These documents effectively "guarantee", that the goods were "sold" and are "en route" to the Buyer. The Buyer is secure to the fact, that he has "bought" the items or services and the Seller is secure to the fact, that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will "guarantee" payment if he complies with the terms of the Letter of Credit.
This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear, that the issuing bank will not "honour" its obligation, providing, that the bank is of an acceptable size in respect of the amount of the Letter of credit issued.
The Letter of Credit is issued in a manner, which has been recognised by the Bank for Intemational Settlements (BIS) and the International Chamber of Commerce (ICC), and is issued subject to the Uniform Customs and Practice for Documentary Credits, ICC Publications No. 500, Revision 1993.
This type of Instrument is normally called a Documentary Letter of Credit ("DLC") and is always based on a commercial transaction with an underlying sale of goods or services between the applicant (Buyer) and the beneficiary (Seller).
During the evolution of the commercial related Letters of Credit, a number of institutions began to issue Standby Letters of Credit ("SLC").These credit instruments were effectively a surety or guarantee, that is, when the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank, that issued the SLC, would take over the liability and pay the beneficiary (Seller) on behalf of the Buyer.
In the United States, banks are prohibited by regulation from providing formal guarantees and instead offer these Instruments as a financial equivalent of a guarantee.
A conventional Standby Letter of Credit (SLC), is an irrevocable obligation in the form of a Letter of Credit, issued by a bank on behalf of its customer. If the bank's customer fails to meet its obligations out of the terms and conditions of its contractual agreement with a third party, the SLC issuing bank is obligated to pay the third party, (as stipulated in the terms of the SLC) on behalf of its customer. A SLC can be primary (drawn on the bank) or secondary (available in the event of default by the customer to pay the underlying obligation). (These are passages of text out of "Recent Innovations in International Banking - April 1986", prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.)
As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held "off balance" sheet, in respect to a bank's accounting principles.
During the period when SLC's were being evolved and used, the banks and their customers began to see the profitable situation created by the "off balance sheet" positioning of the instruments. In real terms, the holding of the Standby Letters of Credit was attributed to a "contingent" liability and, as such, was held off the balance sheet therefore in an unregulated area.
Due to constraints, being imposed on the banks by regulatory bodies and government control, the use of these "off balance sheet" items as a financial tool to effectively adjust the capital asset ratios of the banks, was seen to be a prudent and profitable method of staying within the regulations and yet to achieve the needed capital position.
At the request of central bank Governors of the Group of Ten Countries, a Study Group was established early in 1985, to examine recent innovations in, or affecting the conduct of international banking.
The Study group carried out extensive discussions with international commercial and investment banks, that are most active in the market for the main new financial instruments. The purposes would both, improve central bank knowledge of these instruments and, their markets, as the situation existed in the second half of 1985, and to provide a foundation for considering their implications for the stability and functioning of international financial institutions and markets, for monetary policy, and for banks financial reporting and statistical reporting of international financial developments. Alongside this work, the Basle Supervisors Committee has undertaken a study of the prudential aspects of banking innovations and a report on the management of banks' off balance sheet exposure and their supervisory implications was published by that Committee in March 1986.
The growth of these instruments can be attributed generally to the same factors affecting the trend towards forward securitisation, with two additional influences.
Firstly, bankers have been attracted to off balance sheet business because of constraints imposed on their balance sheets, notably regulatory pressure to improve capital ratios, and because they offer a way to improve the rate of return earned on assets.
Secondly, for similar reasons, banks have sought ways to hedge interest rate risk without inflating balance sheets, as would occur with the use of the inter-bank market. (These are passages of text from "Recent Innovations in International Banking - April 1986" prepared by a Study group established by the Central Banks of the Group of Ten Countries and published by the Bank of International Settlements.)
Why should such an instrument be issued?
To understand the logic behind the actual mechanics of the operation, it is necessary to look in the way, in which banks usually operate. The banks' credit rating and status within society is judged by the "size" of the bank and its capital/assets ratio, etc. The bank lists its assets; at banks and cash position, investments, loans & discounts, etc., against its liabilities; deposits, debits, capital, reserves, surplus and profits and the liabilities showing a ratio of liquidity. Each jurisdiction of the world banking system has different minimum capital adequacy requirements and, depending on the status of the individual bank, the ratio over assets which the bank can effectively trade, can be a high as twenty (20) times the minimum capital requirements.
