being something that you could trade.
with other individuals. Because they can.
comprehend it. And in aggregate, you can claim.
8% of individuals are going to default and all of that. Anyhow, this isn” t the.
CDOs, collateralized financial obligation. obligations, are originated from home mortgage backed securities. Which ‘ s why they are called.
acquired instruments. What CDOs are, you take these.
home mortgage backed securities, they” re fundings to some individuals in. some area of the country,’or maybe they ‘ re diversified. throughout regions, then you slice and dice them.So what you do
is, you cut.
them and right into tranches. And I enter into a whole lot a lot more.
detail on this in the other videos. And you say, this team.
of the CDOs, they” ll obtain the initial payments. Any payments right away go
. to this very senior tranche. And afterwards the following settlements.
go to this set. And afterwards this leading tranche, you.
can call it one of the most younger tranche, it” s in some cases called.
This tranche, they” re going
to. If everyone pays, they obtain.
made whole, however if a great deal of individuals default, all.
the defaults are going to hit this tranche.And to kind of
make up for the
. reality that this is the riskiest tranche, or basically these.
individuals are handling all of the risk, or essentially these.
And a tranche is just a.
layer, just simply slicePiece I wear” t desire to use.
of the danger, this person is going to obtain a.
greater yield.So while he or she may be. obtaining 6%, he or she could be getting 7 %on their money,. possibly this individual obtains 12%
on their cash. This is an additional fascinating.
thing. Because this person is the.
most safe, the scores firm, which I” ll probably.
do another whole series of video clips on. They could provide it.
a AAA ranking. And perhaps they provide this.
tranche, and I” m comprising points, yet perhaps they.
provide it a AA score. However this equity tranche, it.
And due to the fact that it” s a junkier. The individual who built.
this entire collateralized financial debt commitment and that sold.
these tranches to the general public markets. And this procedure incidentally is.
called securitization, because you” re producing safeties out.
of these assets that you market to everybody, maybe the Chinese,.
or whoever, sovereign wide range funds. People only want to.
buy these tranches.So the banks
need to number.
out what to do with this tranche, which is the odiferous.
equity tranche. Most of them just maintained it.
on their equilibrium sheet. They claimed, 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.
simply an apart. Therefore I intended to show you this.
because these aren” t just any domestic CDOs. These aren” t the AAAs.They may be, several of them. However simply for the benefit of.
argument, allow” s claim that these are junky ones or foul-smelling. Anyway, that” s my instance
. financial institution, the asset side of its annual report. Allow” s think of. its obligations.
Well let ‘ s just state it.
has a lot of car loans. Let ‘ s state it has car loan. A for$ 10 billion. Let me really throw.
Let ‘ s claim it has a billion. A bank always has to.
keep some money. Just in instance someone requests
. their cash instantly. That ‘ s in the context of.
an industrial back. However anyhow, allow ‘ s say it has. some money simply for instant liquidity demands.
So the liability side. has funding A. It owes a person $10 billion. It has loan B, it ‘ s another. $10 billion. And let ‘ s state it has car loan C. Loan C is, just to make it.
interesting, let” s claim it ‘ s for$ 3 billion.
So in this example now,. , if we presumed that all of these possession values are appropriate.
.
and all of these obligation values are right, what.
is this bank” s equity? And in this instance,
it ‘ s a. openly traded company, what is its investors ‘ equity? Allow ‘ s
figure it out.Well, its possessions are $21, $25,.
$ 26 billion in assets. Its liabilities are.
$ 23 billion. $26 billion of possessions minus.
$ 23 billion of obligations means that we have $3 billion.
of equity, of shareholders’ ‘ equity. And simply to make it clear.
what this equity is. Allow” s state this is a publicly. traded firm. , if you possess a share of the.. firm, you’have a share
of this equity. Actually, allow ‘ s just. write it out. Allow ‘ s call this Yachovia Bank. Actually,’I shouldn ‘ t,. that ‘ s also close. Allow ‘ s call this Financial institution A. And allow ‘ s say that Financial institution A has,. let me compose something, let
‘ s claim that it
has. 500 million shares.If go into Yahoo Money, you.
said the number of shares are outstanding? It has 500 million shares. Each share cost, or the.
publication value of each share price, essentially must be.
this $3 billion of equity based upon the equilibrium sheet. Which” s why they call.
it book equity. Due to the fact that the annual report.
is often called the company” s publications. So this is this $3 billion.
of equity split by the variety of shares. So each share must deserve,.
allow” s see,$ 3 billion divided by 500 million, it must be $6.
of book equity per share.And that ‘ s
something vital.
to realize. Since a great deal of people assume.
that if a supply cost mosts likely to absolutely no, that implies that.
you” re getting the firm for nothing. No, that” s not real. That simply indicates that the.
equity deserves no. And I just realized that.
I” m out of time. I” m mosting likely to continue this.
in the next video. And we” ll explore this.
a little bit extra. See you soon.
That ‘ s not the concern here.
Let ‘ s claim it ‘ s
$ 10 billion. When again, it ‘ s just. And in this instance,
it ‘ s a. publicly traded company, what is its shareholders ‘ equity? Allow ‘ s call this Financial institution A. And let ‘ s state that Financial institution A has,.