Banking Flashcards
municipal bonds (fancy word for loan)
-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me
If I owe the bank 1 million my problem f I owe the bank 10 billion that is the bank’s problem so tehy wull never lend huge sums of money to one entity because then you are exposed to more risk you are nto diversified what if hte entity defaults
- someone culd not be good for hte money, so if a company needs to borrow a huge amoutn of money, they can go to the banks in general, and get together and say IBM wants to borrow 10 billion dollars goldman is willing to do half a billion, JP morgan is willing to do half a billion
but if even bigger amount than IBM can go to the market….
but if even bigger amount than IBM can go to the market….
everyone can chop up a loan and pitch in
bonds are a way to chop up a loan and get a lot of money, emcahisms are exactly the same as a loan from the bank, like microloans from 100 thousand different banks
if actually trading on sovergin debt or bonds…….
if actually trading on sovergin debt or bonds
1. if a soverigen nation says they will not pay you what will they do about it, costa rica and argentina says fuck you
I will not pay you
2. if you feel great about Argetina at hte time, fully worth what payback amoutn would be then lets say 2 years later and argetina
shits the bed and screws up and hte market thinks we can’t get our money back, then we short the bond, and like a stock, 5 years ago the
security was worth 100 bucks things were looking good, but then 2 years later stuff is looking a lot less good and it trades down to 50, I
can go and buy that for 50 bucks in the hope that I get payback
3. prices of debt and bonds mve around just like stocks, so for active debt investors not just liek sign me up set it and forget it, actively
trade it, not to be too topical puerto rico bonds a lot of interesting features for bonds issued for PR, triple tax advantage, municipial bonds
don’t have to pay X tax, for ex if I invest in NYC debt and NY resident, I am except from federal tax but if in state resident I am except from city and state tax, but then I decide to say hey detroit school district bonds and I want to buy that as an NY state resident
municipals are tax free at federal level sometimes free at state level
4. federal bonds don’t have to pay state tax, triple tax break PR for common wealths and territories, but PR given tis economic relationship
with US and mainland US and amoutn of money goes back btw two entities
housing market 2008
banks make loans to people
think about one indiviudal mortgage that a bank makes, small community bank they make 1 mortgage, this is what finance ppl love to do anytime there is a series of cash flows or pattern of cash flows we can make money off of that by throwing into a bigger instrument called a mortgage backed security
so if we have all these individual mortgages overhere from different parts of country, credit levels, etc right for if we pool a bunch of stuff together I will get a benefit of diversifitication, benefit was that it has never been the case since the great depression that housing values across the country went down at the same time** bc if one of hte mortgages super multimillion dollar home in bel air vs warehouse space in BK those two things can’t be correlated, BUT THEY ARE
if you are a soybean farmer 80% of your worth is in 80% in price power of soy bean like 20% is water or agriculture
but when shit hits the fan everythign all goes to 1
everyone is selling it at the same time and it moves together, so if actually being thoughtful about correlation so when ppl run for the door at the same time everything goes down
so they all go to one and everything runs off a cliff
mortgage 2008 issue 2
not a new thing existed since 80s, second clinton term
no one thought home prices could all go down at the same time and same level of pain but back to this Michael Burry
a bunch of banks make a bunch of loans aka mortgages to home buyers
-then IB say i will take these mortgages and diversify them across whatever, throw them into a new pot called special purpose vehicle so this new box will get stuff from new monthly mortgage payments, money coming in from individual checks from individual borrows
so pretend this is revenue for them compnay that has revenue coming in, just like any other company it can issue bonds, hey guys and market we want to use these mortgages we have and it is functioning as the colatteral and security to issue bonds to other ppl
so the mortgage holders pay their mortgages into bucket of little compoany and then this little company forwards on these payments to investors who bought these bonds, way to connect individual mortgage payments to investors at the end of the spectrum
mortgage issue 2008 3
call option=
if I can buy or sell a normal thing, bodn stock whatever, I can also buy or sell options related to that thing
options are a right to buy at a certain price within a certian period of time** the details are nto as important, but ton of leverage built in so you had ppl buying the option to clal these mortgage bonds
so if somethign goes wrong if you want to buy insurance on these bonds incase they default just liek health insurance, if you want to pay for it we will promise to pay you something if somethign goes wrong that is when thi
AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps
credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about
but then AIG went out of business and forced into insovlency
CDS= credit default swaps
AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps
credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about
Michael Burry, Steve Isnen (steve Carrell), Paulson…
they placed a bet hte housing market will go to shit
like buying life insurance, on someone dying
he bought insurance on sick banks and bought insurance on the sick bonds that went into it, into instruments taht made up more complex things* he did it at the level of these loans look like they will go bad, these mortgages look bad so lets buy insurance on those first then he did a second level
oh holy shit goldman, huge banks had exposure to these risks
so he had to pay premium along the way and if it pays off you make bank*** last good trade jim paulson made
life insurance on ppl…..
ike buying life insurance, on someone dying, a lot of ppl take out insurance on top performers if Patrick gets hit by a bus they get paid common business
csuite ppl almost always part of it, if I have a rockstar lawyer what if he gets hit by a bus and he brings in billions of revenue for a year, I want to amke sure from a management perspective his practice doesn’t go to zero overnight. if he gets hit by a buss then I have 100 million so it gives me some breathing room to rebuild that practice so it doesn’t hit me like a ton of bricks, here are all the boxes I want to check off they all go into one thing life insurance, key person insurance, pandemic insurance
Wimbledon most large sporting events they buy a giant weird insurance policy bc all of their revenue comes from a two week period, so wimbledon got over 100 million dollar pay out from insurnace company so they dont get a hole in balance sheet paying for it forever, cost along the way but if it actually pays off
municipal bonds from patrick notes 10.30.24
municipal bonds
-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me(I put on brainscape)