In simple terms, for every US$100 held in capital, the bank can lend or obligate at least US$1,000 to clients or institutions against the cash held on hand.
The money placed on deposit by the bank's customers, is dealt with, in a different manner to the actual cash reserves or assets of the bank.
When the bank disposes of an asset, the resultant capital is able to be "leveraged"; using the bank's multiplier ratio, based or the minimum capital adequacy requirements.
To bring all this into focus and identify the application of these points to the matter of question, we will now make the following overview:
A bank receives an indication from a client, that this client is willing to "purchase" from the bank a one year obligation, zero coupon, effectively unsecured by any tangible asset of the bank, the credit instrument is based solely on the "full faith and credit worthiness of the bank".
Obviously the format of the credit instrument must be one which is acceptable in any jurisdiction and freely transferable, able to be settled at maturity in simple terms and without any restrictions other than its maturity conditions. The instrument which immediately comes to mind is a Documentary Letter of Credit or a Standby Letter of Credit. However, as the issue is not trade or transaction related, most of the terms and conditions do not apply. The most simple straight forward version of a clean credit obligation, sometimes referred to as the "London Short Form" of a Letter of Credit is perfect. The text therein, is specific and does not contain any restrictions, except the time when the credit is valid and can be presented for payment. It is in real terms, a time payment instrument, due on or after one year and one day off the date of issue, usually valid for a period of fifteen days from date of maturity.
Standby Letters of Credit serve also as substitutes for simple or first demand guarantees. In practice, the Standby Letter of Credit functions almost identical as a first demand guarantee. Under both, the beneficiary's claim is made payable on demand and without independent evidence of its validity. The two devices are both security devices, issued in transactions not directly involving the sale of goods, and they create the same type of problems. (This is a passage of text from a paper entitled "Standby Letters of Credit: Does the Risk outweigh the Benefits?", published in the 1988 Columbia Business Law Review.)
The blank piece of paper, which is technically an asset of the bank valued at say 2 cents, is now "issued" and the text added in say "ten million USDollars face value", signed and sealed by the authorised bank officers. The question now is, "what is this piece of paper worth"? 15 it worth 2 cents or US$10million, bearing in mind, that it is completely unsecured by any tangible, that are real assets? In reality, it has a "perceived value of US$ 10 million" in 366 days time, based upon the "full faith and credit of the bank".
The next question, which now must be asked, is "will the bank honour its obligation when the bank note or credit is presented"? This will, of course, depend upon the reputation and credit worthiness of the issuer.
Having now arrived at the "belief" that the "value" is US$10million in 366 days time, the "Buyer" must negotiate a price or discount, which is acceptable to the bank, to cause it to "sell" the credit.
To arrive at a sale price, one has to determine the accounting ramifications of the sale. The liability is US$10million, payable "next year", and it is important to note, that the reason for the one year and one day period, is to take the liability into the next financial year, no matter when the credit is issued. The liability is held "off balance" sheet and is technically a contingent liability, as it is not based upon any asset. On the other side of the model, the bank is to receive cash from the "sale of an asset" and this cash is classified as capital assets, which in turn are subject to the ratio multiplier of, e.g. ten (10) times.
So, in real terms, the issuing bank is to receive say 80% of the face value upon sale, which is US$8million cash on hand against a forward liability of US$ ten (10) million in one year and one day's time. The actual contingent liability, being US$ two (2) million. The cash received, US$ eight (8) million, allows the bank to lend ten (10) times this amount under the capital adequacy rules, so a sum of US$ eighty (80) million is feasible to be lent on balance sheet, against normal securities, such as e.g. real estate, etc. If the interest rate actually is, e.g. eight per cent per annum (8%p.a.) and the bars are short term, e.g. one (1) year, to coincide with the liability, the income and return (without taking into account the principal sums loaned) from interest alone is equal to US$ six point four million (6.4 M).
At the end of the year, the credit is due for payment against the cash on hand and the interest received, in other words, US$ eight (8) million plus US$ six point four (6.4) million, total of US$ fourteen point four (14.4) million, less the US$ ten (10) million, shows a gross profit of US$ four point four (4.4) million or forty-four per cent (44%), plus the value of the bar amounts (principal).
