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Current time:0:00Total duration:12:02

Video transcript

welcome back and I've made this balance sheet so messy I think it it would make sense to to redraw it cleaned up a little bit so what's our new bed after we've unloaded a lot of those assets let me assets so now the book value all I have now I have a little bit of cash let me write that down I had one dollar one billion dollars of cash let's say everything is in well write the bead there so you know 1 billion of cash and just you know you know Bank needs cash to operate it can't just use all of its cash to pay off things because they don't won't be able even transact with its customers or pay its rent or you know send its executives on their Learjets whatever it needs to do but anyway you have 1 billion of cash so you might have been thinking well why didn't just use its cash to unload some of that debt well you always have to keep some cash online just to conduct business and actually that's called working capital but anyway back to the point of this video so you have 1 billion dollars in cash and at least the management of this company thinks that it has 4 billion dollars worth of residential CDOs and this is the toxic stuff that's the focus of of this government bailout which is really historic in its proportions and I'll talk more about that later and then on the liability side so liabilities liabilities what was left I think I had called it loans see I'll write liabilities in red just because they're bad they're not bad but you know there's something you oh so they're not as pleasant so alone see and we said loan C was three billion dollars three billion and then what is the equity I'll do that in yellow equity so the total assets were five billion in assets right five billion in assets total assets you have three billion in liabilities so if you believe what the what what the accountants or the bank management has said about their assets if you wanted to just liquidate everything if you had five billion assets you paid out you liquidate them got five billion dollars you paid off your three billion in loan you'd be left with two billion dollars so that's the equity two billion dollars of equity and just as a reminder how many shares were there I think I originally said in the original video that we have 500 million shares 500 million shares so each of those shares is one 500 millionth of this equity so let's see the book value per share let me write that here book value per share is what it's going to be the book value 2 billion divided by 500 million so it's $4 $4 remember was $6 not too long ago but we had to take that with those commercial mortgages that we thought were worth 10 billion actually ended up being worth 9 billion so we lost a billion dollars of our book value and a billion dollars translates to $2 of the share price anyway fair enough and you know maybe at this point maybe at this point the market value of the share let's say the market value market value so that's essentially the stock price if you were to look up this company sticker price let's say it's at $1 right because they're like boy you know after all this Bear Stearns and Lehman Brothers this is all getting a little nerve-racking so and and they have this the shady thing over here so we have to be careful so if the market value is $1 what are they saying about the assets or what are they saying about the equity well there that was the market cap is the it's the share price times the number of shares so that they're saying essentially that the market cap and that's equivalent to the market value of the equity or what the market thinks the equity is worth that's $1 times 500 million shares so that's worth 500 million 500 million or 0.5 billion so the market is actually saying no you don't have two billion of equity you only have half a billion of equity and it's probably because they think this is worth a billion and a half left but anyway we'll leave that aside for now but now we're getting to the crux of the issue the two of those other loans they came due no one was willing to renew the loans or give them new loans so the company had to liquidate some of their assets in order to pay those loans now now we're we're kind of this is the endgame we have loan C and let's say loan C comes due so they say hey you know what things are really shady I don't your your assets they look very similar to Lehman Brothers and Bear Stearns we're not going to renew your loan you go out to the credit markets you try to issue bonds you try to do anything you can no one's willing to give you a loan just because they're all a little bit scared so what do you do well you have to pay three billion dollars of loans you just you just have to write because no one's willing to give you three billion dollars well you say out of this cash I can't use all of it if I just wanted to operate bare-bones you know maybe I could give point five billion cash but that's not going to help my situation at all right because that I still would have two and a half billion left so you're like wow I'm in a situation where I have to sell these CDO so now now all my models and all my assumptions are going to see if they were even vaguely accurate right if these things are worth really worth four billion dollars so I go out there and I try to sell my my CDOs I try to sell them for for whatever I can get for them because I have to sell them and one there's no market for them because just there's a lot of people who want to unload them but there's not really anybody who's keen on buying it so there might not even be any market but you're like no I want to sell them so you just you know you broadcast it out to every hedge fund and private equity fund and every bank out and you say who wants to buy my CDOs and some private equity firm comes to you okay well you know I think that those things are pretty toxic but they're probably worth maybe something I'm pretty optimistic about the real estate market and maybe in ten years they might come back so I'm willing to give you I'm