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Current time:0:00Total duration:10:25

Video transcript

so the example of the bank we've been studying we actually you know kind of doing it in real time and I was doing this on the fly we actually showed how this Bank got quote-unquote bailed out and they got bailed out by the sovereign wealth fund because when this last piece of debt came due it couldn't sell its CEOs for enough money to pay off that debt so they just kind of held fast and didn't sell their CDOs they couldn't get any any other loans to pay off this loan but what they were able to do is to convince some foreigners who are enamored by the brand of this you know this institution of American capitalism so they were willing to buy some shares in this company and essentially bail it out so in the example we used to have 500 million shares the company issued another two billion shares sold him at a dollar fifty per share and they got three billion dollars for it and this we had three billion dollars in cash we had a billion before us and then we had four billion we could pay off the loan with a with three billion of the cash and then we're left with 1 billion dollars left and now this company would have let's see if you have a billion cash and 4 billion of CDOs it would think that it has five billion dollars of assets if these are really worth four billion dollars it has no liabilities so it has five billion dollars of equity notice the equity doesn't change when you take some of your assets and you get what your if when you if you get the value of the assets that you think they're worth and you pay off some liabilities it doesn't change the value of your equity but what's what's happened now well one this is just you know just don't get comfortable with someone's turn ology terminology this company now is completely d levered because it has no it has no liabilities it has no debt and its assets are equal to its equity and you'll find that a lot of companies that are you know startups and technology companies a lot of those have very little debt and so they're completely delivered anyway that was just aside but this was an example of how a company could get bailed out and who lost here well the shareholders lost right because before you there was only 500 million shares that split up the equity and now there's 2.5 billion shares to split this equity so the book value of the shares if you even believe that these are really worth four billion they went from four dollars to two dollars and I think this is an important aside here because I know I've mentioned before that you know this the market price when you buy or sell a share it's just transacting between another person who used to be holding that share right so how does it affect the company well it affects the company when the company needs to raise more money and that's what happened in this example the company had to raise more money it had to go to this maybe it was you know the government of Singapore's sovereign wealth fund and they say government of Singapore please invest in us by some of our shares and when when the government of Singapore when any investor wants to buy new shares they use the market value what that stock is trading at as a good reference point for what you might have to pay for those shares oftentimes if it's kind of a desperate situation and this person is kind of saving you they'll pay below the market price but sometimes if they say oh this is a lucky opportunity to get such a large number of shares and essentially take control the company I might pay a little premium over it so I'll pay $2 per share which was a little bit of premium over the the market value at the time which was a dollar but anyway that's why the the market price of something in the secondary markets where a share is just trading between people who aren't related to the company why that's important because when the company needs to raise money that is used as kind of the fair market value of a company shares but anyway this was a the situation where the company gets bailed out but what happens in the situation where it doesn't get bailed out let's do that let's say that the sovereign wealth fund never happened let me clear this let me see if I can so the assets that's right assets had a billion dollars of cash 1 billion cash and we have these 4 billion of CDOs CDOs for a total of five billion dollars the liabilities see we had a we had loan see it's coming due for three billion dollars and then you had the equity which is essentially the total assets minus the liability so that's 2 billion dollars and that split amongst 500 million shares 500 million shares right and that tells you that the book value per share is four dollars four dollars of book value per share we're not gonna worry right now what the market value of the shares are so let's say they shop everything around all of these sovereign wealth funds they've got burned because they invested in Citibank last year and the stock just continued to plummet they invested in all of that I think the innocent you know Merrill Lynch all of these they invested in and they just continue to plummet so they've been burned they don't want to be the you know the last guy holding the potato so there's no one who's willing to invest equity so it just forces the issue these people loan see they say you know what we're not gonna give you a new loan you can't pay this loan because even if you sold these CDOs you're only getting $1 