The reason for issuing the credit is now obvious, the resultant yield is well over the given discount and the bank is in a profitable position without risk. They have achieved a greater yield on assets, compared to any conventional method.
There is a greater underlying reason, which emerges, when an overview of the complete supply system is taken. To simplify the explanation, a flow chart has been drawn, that shows the roles of each entity and the details which are given by an individual, who represented the information as direct from the "Federal Pool".
To understand the system, one must take a view, that is not supported by any physical evidence, however, one, that is indicated by the actual occurrences of events.
As most people are not aware, the Federal Reserve Bank is not a Federal Government entity or body, it is in fact a private institution. It may well operate in a quasi-government manner, but it is still under the control of private individuals.
If one assumes, that the money supply requirements for a specific period shows a need to print, i.e. one hundred (100) million USDollar of new issue currency, and the US-Treasury is required to issue same, the impact of the release of the "new" Dollars in terms of inflation and market effect is quite strong.
If, however, the US Treasury through the Federal Reserve Bank was asked to forward "sell" those Dollars for "cash", the amount of "new'" Dollars today is reduced by whatever amount is being yielded. If we take the case in question, suppose the Federal Reserve Bank "contracted" with a major world bank to "issue" Dollar denominated one year paper in the amount of one hundred (100) million USDoIIar and "sold" this paper through a secure network of entities so that the "sale" did not appear "on market" and that the "sale" was at a discount of say eighty per cent (80%) off face value. The cash yield back to the US Treasury would be eighty (80million USDollar against a Dollar credit of same amount to the issuing bank, with the bank taking a one hundred (100) million USDoIIar liability position at maturity date.
The US Treasury has now received eighty (80) million USDollar in cash back from the market system and need to print only twenty (20) million USDollar to meet its current obligation to the money supply. This is twenty per cent (20%) of the original amount and as such, its impact on the system is greatly reduced. Of course, if the amount "sold" is greater, than the money supply requirements, the US Treasury has a reduction, which allows interest rates to be maintained and controlled.
The long term position is not affected, as the bank has taken-on the liability, not the US Government, the Dollar credit is classed, as "cash" for the purpose of capital adequacy and is not required to be physically "printed" as such, a simple ledger entry is sufficient.
The off market issue and sale of bank credit instruments is controlled by simple supply and demand techniques, and all USDollar denominated paper is "issued" through the Federal Reserve Bank.
To do this, the Federal Reserve Bank enters into an understanding with the U.S. Treasury and the top 100 world banks, excluding state operated banks, American banks to some degree, with the exception of Morgan Guaranty, Third World Banks and any other banks, which may have a credit or capital problem.
Each bank agrees to allow the Federal Reserve Bank to issue on its behalf, a specific amount of USDollar denominated paper or the alternative applies, where the Federal Reserve Bank allocates a specific amount to each bank. The details are nowhere published and no physical evidence is made. In any case, the result is, that a specific volume is available and the Federal Reserve Bank is now able to release it on demand.
The various bank paper is "pooled" together, to give the total position for each year and it is from the "Federal Pool", that the supply contracts are issued. The existence of the "Federal Pool" is not confirmed. However, various documents, including GNMA transfer documents contain a "Pool Number".
The "Grand Master Collateral Contracts", which one hears about, are effectively issued by the Federal Pool. It is indicated, that these are usually issued in several billion USDollar units, with each increment being five hundred (500) million USDollar. In other words; the minimum order with them is five hundred (500) million USDollar, in one hundred (100) million increments (referred to as "tranches". It has been indicated, that the "cost" or deposit for one of these contracts is five hundred (500) million USDollar cash, and more. This obviously reduces the number of entities, who are able to participate.
One point, which should be raised at this time; although the market place and issue of these instruments "unregulated", the banks are effectively controlled by the B.I.S. and self imposed rules.
Otherwise, the whole system would be subject to manipulation and abuse by a bank or group of banks, entering into a form of "insider trading", this would be detrimental to the system and the long term effect of same.
The entities, who are the holders of the "Grand Master Collateral Contracts" "sell" "Master Collateral Contracts" to a larger range of entities. These contracts are usually issued for a minimum of five hundred (500) million USDollar. Costs or guarantee deposits for these contracts are indicated at one hundred (100) million USDollar. A standard order with them, is for one hundred (100) million USDollar. The holders thereof are commonly referred to as "cutting houses", as they usually reduce the size of the denomination from one hundred (100) down to as little ten (10) million USDollar. They, in fact, "cut down the size of the not" hence "cutting houses".