willing to give you one billion dollars for that those CDOs right so essentially you know what's the market price of something it's the best price that someone's willing to give you for something so the market price of this because you shopped it around you've gone to the market you've gone to everyone you can the market price for this is essentially the market is offering you 1 billion dollars for this CDO so what do you do well if you sell it for 1 billion dollars does that help your situation if you sell this for 1 billion dollars you get a billion dollars here you have a billion dollars of cash you have a total of two billion dollars that still won't pay you're still going to be bankrupt and even more the company management they're very stubborn they say you know what one if I sell it I'm gonna go bankrupt and I think that that's some kind of fire sale price quote unquote that that's not the real price all of a sudden for the first time in my career when I was getting you know when I was getting thirty million dollar bonuses I heavily believed in the market but now I'm in denial of the market I say you know what the only reason why there you know I'm only getting a billion dollars for this is because everyone is afraid and these things if someone were to just hold them to maturity if someone were to just hold these assets for the thirty years over which you know their mortgages the underlying mortgages will just you know pay out someone's going to collect roughly four billion or maybe at worst three-and-a-half billion so I'm not gonna I'm not going to do this but really you have no choice so what you try to do is you say well can someone give me some type of a loan can someone type it you know just just lend me some money in the short term just so that I could get this paid off and I'll be willing to give this as collateral right collateral on the loan is you give me a loan and you take this as collateral and if I don't pay the loan you just keep the asset right and that's essentially what the Fed was doing the Fed traditionally only gives loans if you give something really nice as a collateral like you know Treasuries or essentially just Treasuries and and they'll still take a little discount of your collateral like if you give if you give the Federal Reserve a dollar of Treasuries they might give you 80 cents of loans but over this whole credit crunch the Fed has gotten looser and looser in terms of what it's willing to accept as collateral so actually the Fed I don't I don't know the details of how toxic of an asset they were willing to take his collateral but they were will they started loosening it up to pretty pretty toxic assets so maybe you could get a loan but let's just put that aside right now but this is the situation we're facing you have a bank and it's essentially being forced or it perceives it forced into bankruptcy even though even though it thinks that it has positive equity so you could get a loan from the Fed or someone else if they're willing to take this kind of toxic stuff as collateral let's assume that they're not for now the other option is you can recapitalize you can get someone to invest in firm you can sell equity in the firm and get some more cash to pay off this loan if you can convince someone that no your firm is really in the future going to be worth a lot more this is just a stressful situation so you go to some sovereign wealth fund and that's just a way of saying a some foreign government that's been collecting dollars because they've been selling this oil or cheap manufactured goods so you go to those that look you know we are this super Bri nowhere where Goldman Brothers or you know where Lehman Sachs we are this this great brand in the banking industry wouldn't you like to have a piece of this thing that represents American capitalism and they say sure you know you know we'll be interested in investing so they they say well you know what the market price is a dollar and you know III think you're that's probably a little distressed so we'll be willing to pay a dollar fifty per share and we'll buy I don't know we'll buy let's see how much do you need we'll buy two billion shares at a dollar fifty per share so what happens so let's say the sovereign wealth fund sovereign wealth fund they're going to buy two billion shares two billion shares at a dollar fifty per share so now what does the balance sheet look like so two billion a dollar fifty per share they're essentially giving you that that is equal to three billion dollars right so now you get three billion more in cash so this becomes four billion but you can't get something for free so what where is what what happened are our liabilities increasing well no our liabilities increase they didn't give us a loan right they they invested in this they essentially bought shares of the company they bought two billion shares so how does that get accounted for well instead of our share count being five hundred million shares this is how many shares before we had before the company essentially created two billion new shares so now the company has 2.5 billion shares so now we have 2.5 billion shares and it's something interesting here what is the new book value of the shares so what are our total assets for Billy plus four billion it's 8 billion of assets our liabilities are still 3 billion now our the value of our share after the investment and you can kind of call this the post value the post-money valuation or Book value is 5 billion right 8 billion minus 3 billion and now what's the Book value of our shares see five billion divided by five hundred and I'm sorry but / 2.5 billion it's two dollars per share it's two dollars per share so our new Book value is two dollars per share and that's interesting because it's someplace in two dollars per share this is two dollars per share someplace in between our old book value and the price that the company paid right they are the sovereign wealth fund paid a dollar fifty per share but anyway I just wanted I just realize I'm out of town time again I'll continue this in the next video