for them so we are going to force you into bankruptcy and that's how bankruptcy happens when what when you break one of the they call you know the the covenants with one of the people who lent you money what the covenants say you know if you don't pay a loan within this amount of time or if somewhat some other thing happens to your financials you are then declared insolvent and you go into bankruptcy and what happens in bankruptcy well in bankruptcy you're the the bankruptcy courts take receivership of all of your assets so the bankruptcy courts take receivership of all of the assets so they just say okay we're gonna this is what you own and you might get something we're not gonna go to the details now maybe do a whole series of videos on the details of bankruptcy you might get some type of loan that helps you just continue to do business because people have to figure out if are they just going to restructure your your liabilities are they just going to dissolve you because you're not you know a viable you're not a lot a viable entity anymore but anyway the Bankruptcy Court will take hold of you and essentially let's assume that they're going to dissolve you they will then split you amongst the P the stakeholders the people who you owe money to and actually no listen let's not say that they dissolve you let's say that everyone agrees that this brand is worth a lot you know whatever we call it goldman lynch or you know Lehman Sachs whatever our brand is it's worth a lot no one wants to see it disappear so what happens when you go into bankruptcy well the creditors get first dibs on everything so one way to think of it is low see gets first dibs on the assets and then anything that's left over goes to the equity holders so let's say the loan see guys they say you know what we like this we want to keep this Bank as an ongoing entity but what we want to do is we don't let's just we just want to dump these CDOs so the Bankruptcy Court okay yeah we'll liquidate these CDOs just because everyone agrees that they're really shady so they sell them and they only get a billion dollars for them so they get a billion dollars for these CDOs so now we have two billion dollars of assets it's essentially two billion of cash right because we got a billion of cash for those so two billion of cash that's all that there is plus there's you know I mean there's probably some buildings and all that which we're not listing here but there's a brand and all of that this guy's owed three billion dollars so he says okay fine you know what I'm gonna do I'm gonna keep this company running I'm owed two billion dollars I'm gonna keep that two billion dollars in there but what I get is essentially I get all of the new shares of the company so what essentially the Bankruptcy Court is going to do they're going to create a new corporate entity they're going to put all of these assets into it and then issue another I don't know hundred million shares so the essentially create a new entity where the new entity say it has two billion of assets two billion of cash and let's say it has no debt or I see maybe these people they say you know it will even will even give you some money that these are the people in command I don't want confusing so let's say that you have no debt so you have two billion of equity two billion of equity and let's say that there are hundred million shares a hundred million dollars one hundred million shares so the book value of the new shares is twenty dollars per share and you might say wow that's great someone could have gotten these shares for you know whatever they were I said they were trading for before they could have gotten them for $1 per share before now they're worth $20 per share but no that's not the case it's actually horrible these shares the shares of the old company are worth zero because when you liquidated the company or at least when you try valued the company or what was we didn't liquidate it because we were saying we still want to create we still want the company to continue its operations but we're saying that the value of the company is only 2 billion this guy's owed 3 billion dollars so he says you know what I should get the whole company and I'm still getting you know not everything that I deserve but I'm gonna get the whole company so essentially whoever lent loan see all of these shares are now their shares and the equity holders get wiped out the old equity holders so those shares go to zero and so this is an interesting example because I've seen people on CNBC say oh what a great deal I could buy shares of Lehman Brothers for you know I don't know a dollar right but that's not the case because though this say old Lehman Brothers has all of these assets and it's never going to completely disappear that might be true to some degree but Lehman Brothers assets might be greater than its liabilities which means that its equity is actually worth negative so that dollar isn't a great deal if you really thought that Lehman Brothers in the long term was going to come back what you might want to do is somehow try to become one of its bondholders and then when it goes through bankruptcy on the other side of the bankruptcy you might end up in shares of the new bank whatever it's called you know Goldman Brothers or whatever anyway I realized I'm out of time in the next video I'm gonna put it all together and show you one why our financial system is freezing and to what the government's bailout is attempting to do see in the next video