The "cutting houses" then in turn "sell""delivery commitments" to "wholesale brokers", the cost of such is indicated at approximately two point five (2.5) ten (10) million USDollar each in cash.
In both cases, the cash payment or deposit is potentially exposed to be called upon, in case an order is not met or paid for in time, and if called upon, the contract or commitment holder will lose his contract and be excluded of the system, to prevent any new contract position. The rules are very simple, cash payment at all times for all notes ordered, this is a cash driven industry not credit.
It is assumed, that each "cutting house" would normally issue, i.e. fifty (50) delivery commitments or "sub master contracts" at two point five (2.5) million USDollar each. Therefore, the deposit of one hundred (100) million USDollar of a "cutting house" is thus covered, plus a certain amount of reserve. This is very similar to the normal activities of post betting, where the odds are "laid off" to restrict the exposure.
The "wholesale brokers" are responsible to feed the volume of instruments to the clients or customers who are at the retail or retail distribution level and, subsequently, to the secondary market.
As shown on the flow chart on page 10 hereinafter, the system is very similar to a car import / distributor network.
The issuing banks can be identified as the manufacturers of this product which in this case, is the bank paper. The Federal Reserve Bank can be identified as the importer (80%). The Federal Pool can be identified as the storage depot (82.5%) for all the product prior to sale and are responsible for the bulk release to the global distributors. The cutting house can be identified as the continental distributors (85%) and are responsible for the release of units to the regional distributors, the wholesale brokers, that can be identified as the regional wholesalers (87.5%), who release units on demand to the retail showrooms (89%) who deliver the units to the public buyers. The public buyer exists in the secondary market (92-94%), such as e.g. pension funds, mutual funds, Middle East (Muslim) Clients' banks (to purchase on the secondary market, is not classed as contrary to the rule). These buyers hold these instruments until their maturity and gain the preferred yield, e.g. ten per cent per annum (10%p.a.), from the discount off the face value (10%) from the issuing banks.
In conformity with the scheme aforementioned, which was valid until the early 1990's, lots of paper were sold. However, more severe rules to proceeding and minimum purchase amounts were adopted and ratified by the Federal Reserve Governors and Chief Executives of the top one hundred banks in the world. Purchase amounts were to increase steadily from ten to twenty-five, to fifty and to one hundred Million USDollars over a period of time of two years. This and the tighter proceeding rules, eliminated a lot of talks on the street. Plus, the wholesale brokers are thereby no more requested and the contact with potential clients is now more often made by the cutting houses. The primary clients changed their seats with the big boys; as with the minimum purchase amount being of one hundred (100) Million USDollars.
Within the years of 1992 to 1995, several wealthy individuals caused or backed the formation of investment trust companies. These trust companies contracted with prospective clients to manage their moneys under certain parameters. The top bracket of these companies accepted and accepts still by today clients, that want to complete a placement of a minimum of ten (10) Million USDollars or more.
The largest problem, regarding this matter, is the contradictory and somewhat unusual attitude of the banks, when an attempt is made, to obtain any definitive documents or undertakings, the very existence of these instruments is denied by senior level bank officials and yet, within the same banking institution a most definite purchase interest for such instruments has been found.
Also, the regulatory position of these instruments creates a major problem for any regulated entity to participate. How can an unregulated item be handled by a regulated body.
Based on all the information available, it may be assumed, that the main reason for most of the mystery and misinformation is quite simple; this is a very sophisticated form of financial engineering, it makes normal accounting principles a complete mockery and basically exposes the banking system for what it is.
In reality, the whole system is flawed and is one which no one really understands. We based our daily life on a "paper house". Nothing has really changed since the very first "money" transactions or even earlier; "I'll swap you two shells for your XYZ goods". The whole monetary system is based on "perceived value"; including currencies, credit and day to day life.
A bank note, issued by the Bank of England, is in reality an unsecured "Promissory Note", payable on demand. Its face value is its perceived value, however, if the word demand were changed to a future date of i.e. one year and one day, the perceived value has now been reduced to cover the "cost of money" for the period.
