Derivex - interest free loans?

APRA says they don’t cover -> talk to ASIC, but then ASIC they don’t cover and to talk with the state department of fair trading -> but they don’t cover until after the fact.

This gave me a good idea for an amoral cunning plan , I should create a company that on the surface provided low interest loans for the hardworking battling poor and yet paid high interest for depositors, behind it all however it will be actually based on the classic Ponzi/Pyramid scheme, paying the high interest using the money of the “depositors” suckers below.

Due to the gaps in the supervisory bodies, nobody will come after me until it all implodes and the suckers have lost everything. Of course which time I would have taken my well earned profits and run, err moved, presumably to a Majorca where due to my hemorrhoid condition I would be unable to return to Australia to answer my accusers.
 
Aceyducey said:
David,

Neither group is prepared to 'endorse' some group. It leads to more problems :)

Cheers,

Aceyducey

I thought they might at least prove if it was a scam or that their process was just. If they did then we wouldn't end up with another Henry Kay situation. If they said it was above board and legal then that is really all that was needed, they don't need to say use it and if not then have a warning to stay away.

David
 
hey people,
I have got the general jist of it, you borrow 500k from devirex, and they secure 1.6million, they use the difference to invest to make their money....i hope this is correct...

my question is, is the security...ie is your property the security for just the amount you receive...ie 500k or are you responsible for the whole debt of 1.6 million?
Cheers
Mitch
 
mitchmakhan said:
hey people,
I have got the general jist of it, you borrow 500k from devirex, and they secure 1.6million, they use the difference to invest to make their money....i hope this is correct...

my question is, is the security...ie is your property the security for just the amount you receive...ie 500k or are you responsible for the whole debt of 1.6 million?
Cheers
Mitch

It would appear from Devirex comments that you would be not liable for the entire debt as they are borrowing based on the income stream (what you think is capital repayments), not actually on your property. What is unclear is the status of your capital/principle repayments, whould you be treated as a general creditor in a bankrupcy and thus receive a few cents (or zero) of each dollar of "principle" you repaid? or would your principle repayments be as safe as "houses" so to speak? Remember for you it is capital repayment but for Devirex it is income!
 
Has anyone read When Genius Failed : The Rise and Fall of Long-Term Capital Management

Anway some comments about the book

John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
In a decade that had seen the longest and most rewarding bull market in history, hedge funds were the ne plus ultra of investments: discreet, private clubs limited to those rich enough to pony up millions. They promised that the investors' money would be placed in a variety of trades simultaneously--a "hedging" strategy designed to minimize the possibility of loss. At Long-Term, Meriwether & Co. truly believed that their finely tuned computer models had tamed the genie of risk, and would allow them to bet on the future with near mathematical certainty. And thanks to their cast--which included a pair of future Nobel Prize winners--investors believed them.
From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term's aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term's traders that they borrowed with little concern about the leverage. At first, Long-Term's models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. It seemed the geniuses in Greenwich couldn't lose.
Four years later, when a default in Russia set off a global storm that Long-Term's models hadn't anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures. With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street's leading banks to underwrite a bailout.
Roger Lowenstein, the bestselling author of Buffett, captures Long-Term's roller-coaster ride in gripping detail. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein crafts a story that reads like a first-rate thriller from beginning to end. He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term's partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible.
When Genius Failed is the cautionary financial tale of our time, the gripping saga of what happened when an elite group of investors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein's hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama.

And another from http://www.bearcave.com/bookrev/genius_fails.html
The classic image of a Wall Street market trader is someone, usually a man, on the trading floor, shouting buy and sell orders, clutching a sheaf of trading tickets. Floor traders must have an instinctive feel for trading and get by on their quick wits. They are now a vanishing species and will soon join Mark Twain's riverboat captains in extinction and myth.

Modern trading is now almost entirely paperless and takes place in the cyberspace of computers and computer networks. The instincts of market traders are being augmented and in some cases replaced by mathematical pricing models. Traders are being drawn from schools like MIT, rather than the City College of New York. A feeling for market dynamics and trends will always be important, but along side these skills modern traders have a command of statistics and probability theory.

