Bailout 2: Book value발음듣기
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Bailout 2: Book value
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In the last video I just discussed a personal balance sheet and what illiquidity or what insolvency means.발음듣기
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And if you understood that, I think we're now ready to tackle what a balance sheet of some of these potentially troubled banks might look like.발음듣기
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And I'm going to talk about banks very generally right now, both commercial and investment banks.발음듣기
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In a future video I'll tell you the difference between the two and what regulation means and what leverage means and all that.발음듣기
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I'm just throwing that in there just as filler just to show you that there could be a lot of different types of assets in there.발음듣기
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So $1 billion of government bonds, that's an asset that says the government owes me a billion dollars.발음듣기
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Similarly, corporate bonds, that's saying that these corporations, wherever these bonds are issued by, they owe me collectively $10 billion and in the meantime they're going to pay me interest. So that's all it is.발음듣기
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So the $10 is the interest payments plus what they're going to pay you back, which might be $9.9 billion.발음듣기
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Actually, let me draw a couple more assets here just to show you this is the stinkiest of them all.발음듣기
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So this is, essentially, I lend money to companies to buy land or develop land or buy buildings that they're going to go rent out to other people.발음듣기
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And then finally, and I'm not being comprehensive here, I'm going to throw in the crux of the issue here.발음듣기
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And I've done a video on CDOs, but just to kind of have review, CDOs are a derivative instrument.발음듣기
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I know that sounds complicated, but that just means they are derived from another instrument.발음듣기
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Which probably is a sign that the stink is starting to emerge from this part of the balance sheet.발음듣기
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All a mortgage backed security is a loan to a big group of people and you put them all together so that you can kind of be able to statistically give it properties.발음듣기
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If you lend to a bunch of people, it starts to become something that you could trade with other people.발음듣기
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What CDOs are, you take these mortgage backed securities, they're loans to some people in some region of the country, or maybe they're diversified across regions, then you slice and dice them.발음듣기
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And then this top tranche, you could call it the most junior tranche, it's sometimes called the equity tranche.발음듣기
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So if everyone pays, they get made whole, but if a lot of people default, all the defaults are going to hit this tranche.발음듣기
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And to kind of make up for the fact that this is the riskiest tranche, or essentially these people are taking on all of the risk, or essentially these tranches are giving all the risk to this tranche.발음듣기
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So while this person might be getting 6%, this person might be getting 7% on their money, maybe this person gets 12% on their money.발음듣기
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Because this person is the most secure, the ratings agency, which I'll probably do another whole series of videos on.발음듣기
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And maybe they give this tranche, and I'm making up things, but maybe they give it a AA rating.발음듣기
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So the person who constructed this whole collateralized debt obligation and who sold these tranches to the public markets.발음듣기
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And this process by the way is called securitization, because you're creating securities out of these assets that you sell to everyone, maybe the Chinese, or whoever, sovereign wealth funds.발음듣기
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So the banks have to figure out what to do with this tranche, which is the stinky equity tranche.발음듣기
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They said, oh it looks like housing never goes down, we get a really high yield on this, so we are going to keep this tranche for ourselves.발음듣기
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So in this example right now, if we assumed that all of these asset values are correct and all of these liability values are correct, what is this bank's equity?발음듣기
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So $26 billion of assets minus $23 billion of liabilities means that we have $3 billion of equity, of shareholders' equity.발음듣기
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And let's say that Bank A has, let me make up something, let's say that it has 500 million shares.발음듣기
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So, each share price, or the book value of each share price, essentially should be this $3 billion of equity based on the balance sheet.발음듣기
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So each share should be worth, let's see, $3 billion divided by 500 million, it should be $6 of book equity per share.발음듣기
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Because a lot of people think that if a stock price goes to zero, that means that you're getting the company for nothing.발음듣기
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