If we were to discuss the value of one single fifty pound note, the "value" today would be approximately forty-five pounds. However, if we wished to "discount the present value" of several million of these notes, it is reasonable to expect, that the "wholesale" buyer, would be expected a better "price". The note, however, still has a "perceived value" of fifty pounds and a present value of approximately forty-five pounds.
Very little "cash" is used in the day to day operation of business, mostly it is in the form of ledger or "paper" entries. Even when a private bank account is used, over ninety per cent of all the transactions are "paper" driven not cash. A cheque is a "Promissory Note", either unsecured or guaranteed ("availed") by the bank, up to a certain limit (cheque guarantee card). If a bank draft is "purchased", the draft is still unsecured, but is perceived to be a one hundred per cent guarantee of payment.
The current trend towards "plastic" and "electronic banking" is an indication of the future and is based purely upon the amount of business, which takes place daily. The banks can no longer cope with "physical" "paper" and need to reduce each transaction, to a simple ledger entry. The end result is less "money" and more "business".
The use of these instruments, as a medium for short term investment is obvious, if one takes the differential between "invoice" price and the "present value" and moves a client into and out of the instruments on a regular basis, the effective yield is substantial.
The downside risk is nil, if one retains strict protocol over the potential purchases, with a worse case scenario of the fact, that a client would either NOT transact and therefore not be at risk. If an instrument had been purchased and for whatever reason, could not be onwards "sold or discounted", the client would automatically achieve a substantial yield based on the maturity value against the "invoice price".
The preceding document is a summary of the circumstances and evidence, which has been presented and are based purely on the same, as received, no representation is made or implied as to the legal position of the information contained therein or for any resultant losses, if so incurred as a result of the use of any of the referred to information.
Any potential Financier / Investor or Participant, is advised to seek independent legal and or financial advice, before making any decisions regarding this type of investment.
Millennium Boutique is an area of interest for investors, brokers or anyone who might be looking for more insight into the workings of Cash Flow. As time goes on this will develop into more of a 'forum' for Boutique type products both for lending and investment.
Firstly, let me state that there is a very large community of cash in this country looking for places to reside for a while and earn a very good return.
Of course one of the most secure investments is in real property. Whether it is residential, commercial, bare land, or anything in between, most investors like 'Sticks and Bricks'.
At our Commercial Real Estate Loan Page we tried to give you a general snap shot of what our lenders like. However here at the "Boutique" we have lenders that will look at the 'other ' commercial stuff. Like deals under $2 Million. Mixed use properties that don't fall into 'lending guidelines'. Difficult or distressed deals. We have great sources to place these loans with. To get a quote please go to our Commercial Loan Request Worksheet and tell us about your deal.
Hard Money
Hard Money is an area of finance that has it's place. If you know how to use Hard Money, it can make your deal sing. The challenge is that most people get the impression that 'Guido' is always looking over their shoulder waiting for them to slip up so he can come after them for the payment of cash or whatever. And this couldn't be farther from the truth.
Hard Money lenders that we deal with are respected members of the business community. These entrepreneurs saw the need for a minimal underwriting, low paperwork loan. They will usually lend in situations where it 'makes sense' and where there is a definite exit plan.
Typically the points and fees are incorporated in the loan. The payments are interest only typically for a term of 1 to 10 years depending on the project. Each deal is priced on it's own merits, so a broad brush generalization of Hard Money loans won't fit.
To find out more about our Hard Money programs and/or to submit a request for funding , please visit our Commercial Loan Request Worksheet.
High Yield Program
The following information is for "information purposes only"and is not to be construed as investment advise or typical results. Any investment carries with it inherent risk. Our Agent will take on clients on a "best efforts" basis and therefore the actual individual results will differ from the information presented herein. Millennium Funding makes no representations as to the veracity of the information contained herein.
Many people have heard about "High Yield" investment programs and various iterations of the like. Most of these programs either require the 'Investor', you with the cash, to relinquish control of your cash in some form, or have the cash funneled through some offshore bank.
While some of these programs are legitimate, others stall out.