John Meriwether gained a measure of fame in Michael Lewis' book Liar's Poker, where he is described by Lewis as a Salomon Brothers Uber-trader and master of Liar's Poker. Meriwether was one of the top bond traders at Salomon Brothers and later became head of the fixed income securities department (which was responsible for mortgage security and bond trading). Meriwether was one of the first people on Wall Street to recruit mathematicians and physicists from schools like MIT and Cal. Tech and turn them into bond traders. Meriwether was a harbinger of the conjunction between Wall Street and the Ivory Tower.

Perhaps to the horror of the old Wall Street operators, academic financial theory provided a framework that allowed markets to function more effectively. One example of this is the Black-Scholes model for pricing stock options. Acceptance of the Black-Scholes model has become so wide spread that Web sites like Yahoo and E*trade that quote stock option prices also list the associated Black-Scholes values.

When Genius Failed, by Roger Lowenstein, is the true story of Wall Street traders, academics and hubris. It is the story of the failure of Long-Term Capital Management, a hedge fund founded by John Meriwether.

In 1991, when John Meriwether was the head of the Salomon Brothers fixed income security desk, a US Treasury bond trader in Meriwether's department at Salomon falsified a US Treasury bill bid. The scandal that ensued when this came to light put Salomon in danger of losing their status as a Treasury bill broker. The head of Salomon, John Gutfreund was forced out and Meriwether went along with him.

This left John Meriwether unemployed and very wealty. But Meriwether, to use Michael Lewis' term, was a Big Swinging Dick, a Master of the Universe, an Uber-Trader. Consignment to the golf course, even a very exclusive golf course, is not as gratifying as being a player in the market. In 1993 Meriwether took the first steps toward founding the Long-Term Capital Management (LTCM) hedge fund. As befits a Big Swinging Dick market trader, LTCM was to be a Big Swinging Dick of a Hedge fund, capitalized with two and a half billion dollars. For the privilege of having their money managed by Masters of the Universe, LTCM would also charge investors over double the usual management fees.

A hedge fund is an investment fund for wealthy individuals and institutions like banks and pension funds. The number of investors in a hedge fund is limited and they are restricted, in theory, to only those who can afford the risks which may be associated with the hedge fund. Unlike mutual funds, hedge funds are unregulated.

Although the story of the failure of LCTM and its subsequent bail-out, organized by the US Federal Reserve is inherently interesting, it is the stories of the people involved that make When Genius Failed difficult to put down. Lowenstein wrote a best selling biography of Warren Buffet and he excels at telling the stories of the people behind the events.

The Genius mentioned in the title refers to Robert Merton and Myron Scholes. Nine months before LTCM failed 1997, Merton and Scholes shared the Nobel prize in economics. Merton, Scholes and Stanford's William Sharp (famous for developing the sharp ratio to measure risk) are some of the founders of modern finance, which attempts to apply quantitative techniques to market analysis. Merton and Scholes jumped at the chance to join LTCM where they could not only apply their theoretical work but make a great deal of money.

The trading cachet of the LTCM trading group, headed by Meriwether and the stellar academic reputations of Merton and Scholes was joined by the final pillar of LTCM's power base: David W. Mullins who was vice chairman of the US Federal Reserve before joining LCTM.

As a Big Swinging Dick hedge fund with the most stellar partners and a huge capital base, LTCM was able to convince banks to lend them money at rates that were not available to lesser mortals (including investment banks like Salomon Brothers). LTCM used this credit to leverage their capital base by a factor of twenty to thirty times. In the first few years this allowed LCTM to make spectacular profits for themselves and their investors.

One of the flaws of When Genius Failed is that Lowenstein sacrifices the details of the investment strategies used by LTCM to tell the story (Nicholas Dunbar's book Inventing Money does a better job explaining the details of the LTCM's financial strategies). Many of the strategies that LTCM used involved derivatives. The term "derivative" has taken on an ominous cast because of the failure of hedge funds like LTCM. Derivatives are more innocent than their sinister reputation. A derivative is a security that derives its value from an underlying asset. A futures contract for corn, for example, derives its value from the underlying market price for corn. A stock option derives its value from the underlying price of a stock or stock index. Derivatives and the strategies traders use to make money on them can be complex and Lowenstein may have felt that these details would make the eyes of many readers glaze over. For example, Lowenstein never fully explains what exactly a "swap" is and incompletely explains LTCM's "volatility" bets. As we will see below, LTCM lost most its money on swaps and volatility bets, so these derivatives play an important part in the story. I've included a footnote here on interest rate swaps and volatility bets.

