Presented by:
Jamil A. Massengill, Consultant | Facilitator | Buyers Rep
Company:
JAMAIA Financial Marketing Group, Inc.
Email:
JAMAIAFinancial@Adpost.com
PPP FUNDAMENTALS - YOU NEED TO KNOW THIS!
Part # 1
Disclaimer: This information is presented for the general informational
and educational purposes of the reader and is not intended to be any form of
solicitation to buy or offer to sell any form of securities or investment
services. This information is presented ‘as is’ with no implied or inferred
warranties as to its completeness or accuracy. It is not intended to be the
basis for making any business decision and the reader accepts all
responsibility for his actions or lack thereof in any instance as a result of
his possession of this information.
This brief account aims at helping
you find out about some of the obscure or unclear aspects relating to the
Private Placement Opportunity Programs (PPOP) also known as PPP (Private
Placement Programs) or under other acronym like PPIP (Private Placement
Investment Programs), etc. There are lots of people who know something but
cannot grasp the whole picture. The following account is based on our personal
experience of several years in this business and on some lessons/statements
made on an internet board by a very expert professional (called "The
Insider"). To explain the involved matters, we will study it mostly from
an investor's standpoint and a broker's standpoint.
TOPICS
Before speaking of Private Placement
Opportunities (as follows called PPO) we need to realize some basic reasons for
the existence of this business. It means that there is a need to learn some
basic concepts about what money really is, and about how money is created, and
how the demand for money and credit can be controlled, and that someone can
issue a debt note which can be discounted and sold, and resold in an arbitrage
transaction (the basic system for running most of these programs), etc.
THE BASIC REASONS
To fully understand what it's all
about there are some basic principles that you must understand:
MONEY CREATION
The first reason why this business
exists is to create money. More money is created by creating debt. You as an
individual can lend out $100 to a friend and you can make an agreement that the
interest for that loan is 10% so that he must pay you backing $110. What you
have done is to actually create $10, even though you don't see that money.
Don't consider the legal aspects of such an agreement, just the facts. Now, the
banks are doing this every day, but with much more money. Banks have the power
to create money out of nothing. Since PPO ("Private Placements
Opportunities") involves trading with discounted bank issued debt
instruments, money is created due to the fact that such instruments are
deferred payment obligations (debts). Money is created out from debt.
Theoretically, any person/ company/ organization can issue debt notes (don't
look at the legal aspects of it). Debt notes are deferred payment liabilities.
Example: A lawful person (individual/company/organization) is in need of $100
so he writes a debt note for $120 that matures after 1 year, which he then
sells for $100 (this is called "discounting"). Theoretically the
issuer is able to issue as many such debt notes at whatever face value he wants
- as long as there are those that believe that he's financially strong enough
to honor them upon maturity, and thereby is interested to buy such debt notes.
Debts notes like Medium Terms Notes
(MTN), Bank Guarantees (BG), Stand-By Letters of Credit (SBLC), etc. are issued
at discounted price by some of the major world banks in a very large amount of
billions USD every day.
Generally speaking they do
"create" such notes (debt notes) "out of thin air" so to
speak. That is, they only have to write the document. It's as easy as if you as
an individual write a debt note.
Now, the core problem: To issue such
a debt note is very simple, but the issuer would have problem to find a buyer
unless the buyer "believes" that the issuer is financially strong
enough to honor that debt note upon maturity. Any bank can issue such a debt
note, sell it at discount, and promise to pay back the full face value at the
time the debt note matures. But would that issuing bank be able to find any
buyer for such a debt note without being financially strong enough?
An example: If you had US$ 1 million
and had the opportunity to buy a debt note with the face value of US$ 1 million
issued by one of the largest banks in Western Europe for let's say US$ 800,000,
a debt note that matures in 1 year, wouldn't you then consider buying it if you
had the chance to verify it? Now, if a Mr. Smith approaches you on the street
and asks you if you want to buy an identical debt note issued by an unknown
bank, would you consider that offer? As you see, it's a matter of trust and
credibility only. And now, maybe, you will also understand why there's so much
fraud and so many bogus instruments in this business.