The truth is that "High Yield"programs are real. They really are more correctly termed 'Capitol Enhancement Programs'. The challenge is finding a program that has all the markings of a legitimate program, and is attainable for you as an investor to invest in. You should be looking for the following:
The answer is:
If you are satisfied with the security of the program
so far (of course you will have questions and you will get each one answered
), then the next thing you need to determine is; How long can you keep
your funds in the program before you need them released? If you can keep
your funds in the program for the full term of 40 - 44 weeks, you can receive
outstanding yields.
One question keeps coming back; 'If this is so good, then why haven't I heard or seen more about it'?
And the answer is; 'The Program / Agent is prohibited from soliciting'. Individuals who are interested must make a request from the Director/Agent to discuss a business deal with the Agent and sign a statement that they were not solicited. This alone tends to keep these programs out of the main stream.
Another question that is frequently asked is 'How does it work'? Let me give you an example and then try to explain the history.
Step 1
The Principal account holder signs a letter of engagement
making an inquiry in reference to a "Business Deal" the "Capitol Enhancement
Opportunity".
Step 2
Principal opens an account with a major US Bank: e.g.
Bank of America, Citi, Chase etc. Principal may use own account if in a
qualifying bank.
Step 3
1) The Principal and the Agent sign a Fee Agreement.
2) The Principal provides the Agent with a letter of introduction to the
Principal's bank. 3) The Principal signs an agreement granting the Agent
permission to "screen" the Principal's account.
Step 4
Once the account has been established and the necessary
agreements put in place, the returns will begin. The Principal may open
up a second account (Sole Signature) to place the returns into, or let
the returns accumulate by which the returns will increase. The following
is an example of the returns:
## Based upon the principal amount of $ 10 Million, there may be an immediate return within 72 hours of 50 - 70 %. This is for week 1 only. This will be determined at the time the transaction in initiated and is on a best efforts basis.
The amounts required under these programs are block's of $ 100 Million to $ 500 Million USD, but these can be broken down into smaller Blocks of $ 10 Million. These can also be syndicated if need be and must be cash.
Some History
This program has been around since the late 1940's. The
Bretton Woods Convention stipulated that a new international monetary system
must be established headed by a strong international banking system and
a common world currency not tied to the gold standard. Thus the inception
of the International Monetary Fund, the World Bank, and the Bank of International
Settlements.
By 1961 the Bretton Woods Convention plans were exceeding
beyond every expectation. This created a new problem. The United States
Currency was still tied to the Gold Standard. With American dollars being
used to rebuild Europe after the second world war, it left the US with
dollars in short supply. The gold supply was dwindling also. A system was
needed to draw US dollars back into circulation through the private banking
sector. An old idea becomes new again.
A system was found in the centuries old frame work of
Import/Export finance. This system was based on the world's banks extending
the use of forfeit finance not backed by gold, but rather by their own
good faith and credit. These "off balance sheet" transactions provided
a plethora of funds for institutional and governmental projects.
Very little cash is used in the day to day operation of business. Most business is done in the form of ledger or "paper" entries. Transactions for private bank accounts are "paper" driven not cash. If a bank draft is purchased, the draft is still unsecured, but perceived to be a 100% guarantee for payment until cashed.
The current trend has increased the use of plastic and electronic banking. Banks use a simple ledger entry that results in less paper and more business.
In the case of large bank transactions the issuance of a bank note is in reality an unsecured "Promissory Note" payable on demand. The face value is the perceived value, however, if the word "demand" were changed to a future date of say "one year and one day", the perceived value has been reduced to cover the "cost of money" for the period. This is known as the "time value of money".
The use of these instruments as a medium for short term investment is obvious. One just has to look at the difference between the"invoice" price and the "present value", or the "discount" to see the return potential. If a client were to be moved in and out of these instruments on a regular basis, the effective yield is substantial.
Why would a bank be interested in doing this? To understand the benefit to participating banks, we must first review the mechanics of their operation. A banks credit rating and our view of them is tied to it's "size" and it's "capitol/asset" ratio. The bank compares it's capitol such as common stock, declared reserves, retained earnings plus the number of perpetual irredeemable and non-cumulative preferred shares, versus it's "assets", such as cash (including deposits), securities, mortgages, etc.
The jurisdictions of the World Banking System have different minimum capitol adequacy requirements and depending on the status of the individual bank, the multiple over assets, which the bank can effectively trade, can be more than ten times the minimum required capitol.
