 We are Facilitators of Investment, Finance and Trading Programs in direct Cooperation with AAA - rated European Prime Banks, Placement Program Managers and Providers within the international banking system, preferably in Swiss, Germany and Great Britain. Banking Contracts are provided to High Net Worth Clients, whose investments are under their own account name, guaranteed, insured and safely guarded and always under their control during the period contracted. We are providing World Capital Market & Financial Management Research, Capital Market Services as part of Political & Economic Risk Management, Financial Markets Research on Instruments and Institutions, International Capital Movement and Monetary Cooperation, evaluating Economic Performance & Investment Potential towards competitive and yielding Placements on World Capital Markets. Our services incorporate Investment Banking, Private Banking, Personal Banking & Wealth Management, Asset & Financial Management, Investment Funding, Project Finance & Loan Funding through the Facilitation of Specialist Banking Contracts for entering the bank secured Investment Programs conducted by European Prime Banks or Money Center Banks preferably in Swiss, Germany and Great Britain in close Cooperation with Placement Program Managers and Providers - To provide guidance and assistance to principals as private clients and high-net-worth individuals, corporations & institutional investors, banks & funding groups, trusts & foundations, executives & managers, and entrepreneurs through professional excellence according to international banking standards. - To explore innovative financial solutions and facilitate global investment potential for wealth creation and life quality enhancement by providing global reach and connectivity between capital markets and knowledge driven Investors profiteering from yielding investments. For entering Investment Programs, please start your request, and in order to meet the requirements, anticipate our Terms & Conditions, which you find as link below or via Index. WHY SHOULD SUCH INSTRUMENTS BE ISSUED? To understand the logic behind the actual mechanics of the operation it is necessary to look at the ways in which a bank usually operates. The banks credit rating and status within society is judged by the “size” of the bank and its capital/asset ratio. The bank lists its real assets and its cash position, including deposits, securities etc., against its loans, debits and other 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 that the bank can effectively trade can be as high as 20 times the minimum capital requirement. For every $100 held in capital the bank can frequently lend or obligate up to $1,000 to other clients or institutions against the cash on hand thanks to the multiplier ratio available from their central bank. Further, if the bank disposes of an asset, the resultant capital is able to be “leveraged” using the bank’s multiplier ratio, based on the minimum capital adequacy requirements. THE ISSUANCE OF A BANK CREDIT INSTRUMENT (STANDBY LETTER OF CREDIT) A bank receives an indication from a client that the client is willing to “buy from the bank a one year obligation, zero coupon, and effectively unsecured by any of the physical assets 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 that is acceptable in any jurisdiction and freely transferable, able to be settled at maturity in simple terms and is without restrictions other than its maturity conditions. The instrument that immediately comes to mind is the Documentary Letter of Credit or Standby Letter of Credit. However, as the issue is not trade or transaction related most of the terms and conditions do not apply. The simple “London Short Form” version of the Standby Letter of Credit is often utilized for this simple one-year “corporate debt” type obligation. The test 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 from the date of issue, usually valid for a period of fifteen days from date of maturity. Standby Letters of Credit also serve as substitutes for the simple or first demand guarantee. In practice, the Standby Letter of Credit functions almost identically to the 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. STRUCTURE OF BANK PROFITABILITY The blank piece of bank paper, i.e., the London Short Form, which is technically an asset of the bank valued at say 2 cents is now "issued” and the text added in to say “one hundred million US Dollar face value”, signed and sealed by the authorized bank officers. The question now is “what is the piece of paper worth?” Is it worth 2 cents or US $100 million? Bear in mind that it is completely unsecured by any tangible or real asset. In reality it has a “perceived value” of US $100 million in 366 days time based upon the “full faith and credit of the bank”, for our purposes always an A to AAA rated institution. The next question, which now must be asked, is “will the bank honor its obligation when the bank note or credit is presented?” This will, of course, depend upon the reputation and credit worthiness of the issuer. Assuming a creditworthy institution we have now arrived at the “belief” that the “value” is US$100 million in 366 days time, the “Buyer” must now negotiate a price, or discount, which is acceptable to the Bank to cause it to “sell” the credit. To arrive at a sales price one has to determine the accounting ramifications of the sale. The liability is US$100 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”, i.e. the issued paper, and this cash is classified as capital assets that in turn are subject to the central bank borrowing multiplier of say, 10 times. So in real terms the issuing bank is to receive say 80% of the face value upon sale, which is US$80 million cash on hand against a forward liability of US100 million in one year and one day’s time. The cash received, US$80 million, allows the bank to lend 10 times this amount under the bank’s multiplier ratio, so US$800 million is borrowed from the central bank at say, 3% discount rate interest, and this in turn is able to be lent “on balance sheet” against normal assets such as real estate, businesses, etc. If the interest rate is, for instance, 8% simple and the loans are short term (one 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$64 million. 