Showing posts with label Interest rate. Show all posts
Showing posts with label Interest rate. Show all posts

Friday, July 13, 2012

A Simple Explanation of Securitization





This was originally written in terms of South African Rand, I've changed Rand into Dollars, and various British spellings for sake of clarity to American readers. I apologize for the lack of attribution, I do not know who the original author is. -AK

A Simple Explanation of Securitization

It is the simple basic task of taking a whole pile of simple single things, joining them all together and calling the collective of them all a new thing, and then selling that thing.

In the banking sector its the taking of a bunch of loans, bundling them together, calling a group of 10 loans a 'structured investment vehicle', and then selling the 'structured investment vehicle' to someone else.

In the Stock Exchange it just taking a group of separate stocks, bundling them together, calling them a unit trust, and selling a unit trust.

In the insurance industry its just taking a bunch of insurance policies, grouping them all together, calling them a re-insurance group, and selling the re-insurance group.

The underlying common principle behind every one of these acts is that the new thing that is formed is not an actual physical thing, and therefore somebody is not paying for an actual physical thing and that is where the whole monetary system collapses.

Its the whole 'widgets in your hand' story.

If you have a factory making widgets and it makes 10 widgets and sells them for $1 each, then the factory has received $10 rand and somebody else has 10 widgets. If that someone else then bunches them together into a 'box of widgets' and sells "A box of widgets" to someone else for $15, then someone else has paid $15 for 10 widgets THAT ARE ONLY WORTH $10.

If that someone else ever tries to sell one of those widgets he has to ask $1.50 for it just to break even, but no-one will ever pay him $1.50 for it because they can buy it from the widget factory for $1.00 already, so at some stage someone will always end up sitting with something that he has paid too much money for that he cannot sell to anyone. And if that someone is a bank, who said to 10 customers give me $1.50 each so that we can buy this 'box of 10 widgets' for$R15, and therefore the bank didn't use their own money, then the bank just turns round to those 10 guys and just says "sorry I've lost your money its not my problem its you who lose out, I'm alright jack because I just get paid a salary for going shopping for "boxes of widgets."  And those 10 customers who gave the bank their money are left sitting with a widget each that they have paid $1.50 for that anyone else can buy at the widget factory for only $1.00.

Wednesday, February 29, 2012

USA Conducting Criminal Probe of LIBOR Rate Setting by Banks


The LIBOR rate underpins loans to consumers, companies derivatives,  interest-rate swaps, floating- and fixed-rate interest payments. 
(Reuters) - The Justice Department is conducting a criminal probe into whether the world's biggest banks manipulated a global benchmark rate that is at the heart of a wide range of loans and derivatives, from trillions of dollars of mortgages and bonds to interest rate swaps, a person familiar with the matter said.