Put simply, for every $100 held in "capitol/assets" the bank can lend, or obligate at least $1,000 to other clients or institutions against cash on hand. Technically the bank note is a piece of paper worth perhaps 3 cents, however at maturity it is worth 100% or more of the face value, possibly in one year. What has happened is the bank note has increased the cash reserves or assets for the bank which can now be leveraged using the bank's multiplier ratio, based on their minimum adequacy requirements.
The next question which must now be asked is; "Will the Bank honor its obligation when the note or credit is presented"? This will of course depend on the reputation and the credit value of the issuer.
For example a bank instrument is valued at US $10 Million in 366 days. The "Buyer" must negotiate a price or discount which is acceptable to the "Bank" to cause it to "Sell" the credit.
To arrive at the sale price, one has to determine the accounting ramifications of the sale. The liability is US $ 10 Million, payable "next year" and it is important to note that the reason for the one year and one day period is to take the liability into the next financial year, no matter when the credit is issued. The liability is held "off balance" sheet and is technically a contingent liability as it is not based upon any asset. On the other side of the model, the bank is to receive cash from the "sale of an asset" and this cash is classified as capitol assets which in turn, are subject to the ratio multiplier of possibly 10 times.
In real terms what does this look like? Well let's say the issuing bank would receive 80% of the face value upon sale of the US $ 10 Million credit, this would be US $ 8 Million cash on hand against a forward liability of US $ 10 Million, due in one year and one days time. This would actually have a contingent liability of US $ 2 Million. The cash received (US $8 Million) allows the bank to lend 10 times this amount (US $ 80 Million) under the capitol adequacy rules. So, US $ 80 Million is able to be lent on the balance sheet against normal securities such as real estate, and other types of loans that banks make.
As an example, the bank sold a piece of paper which would someday be worth it's face value of US $ 10 M, for US $ 8 M. The bank lends US $ 80 M (ten times the $8 M) at 8% per annum or US $6.4M. When the loan(s) is repaid to the bank, the bank will receive the principal of US $80M plus the interest of US $6.4M for a total of US $86.4M. The bank has to pay out on the debenture, the face value of US $10M plus interest (usually 7.5%), which the debenture carried. From a gross profit stand point, the bank made a 57% profit. Interest earned ($6.4M) less interest paid ($750K), divided by the US $10 Million credit that was sold. Think of it, this was accomplished by selling a piece of paper!
The reason for selling the credit is now obvious. The resultant yield is well over the given discount and the bank is in a profitable position without risk as they have achieved a greater asset yield than possible by any conventional means.
Traders buy and sell Standard & Poors rated ("AA" or better) fixed asset securities and they are onwarded (often instantly) to buyer(s) (who are satisfied with the yield as it is substantially greater than "Market Rates"). Profits (gained between the invoice price and mark-up to buyers) are shared with investors.
Purchaser contracts for bonds and other fixed asset securities are usually in minimum denominations of US $ 500 Million and occasionally are cut into US $ 100 Million traunches for sale. Due to the large sums required for participation (a minimum of $55 Million to $100 Million) individual investor participation is severely limited. Most clients are institutions and governments.
Sources indicate that "Off balance sheet bank instrument transactions take place every day through out the world, in every jurisdiction and without fear that the issuing bank will not honor it's obligation, providing the bank is of an acceptable stature".
Federal Reserve Bulletin, volume 79, Number 8, August 1993, describes highly flexible debt instruments, such as US Treasuries, that can easily be designed to respond to market opportunities and investor preferences and compares "off balance sheet bank instruments" and unsecured notes, with US Treasuries (perceived as worth more than 100% at maturity, based on the credit worthiness of the United States of America).
It is proven that instruments with collateral of US Treasuries have a far greater worldwide value.
The value to this program is having contact with an AGENT that has been approved to trade at the Federal Reserve. This takes the onerous high dollar problem and reduces it to a more manageable US $ 10 Million per investor (which can be made up of smaller investors).
The funds are as secure as the top 50 bank that they are deposited in. The account is as secure as the principal signor on the account.
If you can see the benefit for a profit or a non-profit organization of a high yield investment program like this, with virtually zero risk, and can keep the investment in the program for a 40 - 44 week time period, then we need to talk.
If you would like more information please feel free to
contact
us at Millennium Finding
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Millennium Funding
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