In the epilogue Lowenstein summarizes LTCM's losses:

Investment Loss
Russia and other emerging markets $430 million
Directional trades in developed countries (such as shorting Japanese bonds) $371 million
Equity pairs trading $286 million
Yield-curve arbitrage $215 million
Standard & Poor's 500 stocks $203 million
High-yield (junk bond) arbitrage $100 million
Interest swaps $1.6 billion
Equity volatility bets $1.3 billion

This table makes it clear that the last two items, interest swaps and equity volatility bets, account for the majority of the losses. For the first four years, LTCM's trading strategies made huge profits. But no matter how good the trader is and no matter how good the models are, no one wins all the time. There will always be bad market bets. It is impossible to perfectly predict the future. LTCM's losses where large for two reasons:

LTCM used large amounts of leverage. For every dollar of assets in the fund they borrowed twenty to thirty dollars to place their trading bets. In many cases the loans made to LTCM where the equivalent of signature loans. There were not backed by securities and there were no margin calls when the value of LTCM's assets dropped. Leverage greatly magnified LTCM's profits when they bet correctly. It also greatly magnified their losses when the market turned against them. Although LTCM's returns were impressive when they did well, their risk adjusted returns were not nearly as good.

Low liquidity. Or to put it simply, there were few buyers when the market turned against LTCM.

Interest rate swaps are contracts between two parties. They do not trade on an open market the way stocks, bonds or exchange traded options do. The options contracts that LTCM traded in their volatility bets were huge customized option contracts:


Since long-dated options [LTCM was entering into 5 year options contracts] don't trade on exchanges, Long-Term had to tailor private options contracts, which it sold to big banks such as J.P. Morgan, Salomon Brothers, Morgan Stanley, and Bankers Trust. The market for such arcane contracts was thin, with only a handful of players who traded on a "by appointment" basis.
When LTCM wanted to sell these contracts when they started taking losses, they could not get out of their positions at a reasonable price since there were few buyers. And the buyers knew they were in distress.

The huge size of LTCM's leveraged capital base forced them into markets with less liquidity. Investment funds must worry about their trades having a market impact, narrowing or obliterating their expected profit margin. The larger the investment fund, the more this becomes a problem. They could trade in only the most liquid markets (e.g., stocks) or via customized contracts for swaps and options.

When LTCM crashed they had positions in securities with over a trillion dollars of face value. At the time many investment banks were losing hundreds of millions of dollars on similar market bets. There was concern at the US Federal Reserve that if LTCM defaulted on their contracts it would cause chaos and a market crash. This in turn could place the US economy in danger. So the Fed organized a bail-out. A consortium of banks and trading houses put four billion dollars into LTCM. In return the consortium took possession of LTCM's market positions. The investors that had money in LTCM got ten cents on their invested dollar. The partners were largely wiped out. Once LTCM's market positions were unwound the rescue consortium made money on their investment.

LTCM's mistakes were made fatal by massive leverage and lack of liquidity. If not for their huge leverage, LTCM could have survived these mistakes, or at least survived without such breathtaking losses. So while the mistakes themselves did not have to be catastrophic, it is interesting to consider how LTCM's "world view" contributed to their losses. At the heart of LTCM's trading strategies were two core beliefs:

The academic view is that the fluctuations (volatility) of a given stock and, in fact, the entire stock market follows a random course. The most articulate expression of this arguments can be found in Professor Burton Malkiel's book A Random Walk Down Wall Street. According to this view, volatility is distributed in a bell curve (a so called "log normal" distribution), just as people's height and weight are distributed in a bell curve. The larger the movement away from the mean (the center of the bell curve), the larger the movement in the stock price and the greater the potential risk. If volatility falls in a bell curve, risk can be estimated. The calculation of volatility assumes that the way a given security or set of securities has acted in the past will reflect the way they will act in the future. Since the past is known, the future can be modeled.

Markets are perfectly efficient. The actions of market traders will price securities correctly. A "mispriced" security will be returned to its proper price by the market. This is sometimes referred to as "perfect market theory". Markets may be out of balance at some point in time, but they will always move back toward balance.