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$80 million plus US64 million which totals US$144 million income to the bank, less the US$100 million owed on the issued paper and the US$24 million interest owed to the central bank shows a gross profit of US$20 million or 20% yield on the original US$100M bank debenture paper issued. INCOME US$ 80M from issuance of one-year paper US$ 64M from interest income on US$800M at 8% US$144M income EXPENSE US$100M owed to holder of the Bank Credit Instruments. US$ 24M owed to central bank on int. US$800M US$124M expense PROFIT US$144M income US$124M expense/interest and principal US$ 20M profit to bank 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 asset yield than by any conventional means. There is a greater underlying reason which is also indicated if an overview of the complete supply system is taken. To simplify the explanation, a flow chart has been drawn which shows the roles of each entity and the details given by an individual who represented the information as direct from the “Federal Pool” which will be outlined herein. As most people are not aware, the Federal Reserve Bank is not a Federal Government entity or body, it is in fact a private, banking institution. It may well operate in a quasi-governmental manner but it is still under the control of private individuals and profit is still one motive for their activities. If one assumes that the money supply requirements for a specific period shows a need to print, say US$100 million of new issue currency and the U.S. Treasury is required to issue same, the impact of the release of those “new” dollars in terms of inflation and market effect is quite strong. If, however, the U.S. Treasury, through the Federal Reserve Bank was asked to issue or “sell” those dollars for “cash”, the amount of the “new” dollars today is reduced by whatever amount is being yielded. If we take the case in question, suppose the Federal Reserve Bank had “contracted” with a major world bank to “issue” dollar denominated one-year paper in the amount of US$100 million 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 80% of face value. The cash yield back to the U.S. Treasury would be US$80 million against a dollar credit of the same amount to the issuing bank, with the bank taking a US$100 million liability position at the maturity date. The U.S. Treasury has now received US$80 million in cash back from the market/system and need only print, i.e., create reserves of US$20 million to meet its current obligation to the money supply. This is 20% of the original amount and as such, the inflationary impact on the system is greatly reduced. Of course, if the amount “sold” is greater than the money supply requirements, the U.S. Treasury has a reduction that allows lower interest rates to be maintained and/or controlled. The long-term position is not affected as the issuing bank has taken on the liability, not the U.S. Government. Further, the dollar credit is classed as “cash” for the purpose of capital adequacy compliance and not required to be physically “printed” and as such, a simple ledger entry is sufficient. The off-market issuance and sale of Bank Credit Instruments are controlled by simple supply and demand techniques, and all U.S. Dollar denominated papers are “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, most American banks, Third World banks and any other banks, which may have a capital/credit problems. Each bank agrees to allow the Federal Reserve Bank to issue, on its behalf, a specific amount of U.S. dollar denominated paper or the alternative applies where the Federal Reserve Bank allocates a specific amount to each bank. The details are not published and no physical evidence has been made available. In any case, the result is that a specific volume of paper 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 this “Federal Pool” that the supply contracts are issued. The existence of the “Federal Pool” is not confirmed by the Fed. However, various documents including GNMA transfer documents contain a “Pool Number”. The “grand master collateral contracts”, are effectively issued by the Federal Pool. It is indicated that these are usually issued in US$500 million units with each minimum denomination being US$100 million. In other words, the minimum order is US$500 million in US$100 million “tranches” (from the French verb trancher “to slice”). One point that should be raised at this time, although the marketplace and issuance of these instruments are “unregulated”, the banks are effectively controlled by the BIS and self-imposed rules. As mentioned previously the participating banks are not allowed to purchase each other bank’s paper in the primary market, bank to bank purchases are only allowed in the secondary market. Otherwise the whole system would be subject to possible 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 participating banks prefer to compete head-to-head. Further, from the investor standpoint this rule has allowed the investment market