Dr Money
How they zapped you & I
FUNNY MONEY: Financial hit-and-run billionaires
Their weapons of mass destructions:
By Larry Haverkamp (Doc Money)
[email protected]
25 November 2008
Their weapons of mass destructions:
Structured products called 'credit and equity-linked notes'.
Their target:
Earthlings who are not smart enough and paid billions for such bombs.
The fallout:
Collapse of structured products.
Jan 2007
FD (Big Cunning Boss): Our financial engineer has invented an even more potent structured product. What should we call it?
Secretary: How about Cutsey, Wootsy?
FD: Not now, Peachy Weechy. How about Sure Thing Bonds? What say you Mr Engineer?
FE:This will work fine. Investors pay us $100m for 'Sure Thing Bonds'. We use it to buy 150 risky bonds that pay a high interest rate, like 8%. We give investors 5% per year. We keep the balance 3%. Nice.
FD: But they're risky. What if the bonds go bust?
FE: Ahh, that's the beauty of it. The 5% we pay investors each year buys us 'risky bond insurance'. If 1 out of 6 companies OR 12 of the 150 bonds go bust, we get to keep their $100m. If none go broke, we still make a profit of 3% with NO RISK!
S: It's bad luck for investors and good luck for us.
Nov 24, 2008
S: Bad news. Twelve bonds have gone bust. The remainder are only worth $60m. Oh no! We owe $100m. We're finished!
FE: Don't worry, investors lose, we win.
FD: Yup, we took 'Risky Bond Insurance'. Let's file a claim and cash in!
S: I remember! When 12 bonds default, investors lose their $100m and we get to keep what is left from the 150 bonds. It comes to $60m. Hey, we made $60m! I could kiss you, Mr Financial Engineer!
FD: Hold that kiss! Are you sure, Mr Fancy Engineer? We've got a financial meltdown! There is chaos and destruction! How can it be good?
FE: It is only good for you, sir. You make $60m on your insurance contract. The investors who sold it lose $100m. The remaining $40m has gone up in smoke along with other market losses.
S: You're a genius. I will kiss you now!
FD: We got out of this mess alive AND get to keep all the investors' money. Gee, am I smart!
S: There is one little problem sir. Mr Tan Kin Lian is explaining all this to 1,000 investors at Speaker's Corner today. They'll wise up.
FD: Not to worry, we'll use the magic words: caveat emptor. Let the buyer beware. It's their fault for not spotting our game earlier!
:p
How they zapped you & I
FUNNY MONEY: Financial hit-and-run billionaires
Their weapons of mass destructions:
By Larry Haverkamp (Doc Money)
[email protected]
25 November 2008
Their weapons of mass destructions:
Structured products called 'credit and equity-linked notes'.
Their target:
Earthlings who are not smart enough and paid billions for such bombs.
The fallout:
Collapse of structured products.
Jan 2007
FD (Big Cunning Boss): Our financial engineer has invented an even more potent structured product. What should we call it?
Secretary: How about Cutsey, Wootsy?
FD: Not now, Peachy Weechy. How about Sure Thing Bonds? What say you Mr Engineer?
FE:This will work fine. Investors pay us $100m for 'Sure Thing Bonds'. We use it to buy 150 risky bonds that pay a high interest rate, like 8%. We give investors 5% per year. We keep the balance 3%. Nice.
FD: But they're risky. What if the bonds go bust?
FE: Ahh, that's the beauty of it. The 5% we pay investors each year buys us 'risky bond insurance'. If 1 out of 6 companies OR 12 of the 150 bonds go bust, we get to keep their $100m. If none go broke, we still make a profit of 3% with NO RISK!
S: It's bad luck for investors and good luck for us.
Nov 24, 2008
S: Bad news. Twelve bonds have gone bust. The remainder are only worth $60m. Oh no! We owe $100m. We're finished!
FE: Don't worry, investors lose, we win.
FD: Yup, we took 'Risky Bond Insurance'. Let's file a claim and cash in!
S: I remember! When 12 bonds default, investors lose their $100m and we get to keep what is left from the 150 bonds. It comes to $60m. Hey, we made $60m! I could kiss you, Mr Financial Engineer!
FD: Hold that kiss! Are you sure, Mr Fancy Engineer? We've got a financial meltdown! There is chaos and destruction! How can it be good?
FE: It is only good for you, sir. You make $60m on your insurance contract. The investors who sold it lose $100m. The remaining $40m has gone up in smoke along with other market losses.
S: You're a genius. I will kiss you now!
FD: We got out of this mess alive AND get to keep all the investors' money. Gee, am I smart!
S: There is one little problem sir. Mr Tan Kin Lian is explaining all this to 1,000 investors at Speaker's Corner today. They'll wise up.
FD: Not to worry, we'll use the magic words: caveat emptor. Let the buyer beware. It's their fault for not spotting our game earlier!
:p