When markets are stable and no events like the "Asian melt-down" or the Russian bond default perturb them, the assumptions above tend to be true. In fact, during the first three years of LTCM's history, markets were very placid.

Efficient markets show linear behavior that can be described with calculus and statistics. Academics like this because it leads to elegant results which make good journal articles, with nice equations. There is, in fact, some reason to believe that markets are efficient. But there should always be a caveat: markets are efficient, on average, over a long period of time. Unfortunately for those who actually trade in the market, short term effects can be anything but "efficient" and perfect. Unlike physics, where theory is eventually tested against experimental results, much of economics seems almost willfully ignorant of the way the market behaves.

Those who are active in the market, like George Soros, tend to discount academic theory. Anyone who hears news reports about the stock market will realize that rather than being perfectly efficient, markets are not always placid, but sometimes act like a manic depressive, gripped by wild euphoria one moment and crashes the next. A whole language has grown up to describe market "mood", complete with mascots: the bull and the bear.

Markets exhibit avalanche events: a seemingly small trigger can produce a massive wave of change in the market. In the case of LTCM, the avalanche was triggered by the Russian bond default. LTCM was not the only trading firm to lose large amounts of money. Virtually every investment bank lost money when interest rate spreads widened unexpectedly. This was largely because they were using the same kind of trading models. The black-scholes option model and its more sophisticated offspring (binomial trees) are popular with trading firms because they usually provide a good model for pricing stock and bond options. These models work well when the market is "efficient" and orderly. But markets regularly make a transition between order and chaos.

The movement from an efficient market to one that is sometimes wildly inefficient, where, in the case of LTCM, there are persistent mispricings of bonds, is not described by statistics or calculus. These events are best described as dynamical (or chaotic) systems. Dynamical systems are systems where action in the system feeds back into the system, producing a complex result. In markets these actions are produced by traders in the grips of panic selling (or in the case of the Internet bubble, euphoric buying).

By believing in perfect markets, LTCM left themselves exposed to huge risk when the market changed and became chaotic. One question buried in the saga of LTCM is: would it be possible to recognize the switch in regime, from a market that is relatively efficient, where mispricings are corrected in the short term, to a market which is chaotic, where mispricings can be unexpected and long lived.

A number of computer based market models have been proposed that act like real markets. Some of these rely on market models based on a set of dynamical equations. Others rely on a market composed of rule based market actors, which simulate trading in the market. These model produce volatility curves that have "fat tails". That is, bell curves that show extreme events on either side of the center. Although these models act like a real market, they do not necessarily mirror the market.

In theory a model could be built that would predict market regime shift. If we had unlimited amounts of computing power and the ability to simulate humans, with their judgment, fear and greed, we could build a simulation that would perfectly model market behavior. When such a synthetic market got certain inputs, like the Russian bond default, the market will become chaotic. The market could then be run forward in time, telling us what the likely result would be.

There are obvious problems with this thought experiment. Humans and the interactions between them are vastly too complex to simulate. Market information, like the trading volume or close price of a stock is internal market information. Humans act on information (news) that is external to the market. The interpretation of news depends on past news (the Russian bond default might not have produced such an extreme result if it had not been preceded by the Asian melt-down). Finally, even if such a predictive market simulation could be built, it might not be able to recognize a regime shift in time for the information to do any good. The 1987 stock market crash happened in a very short period of time, for example.

Building a market simulation that could predict a regime shift is a daunting task. But it might not be an impossible one. It may be that traders generally act on a limited set of rules, which could be modeled. Instead of trying to interpret news, it might be possible to use the internal characteristic of the market (increased volatility and internal trends) as triggers for the market actors. Black-Scholes and related option pricing models made a great contribution in the past. Dynamical market models may be the next regime.