for these instruments to flourish. The entities that are the holders (Commitment Holders) of the “grand master collateral contracts” are commonly referred to as “cutting houses” as they usually reduce the size of the denominations, i.e., “cut down the size of the issuance”. Their commitments with the banks are frequently in the form of an option to buy an agreed upon amount of the paper per week or per month. A typical figure would be $100M to $500M per week yielding a $4 Billion to $20 Billion per year “commitment” based on the European banking industry typical 40 week trading year. The cutting houses then in turn “sell” or deliver commitments to wholesale brokers. In both cases the cash payment or deposit is able to be called upon if an order is not met or paid for on time. If the contract is called for and the contract holder cannot pay, the contract holder would lose his contract and would be “blacklisted” in the system to prevent any new contract position. The rules are very simple, cash payment at all times. The trading in foreign exchange currency markets is accomplished the same way. It is the “honor system” backed up by the real fear of losing a very valuable “seat at the table” that keeps the brokers honest and the payments prompt. It is assumed that each cutting house would normally issue, for instance, 50 delivery commitments or “sub-master commitments” at US$2.5 million each. Therefore, their deposit of US$100 million is now covered plus a reserve of US$25 million. The wholesale brokers are responsible for feeding the volume of instruments to the clients or customers who are at the retail or retail distribution level and then subsequently to the secondary market. The issuing banks can be identified as the “manufacturers” of this product; in this case the product is bank paper. The Federal Reserve Bank can be identified as the “importer” (80% of face value). The Federal Pool can be identified as the “storage depot” (82.5% of face value) for all the products before sale and are responsible for the bulk release to the cutting house. The cutting houses can be identified as the “regional distributors” (85% of face value) and are responsible for the release of units to the local distributor. The wholesale brokers can be identified as the “local distributors” (87.5% of face value) who release units on demand to the “retail showrooms”. The primary clients can be identified as the retail showrooms (89% of face value) that deliver the units to the “public buyers”. The public buyers exist in the secondary market (92-94% of face value), such as pension funds, high net worth individuals, fixed-income money managers, other bank’s etc., (for a bank to buy on the secondary market is not classed as contrary to the “insider trading” rule mentioned previously). The public buyers hold the instruments until maturity and gain the preferred yield from the discount against the face value (100%) from the issuing banks. The biggest problem encountered regarding this matter is the contradictory and somewhat unusual attitude of the banks when any attempt is made to obtain any definitive documents or information regarding these activities. The very existence of these instruments has been denied at senior levels by bank officials. This is caused by the fear the bankers have of irritating major depositors that would be very upset to learn of this lucrative banking market and then demand higher yields on their deposits. DISCLAIMER The foregoing memorandum is for informational purposes only and should not be construed as an offer to sell nor a solicitation to buy a Bank Credit Instrument trading program nor an offer to sell nor a solicitation to purchase a Bank Credit Instrument. It is highly recommended that the readers rely solely on their own judgment and experience as they utilize any of the ideas contained herein. This memorandum was designed to provide accurate and authoritative information in regard to the subject matter covered. It is presented with the understanding that the author is not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required the services of a competent professional person should be sought. The above information is given in good faith and has been derived form different sources believed to be accurate and reliable. This page is for information purposes only and does not constitute an offer, or an invitation to receive offers to purchase or sell any security or other financial instrument or to engage in any form of business or dealing in any jurisdiction. WORLD CAPITAL FORUM . COM does not accept any responsibility arising in any way - including by reason of negligence - for errors in, or omissions from, this information. |
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| _____________________________________________________________________________ MISSION Shaping the World, where Intellectual Strength and Human Quality, Asset and Value Creation, and Achievements are Ultimate Goals of an Open Mind capitalizing on Imaginative Thinking and Methods, Knowledge and Leadership for meeting Clients’ Financial Target, and leveraging Visions and enlightening Ideas towards a World as yielding Market Place enhancing human conditions and live quality. _____________________________________________________________________________ (C) World Capital Forum . Com 1999 - 2007. Dr. Thomas C. Heynen, Chairman & Executive Director. All Rights Reserved. | management@worldcapitalforum.com | wcfdotcom@yahoo.com | mobile Asia +66.81.928.7721 | mobile Europe +49.162.183.1801 | Skype ID drheynen | VoipstuntID villafox2005 | _____________________________________________________________________________ |