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www.davidchapman.com www.bmsinc.ca

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  • 1. www.davidchapman.com www.bmsinc.ca
  • 2. STRUCTURED FINANCE
    • Asset Backed Securities (ABS)
    • Mortgage Backed Securities (MBS)
    • Collateralized Debt Obligations (CDOs)
    • Collateralized Mortgage Obligations (CMOs)
    • Collateralized Bond Obligations (CBOs)
    • Collateralized Loan Obligations (CLOs)
    • Credit Derivative Swaps (CDS)
    • Asset Backed Commercial Paper (ABCP)
  • 3. UNDERLYING ASSETS of STRUCTURED FINANCE
    • Mortgages
    • Credit Card Receivables
    • Consumer Loans
    • Auto Loans
    • Student Loans
    • Commercial Real Estate Mortgages
    • Corporate Bonds
    • Reinsurance
    • Trade Finance Receivables
    • Junk Bonds
    • Sovereign Debt
    • Project Finance Debt
    • Leveraged Buyout Debt
    • And many, many more
  • 4. KEY ASPECTS OF STRUCTURED FINANCE
    • Pooling of Assets either cash-based or synthetics
    • Delinking of Credit Risk
    • Tranching of Liabilities
  • 5. THE PLAYERS IN STRUCTURED FINANCE
    • Arrangers, Originators and Asset Managers
      • Banks
      • Loan and Finance Companies
      • Investment Dealers
      • Investment Management Companies
    • Investors
      • Hedge Funds
      • Special Purpose Vehicles (SPV’s)
      • Structured Investment Vehicles (SIV’s)
      • Banks
      • Insurance Companies
      • Mutual Funds
      • Pension Funds
    • Compliance
      • Auditors
      • Lawyers
    • Financial Guarantors
      • Monocline or Bond Insurers
    • Servicers
      • Trust Companies
    • The Rating Agencies
  • 6. DERIVATIVES
    • Exchange Traded
      • Futures - Index, Money Market, Bonds, Equity, Currency, Commodities, Precious Metals, Energy
      • Options – On Futures
    • Over the Counter (OTC)
      • Swaps – Equity, Interest Rate, Currency, Energy, Commodity
      • Forwards – Interest Rate, Repurchase Agreements, Currency
      • Options – Interest Rate Cap/Floors , Basis, Bonds, Equity, Warrants, Currency
      • Credit – Default Swaps, Default Option
      • Other – Economic, Freight, Inflation, Weather, Sports, Property
  • 7. DERIVATIVES RISK and BENEFITS
    • RISK
      • Market Price – Volatility, Exposure to changes in prices
      • Counterparty
      • Systemic – Payment system, regulation
      • Agency - Rogue Trader
      • Speculation – Huge Leverage
      • Leverage – Allows for huge leverage of debt in the economy
    • BENEFITS
      • Low cost and effective method to hedge against exposure in underlying assets without selling off assets
      • Allows for lower funding costs and diversification of funding sources
      • Efficient transfer of risk to another party
      • Ability to enhance asset yields and protect value of illiquid securities
      • Increases credit value of assets
      • Increases ability to manage risks in traditional portfolios
      • Reduces risk of future financial stress
      • Improves allocation of credit and sharing of risk in the global economy
      • Increase of liquidity in the global economy
  • 8. STRUCTURED FINANCE RISKS and BENEFITS
    • RISKS
      • Conflicting/Competing interests with liability structure (Tranching)
      • Credit risks in underlying pool of assets could lead to shortfall in flow of receivables to meeting payments
      • Exogenous factors related to standing of third parties
      • Legal and documentation risk
      • Other – similar to derivatives
    • BENEFITS
      • Allows for working around balance sheet or capital constraints
      • Shifting of risk or risk transfer
      • Ability to leverage balance sheet at a lower cost of capital
      • Adds value and leverage to buyouts, yield plays and other structured and arbitrage driven debt or synthetic funding deals
      • Convert illiquid assets to tradable securities
      • Release of trapped equity
  • 9. THE CRISIS TIMELINE
    • 1985-1991 Savings and Loan Crisis
    • 1995-2001 Dot-com Bubble
    • Late 1999 Repeal of Glass-Steagall
    • 2000-2003 Recession period varying depending on country – Fed lowers rates 11 times to 1.75%
    • 2002 Home prices appreciating 10% or more particularly in California, Florida and Northeast States
    • 2004 Home prices appreciating by over 25% in California, Florida, Arizona, Hawaii and Nevada
    • 2000-2007 Mortgage market more than doubles in size – Share of sub-prime lending goes from virtually nothing in 1996 to almost 25% of market by 2006 – Sub-prime lending hits $1.3 trillion and along with Alt-A mortgages and Jumbo mortgages the market is $2.8 trillion in a $10.4 trillion market.
    • 2005 Housing boom ended in August 2005
    • 2006 Housing prices flat, sales falling, inventory slowly rising
    • 2007 February –March Sub-prime market collapses more than 25 sub-prime lenders go bankrupt
    • 2007 April – New Century Financial collapses
    • 2007 August – sub-prime loans discovered in portfolios of banks, hedge funds – stock market panic, huge injections of liquidity
    • 2007 September The crisis goes global with collapse of Britain’s Northern Rock and a run on the bank
    • 2007 Billions of dollars in losses announced by financial institutions including Citibank, Merrill Lynch precipitating a further market panic in December and January 2008 – Fed slashes funds rate from 5.25% to 3% - A credit crunch ensues
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  • 12. Average U.S. Real Estate Price divided by CPI
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  • 27. Average US House Price/Gold
  • 28.