Web based references:
LTCM Speaks, by Joe Kolman, DerivativesStrategy.com

Salon's review of When Genius Failed, by Alan Deutschman


Ian Kaplan - October, 2000
 
This is how I understand the process - in layman's terms

1. Derivex starts off with $950,000.
2. Derivex lends out $500,000 of the $950,000 and also receives a conduit fee of 5% or $25,000.
3. Derivex takes the remaining $475,000 ($950,000 - $500,000 + $25,000) and places this money in cash management account earning 6.2% p.a.
4. Regular monthly repayments from borrower @ 5% per year ($2083.33 per month) go into cash management account earning 6.2% p.a..
5. Derivex sells AAA rated mortgage backed bonds giving a combined interest stream coming from:
a. $475,000 and
b. $2083.33 monthly payments.
6. Bond buyers pay a premium on $475,000 face value for the bonds as they are getting a higher than 6.2% return which increases as the monthly payments roll in i.e. they will be getting $475,000 * 0.062 / 12 + $2083.33 * 0.062 /12 = $2464.93 (6.227% annualised) the first month, $475,000 * 0.062 / 12 + 2 * $2083.33 * 0.062 /12 = $2475.69 (6.254% annualised) the second month and so on…
7. Derivex than uses the $475,000 + premium – skimmed commission @ X% (Derivex profit) from the bond buyers to re-loan to new borrowers and the whole process begins again…

The bond buyers get a steady growing income backed by a regular payer who doesn’t look like defaulting. The borrowers get an interest free home loan that is insulated against interest rate rises (low risk borrowers) and Derivex gets to cream the commission off the top in the same way a floor trader skims commissions on every trade he/she sets up.

Is this a correct understanding?
 
Roofarmer...how much interest do Devirex pay on the original $950,000? Are you asuming zero interest to on this money??

And my quick skim of the Finacial Review suggests that the best CMT in Australia is currently reteurning about 5.10%

The people buying the AAA rated bonds...I understand how you have calculated the interest amounts but where does the money for final payout on the bonds come from?? ie the $100 final payement for the $100 put in on day 1
 
always_learning said:
Has anyone read When Genius Failed : The Rise and Fall of Long-Term Capital Management

Yes . . . this is what I was referring to in the earlier discussion regarding my thoughts that Derrivex will operate a 'hedge' to create their return.

The underlying product (Hedge Fund) will not impact on the mortgage product . . . unless the hedging fails.

Implications of all of this:
Still waiting for the PDS.

Regards,

Steve
 
"....unless the hedging fails"


Next question within any twenty year period what is the risk that a chaotic event like the asian meltdown, like 9/11, like the .com bomb, like Russian bond default will happen? And how could this impact Derivex's income generation model?

I estimate about 3 chaotic market events occur per decade and what is the probablity that one of these could wipe Derivex out?
 
nat r said:
Roofarmer...how much interest do Devirex pay on the original $950,000? Are you asuming zero interest to on this money??

And my quick skim of the Finacial Review suggests that the best CMT in Australia is currently reteurning about 5.10%

The people buying the AAA rated bonds...I understand how you have calculated the interest amounts but where does the money for final payout on the bonds come from?? ie the $100 final payement for the $100 put in on day 1

Hi Nat r,

I am making the assumption that the original $950,000 has been generated from the original investor's funds. Derivex has stated that it takes 18 months from start to finish to build up the necessary capital to meet the first set of loans to investors.

You are right however in the 6.2% being rather high however Bank West currently has an at call account returning 5.25% on amounts above $100,000:

http://www.bankwest.com.au/newsroom/Rates/Personal_Accounts/Gold_Cash_Management_Account/index.asp

so I'm guessing 5.5% wouldn't be out of the question if you negotiated a deal with a big bank to keep all your funds at deposit there. Trevor stated that they struck a deal with ING for 5.44% and ING were happy as this lowers there overall loan exposure due to the amount of funds derivex will be depositing.

I guess it's all about volume. Derivex is hoping to capture 5% of the market and this would not be small business. If they could make say 0.44% on all the money they deposit i.e. give the bond buyer 5% and they keep 0.44% (plus the premium on the bond sales) they would be raking it in. Add in hedging proceeds and future rises in the interest rate and your talking big bickies!

Why wouldn't they simply take their $950,000 and invest at a safe 10%. Well with the $950,000 and the stepping approach outlined in my previous post they can have many times that amount earning 0.44% (or whatever spread they choose) e.g. the $950,000 could easily turn into $950,000,000 through the gearing approach they employ. It's all about the creation of money - the US banking regulators like Fannie Mae and Freddie Mac do it but they are sitting on a bomb waiting to explode due to the fact if interest rates rises and borrowers walk away from their loans they are screwed! What would you rather buy - a mortgage backed bond where the underlying income stream is virtually guaranteed or one which can be wiped out by major interest rate rises?

