In the last video clip I just
gone over a personal annual report and also what illiquidity
or what bankruptcy suggests. And also if you understood that,
I think we” re now prepared to tackle what an annual report of
some of these possibly struggling banks could
Maybe I” ll touch on that.
$10 billion in AAA corporate bonds. As well as all a possession is, is. And also that ‘ s what these are.
These bonds have some future financial value. They have the value of the interest payments. Plus eventually, they ‘ re
. going to pay you the $10 billion back. Or maybe it” s something.
much less than that.So the $10 is the passion.
settlements plus what they” re mosting likely to pay you back, which.
could be $9.9 billion. I” m comprising numbers. That ‘ s not the problem below.
The core of the’concern. is that there ‘ s this smelly possession right here.
Really, allow me attract a couple. Allow ‘ s claim I have
anotherAn additional Allow ‘ s say it ‘ s
$ 10 billion.
This is, basically, I offer. money to business to acquire land or establish land or purchase. buildings that they” re mosting likely to go rent to. other individuals. So once more, it ‘ s just. a financing to someone else.And a financing to somebody else that. I ‘ ve offered is an asset. Since they owe me interest and. ultimately they ‘ re mosting likely to pay the cash back to me. And after that ultimately, and I ‘ m not. being thorough here, I
‘ m going to toss in the crux.
of the problem right here. Allow me see, I have 21 right now,.
let me just make it an also number. Let” s claim that I have. $4 billion, so it all amounts to 25. I have $4 billion in.
domestic CDOs, collateralized financial debt.
obligations. As well as I” ve done a video on CDOs,.
Simply to kind of have review, CDOs are a derivative.
tool. I recognize that seems challenging,.
That just implies they are obtained from.
an additional tool. Which probably is a sign that.
the stink is beginning to arise from this part of.
the annual report. What does it suggest, by-product? Well, you take a bunch.
of home loans. I” ll simply draw.
it down below. These are home mortgages. Perhaps you take a million.
of them. You group them all with each other. As well as you wind up with a home mortgage.
backed safety and security. All a home mortgage backed safety.
is a lending to a large team of people and you placed them all.
together to make sure that you can sort of have the ability to statistically.
offer it properties.Because if you lend to
any type of one. individual, that ‘ s difficult to trade. , if you lend to a bunch of.
.
individuals, it starts to become something that you can trade.
with other individuals. Because they can.
recognize it. And in aggregate, you might say.
8% of individuals are going to default and also all of that. Anyway, this isn” t the.
CDOs, collateralized financial obligation. responsibilities, are derived from home mortgage backed protections. As well as that ‘ s why they are called.
acquired instruments. What CDOs are, you take these.
home loan backed securities, they” re car loans to some people in. some area of the nation,’or maybe they ‘ re diversified. across regions, then you cut and dice them.So what you do
is, you slice.
them as well as into tranches. And also I enter into a lot more.
detail on this in the other video clips. And also you say, this group.
of the CDOs, they” ll get the very first payments. Any kind of payments instantly go
. to this very elderly tranche. And then the following repayments.
most likely to this one. And also after that this top tranche, you.
might call it the most younger tranche, it” s sometimes called.
the equity tranche. This tranche, they” re going
to. obtain whatever is left over. So if everyone pays, they obtain.
made whole, but if a great deal of individuals default, all.
the defaults are going to strike this tranche. And to type of make up for the
. truth that this is the riskiest tranche, or essentially these.
individuals are handling every one of the danger, or basically these.
tranches are providing all the risk to this tranche.And a tranche is
simply a. layer, just a piece. I wear ‘ t wish to utilize. as well elegant words.
Yet in return for taking on all. of the threat, this individual is going to obtain a. greater yield.
So while he or she may be.
obtaining 6%, this person might be obtaining 7% on their money,.
possibly this person obtains 12% on their money. This is another interesting.
point. Due to the fact that he or she is the.
most secure, the ratings agency, which I” ll possibly.
do an additional whole series of video clips on. They could give it.
a AAA ranking. And perhaps they provide this.
tranche, and also I” m making up points, but perhaps they.
give it a AA score. This equity tranche, it.
will certainly get a junkier score. And also since it” s a junkier. ranking, no person is going to intend to purchase it. The person that built.
this whole collateralized debt responsibility and who offered.
these tranches to the public markets.And this procedure incidentally is. called securitization
, due to the fact that you ‘ re developing protections out. of these properties that you sell to
everybody, perhaps the Chinese,. or whoever, sovereign wealth funds. People just want to.
buy these tranches. So the banks have to number.
out what to do with this tranche, which is the stinky.
equity tranche. Many of them just kept it.
on their balance sheet. They said, oh it resembles.
real estate never ever drops, we obtain an actually high return on this,.
so we are going to maintain this tranche for ourselves. And that” s what these. residential CDOs are, that are the core of the concern. Yet anyway, that was.
simply an aside. Therefore I wished to reveal you this.
because these aren” t just any type of domestic CDOs. These aren” t the AAAs. They could be, a few of them.
Let” s believe about.
Well allow ‘ s simply say it.
Allow ‘ s claim it has loan. Let me actually throw.
some cash in below. Let ‘ s say it has a billion. dollars of money. A bank constantly needs to.
Just in instance somebody asks for
. That ‘ s in the context of.
It owes somebody $10 billion. It has funding B, it” s another.
$ 10 billion. And allow” s state it has loan C. Funding C is, simply to make it.
fascinating, allow” s state it ‘ s for$ 3 billion.
In this example right currently,. , if we thought that all of these property values are proper.
.
and also all of these liability worths are appropriate, what.
is this financial institution” s equity? And also in this situation,
it ‘ s a. openly traded firm, what is its investors ‘ equity? Allow ‘ s figure it out.
Well, its properties are$ 21, $25,.
$ 26 billion in possessions. Its liabilities are.
Let” s claim this is a publicly. Let ‘ s call this Yachovia Financial institution. Let ‘ s call this Bank A. And allow ‘ s state that Bank A has,.
You if go right into Yahoo Money. said exactly how many shares are impressive? It has 500 million shares.So, each share rate, or the. publication value of each share price, essentially ought to be. this $3 billion of equity based on the annual report. As well as that ‘ s why they call. it’publication equity.
Since the annual report. is typically called the
firm ‘ s publications. This is this$ 3 billion. of equity split by the number of shares. So each share needs to be worth,. allow ‘ s see, $3 billion separated
by 500 million, it must be $6. of publication equity per share.
Which ‘ s something vital. to understand.
Since a great deal of people assume.
that if a stock price goes to absolutely no, that suggests that.
you” re obtaining the firm for absolutely nothing. No, that” s not true. That simply suggests that the.
equity is worth no. And I simply understood that.
I” m out of time. I” m mosting likely to proceed this.
in the following video clip. And we” ll explore this.
a bit extra. See you soon.
And that ‘ s what these are.
That ‘ s not the issue here.
Allow ‘ s claim it ‘ s
$ 10 billion. As well as in this instance,
it ‘ s a. publicly openly companyFirm what is its shareholders ‘ equity? Allow ‘ s call this Financial institution A. And also let ‘ s state that Financial institution A has,.