LARGE ‘DEBT
INSTRUMENTS' MARKET
As a consequence of the previous
statements, there is an enormous daily market of discounted bank instruments
like MTN, BG, SBLC, Bonds, PN, etc. involving issuing banks and long chains of
exit-buyers (Pension Funds, large financial institutions, etc.) in an exclusive
Private Placement arena.
All such activities on the bank side
are done as "Off-Balance Sheet Activities", and as such, the bank can
benefit in many ways. Off-Balance Sheet Activities are contingent assets and
liabilities, and as such the value depends upon the outcome upon which the
claim is based, similar to that of an option. Off-Balance Sheet Activities
appear on the balance sheet ONLY as memoranda items. And it's first when they
cause a cash flow that they will appear as a credit or debit in the balance
sheet. The bank does not have to consider binding capital constraints, as
there's no deposit liability.
NORMAL TRADING VS
PRIVATE PLACEMENT
All trading programs in the Private
Placement arena involve trade with such discounted debt notes in one way or
another. And to bypass the legal restrictions this can only be done on a
private level. This is the reason why this type of trading is so different from
the "normal" trading, which is highly regulated. In other words, this
business can be done and restricted on a private level only (the Private
Placement level) that falls down in a special regulation without the usual
strict restrictions present on the securities market.
The normal trading known by the
public is the "open market" (as the "spot market") where
discounted instruments are bought and sold with bids and offers like an
auction. To participate here the traders must be in full control of the funds,
otherwise they cannot buy the instruments and sell them on. And there are no
arbitrage buy-sell transactions on this market because all participants can see
the instruments and their prices.
However, beside this "open market" there's a "closed, private
market" where a restricted number of "master commitment holders"
is the inner circle. These master commitment holders are Trusts with huge
amounts of money that enter contractual agreements with banks to buy a certain
number of fresh-cut instruments at a specific price during a specific period of
time. Their job is to sell these instruments on, so they contract
sub-commitment holders, who contract exit-buyers.
These "programs" are all
based on arbitrage buy-sell transactions with pre-defined prices, and as such,
the traders never need to be in control of the investor's funds. However, no
program can start unless there's enough money behind each buy-sell transaction.
And it's here the investors are needed, because the involved banks and
commitment holders .are not allowed to trade with their own money unless they
have reserved enough funds on the market, money that belongs to the investors which
is never used, and never at risk.
The involved banks (the Trading
Banks) can lend out money to the "traders" and it's typically 1: 1 0
but can during certain conditions be as much as 20: 1. So if the trader can
"reserve" $100M then the bank can lend out $1B (actually, the bank is
giving the trader a line of credit based on how much money the trader/the
commitment holder has, since the banks don't lend out that much money without
collateral) and not depending on how much money the investors have.
[Note]: as abbreviation, M is
Million and B is Billion and K is thousand ... so $100M means 100 millions USD,
$1B means 1 Billion USD and $1K means 1 Thousand USD.
So, if a trader says that he must be
“in control” of the investor’s fund then it means that he's not one of the
"big boys" but plays on the open spot market. In this market lots of
different "instruments" are traded. If the trader only needs to
reserve the investor's funds, and doesn't need to be in control of the funds,
then he's trading in this "private market".
Because lots of bankers and other
people in the financial world are well aware of the open market, as well as
being aware of the so-called "MTN-programs", but are closed out from
the private market, they find it hard to believe that the private market
exists.
Look out for our next series of PPP Fundamentals - What you should Know! Part #2
If there is any questions please contact me direct at US 1-910-578-0338
Best Regards,
Jamil A. Massengill
Consultant | Facilitator | Buyers Rep
JAMAIA Financial Marketing Group, Inc.
Direct: US 1-910-578-0338
US Toll Free: 866-576-8743x 101
Skype: jamaiafinancial
Email:
JAMAIAFinancial@Adpost.com