As for the money for the final bond payout - that comes from the borrower repaying the loan you made to them. You just make sure you have enough payments coming in to meet the bond periods you have sold. I guess this is where the proprietary software comes in i.e. you sell 25 * $1000 bonds for $10,100 (includes $100 premium) due to mature in 1 year thus you will have enough from one year's worth of payments to cover this amount. You can then turn around straight away and reloan the $25,000 and write another 25 * $1,000 bonds. The process can be never-ending as long as you have enough bond investors on one side and home loan borrowers on the other side. This is why Derivex makes sure you don't cash out within 5 years so they can have some assuredness of income stream. Trevor even said they would waive the 1.95% early payout fee if your buyer assumed your loan and continued the payments.

Anyway that's my take on it!
 
Roofarmer....a few quick points if I may:

Whoever put the original $950,000 in will be expecting to earn something...it looks like they have put in equity rather than debt. The typical equity return the professional market expects on a start up company is about 20%...I can't see where this will come from ...can you? If they put in as debt they would want about 8%.

I agree bankwest are offering 5.25% ...however, they are not rated AAA so any money you put with them will only have the rating they hold (A or A+) thus making the sale of a AAA bond impossible.

By having a larger amount (Say $10 mill) you will not get a higher interest rate...banks can borrow from each other at 5.25%...why would they pay more from an individual or small company......Bankwest are offering high rates as a 'loss leader' to attract retail high net worth customers. (BTW a deal I'm working on has $5mill on yearly deposit as part of the security base...the best we could get on it was 5.10%)

With regard to Fannie May and Freddie Mac ....they do not create money ...they borrow money secured against home loans....they charge interest on the money they lend so they can pay the interest on the money they borrow...BTW they issue mortgage backed bonds. In other words for every $1 they lend they haev borrowed $1.

Please note that they lend to US borrowers on a 25 yr fixed rate basis so if interest rates raise the boorower is not effected...therefore no walking away. (BTW...I have been to the Fannie Mae head office in the US and met with their funding team so IMHO I have a fair idea how they work)

Just a quick reminder on 1st Uni year economics...only Goverments can create money...everbody else either is a borrower or lender of it.

I have read your explanation re the final bond payment ....I will have to think again....I can't quite get to your point just yet.

Hope this makes sense !!
 
nat r said:
With regard to Fannie May and Freddie Mac ....they do not create money ...they borrow money secured against home loans....
Nat, Freddy and Fanny are the vehicles by which the "newly printed" money gets into circulation. Re-finance your house - buy a new SUV, zero down, no interest.

In a thriving economy the central bank makes money available to productive enterprises to borrow and expand, thus expanding GDP and wealth. In the US though, biz already has too much debt and too skinny margins so they are no longer borrowing. Bernanke has already admitted that they would drop money from helicopters if that was what it would take so tossing the odd billion at NGO's to keep the money circulating is no big deal.

I believe we live in crazy times where anything is possible, you believe all the old rules you learnt at school apply. Let's just wait and see what's on offer?

Thommo
 
Thommo said:
I believe we live in crazy times where anything is possible, you believe all the old rules you learnt at school apply. Let's just wait and see what's on offer? Thommo

Exactly. Why are intelligent people denouncing a company without all the facts at their disposal? Weren't people saying the same thing about interest only loans before they became commonplace? (What!! You never repay the loan? What will the bank say?!? This must be a scam !!!)

By all means, healthy scepticism is always positive... but how can you be open to possibilities if youve already made up your mind thats its a scam?

Jamie.
 
Hi all,

nat r, you seem to have a very good handle on this and live in the real world.

For those who are willing to give it a go, ask yourself this question.

Why do derivex want to have a mortgage over YOUR property, when they could just as easily buy the property themselves, and use the rental return as the income stream for the fancy financial setup???

bye

PS. I think Steve is right by waiting for the PDS, because there is very little chance of there actually being one.
 
Bill.L said:
For those who are willing to give it a go, ask yourself this question.

Why do derivex want to have a mortgage over YOUR property, when they could just as easily buy the property themselves, and use the rental return as the income stream for the fancy financial setup???
Bill,

Are you willing to eat the PDS if there is actually one that comes out? I'll come down to watch :)

Frankly I reckon this is the wrong question.

Banks are in a similar position. Their cost of money means that they'd do much better than investors can do if they bought property outright & became major land holders.

Why don't THEY do it directly? Because that's not what they are there for.

People define the rules on how they intend to make money & create a company (aka a bank or a derivex) based on these rules.

There are many good reasons why banks (& derivex) don't like directly purchasing property - or shares for that matter. And the key one is that the House always wins, while individual investors' fortunes vary.

Derivex is not doing anything unusual in choosing to not buy & own property in it's own right. It's in very prestigious company - a number of the most profitable & highly valued companies in Australia.

If you want to be extremely wealthy, don't focus on controlling the assets but on controlling the capital!

Cheers,

Aceyducey
 
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Thommo...I'm sorry but your take on how Fanne Mae/Freddie mac works is wrong.

Here is a snippet from the Fannie Mae website

Here is how our business works:

First, we have a mortgage portfolio business, a business we've had since our founding in 1938.

In this business, we sell debt securities to raise cash. We use that cash to purchase mortgages or mortgage-backed securities from lenders or in the open market from other investors. Then we make money from the spread. That is our net interest income.

Second, we have a mortgage guaranty business, which we've had since the early 1980s.

In this business:

Lenders bring us a group of mortgages with similar characteristics, such as interest rate and loan term, having run the loans through our underwriting technology (or their own or manually) to assess their risk of default.
Then we package the loans into a security and guaranty the payment of principal and interest if the loans should default.
Then we give the mortgage-backed security back to the lender, which it then can hold or sell on the open market, and at a better price because it has our guarantee.
For providing our guaranty, the lender pays us a fee, which is priced according to the lifetime risk of the loans. This business produces our guaranty fee income.

There is also some good content on their site pointing out that they are in no way supported by the government.

All they are doing is issuing Mortgage Backed Bonds to investment companies that hold yours and my superannuation. This ongoing theme of being a backdoor dumping ground for freshly printed money is just untrue and I don't know where people get these crazy ideas from.

Aceducy: to address your post. Banks under general banking rules set and monitered by the RBA have to hold real Capital against any assets thay hold.

If that asset is a loan on a residential property the capital requirement is almost zero and the return on that low amount of capital is actually very high...this makes there share price go up.

However if that asset is a house they own the the capital requiremnt is huge and the "Return on Capital " (which is what every bank is looking to increase) would be very low.....and their share price would be very low.

Why did they sell all their branches???...because the capital they had to hold agianst them was too high !!


Please Please...I'm not trying to be a smarty pants on this stuff...I actullay do these deals this for a living and have done so for 15 years....I'm not some crank on a keyboard...I live, breathe and sleep this stuff every day and i'm only here to 'try' to pass on my experience to those who are keen to get a free lesson on how wholesale/professional banking and money markets really work.
 
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nat r said:
Please Please...I'm not trying to be a smarty pants on this stuff...I actullay do these deals this for a living and have done so for 15 years....I'm not some crank on a keyboard...I live, breathe and sleep this stuff every day and i'm only here to 'try' to pass on my experience to those who are keen to get a free lesson on how wholesale/professional banking and money markets really work.
I certainly don't think you have been accused of that, by anyone. I for one (while remaining agnostic on Derivex) have learned quite a bit from your posts on the subject. Keep it up!
 
nat r said:
Aceducy: to address your post. Banks under general banking rules set and monitered by the RBA have to hold real Capital against any assets thay hold.
Nat,

I know and understand your point...but it's a different level of detail to my point: the bank didn't have to decide to be a bank in the first place :)

For some hoopy reason financial institutions decided to BE financial institutions rather than landbanks/landlords/developers.

Cheers,

Aceyducey
 
OK....let me put forward the two questions I keep asking myself:

Why not lend the money at 3%....ie half what other lenders charge, be knocked over in the rush and still make a bigger fortune? Banking is about making profits not friends !

How is the person who put in the original $1.5m or $950k (I have lost track as to which it is) get a retuern on theri mony...I don't buy into the idea that somebody will be thankful just to get a return of capital rather than a return on capital.....it is just not true.
 
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