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The Key Multiplier

March 9, 2010 / admin posted in Uncategorized / No Comments

When you deposit $$ in a bank, the bank uses it to count to its capital requirements, which allows them to lend more.  The bank benefits, the depositor benefits and the recipient of the loan benefits.Its a win/win/win situation.  As stated in a previous post, their required ratio is known as a reserve requirement or how much a bank most keep in reserve.

Insurance is a funny business. They know how much revenue they will have right away because it comes from their insurance premiums. What they don’t know is what their expenses and profit/loss will be as they do not know how many claims will be filed for them to pay.  The way they make the bulk of their $$ is how they manage that float of cash since that $$ may not stay with them and go out on claims.  Insurers have capital requirements too, known as source capital. More source capital means more insurance policies written and more potential profit.  When we do a repo trade with the insurer funding it, they get the benefit of getting to write between 3-6x as much in insurance policies as $$ they are lending out.  This is a great deal for them and the client and this key multiplier is why its such a good deal for everyone.

Stu

Southern Lending Solutions

Payment Method: DVP vs Escrow

March 3, 2010 / admin posted in Uncategorized / No Comments

Many repo trade programs use third party (usually an attorney) escrow accounts.  In fact, one very reputable one that we would recommend has exactly this policy.  We have heard of many horror stories with escrow though as the securities are transferred in, payment transferred in, then securities transferred out and payment transferred out. That’s alot of moving parts and stories have surfaced of fraudulent activity and crazy things happening in the escrow process.  Also, some of the private equity or hedge funds use escrow so they then can use the escrowed shares to raise the $$ to pay for the loan.  Allowable but not completely desirable.

DVP stands for Delivery versus Payment. Securities transfer out and Payment transfers in. Both by Fed Wire, both instantaneous and very low risk.  It also means the funding entity doesnt need the shares in order to fund it as the $$ must be available beforehand for an instantaneous transfer. Clients like this higher degree of safety.

Stu

Southern Lending Solutions

Working With Foreign Exchanges

March 1, 2010 / admin posted in Uncategorized / No Comments

Despite what everyone thinks…the American Stock Exchange (AMEX) is not the only one. There are many emerging countries with very strong exchanges. A few of these markets include: Indonesia, Cyprus, and Israel.

Israel is incredibly hot right now due to it strong economic growth.  As many know, the pharmaceutical market is not only very lucrative but very expensive. The cost to do research overseas in countries such as Israel, is sometimes half of what it is in the US.  This makes it very attractive for newer companies to base their  research in Israel. Look for foreign exchanges such as the Tel Aviv  stock exchange to become the new front in the stock market.

Todd
Southern Lending Solutions

What is a Segregated Account?

March 1, 2010 / admin posted in Uncategorized / No Comments

So we know in a Securities Lending Program, a type of Repo Trade, that in the best case scenario that a reinsurer has goals that are in line with our clients’ goals.  How does this all work?

Banks and insurance companies have capital requirements. In banking, the Federal Reserve dictates banking capital requirements by issuing reserve requirements. In other words, a certain amt of capital must be held back in reserve.  These requirements create the limits of how much $$ a bank can lend.  In the insurance world, the equivalent of reserve requirements are known as source capital requirements. Source capital creates the limitations of how much insurance can be written (issued) by an insurance company.

The listed securities being lent against are used for our insurer’s source capital requirements.  The reason why we can count them is through the use of segregated accounts.

What is a segregated account?

A segregated account is an account placed at a bank, investment bank or elsewhere that allows for the counting of capital.  So when the securities are physically transferred away from their current place where their acct is held, they are transferred to one of the segregated accounts but still held under client’s ownership. So client still owns the securities but insurer gets to count them to write more insurance.  How is this possible?  Well every bank in the world does this by paying you a % for your deposits and then lending that $$ out. It’s the same here, just for insurance instead.

This is why the securities are physically transferred away as opposed blocking and keeping them where they are.

While most don’t care about these mechanics, this helps explain why the program does what it does, how are reinsurance funders benefit and why their benefit is aligned with our clients’ benefits.  It also answers 2 of the most common questions we get asked about our program.

Stu

Southern Lending Solutions

The Long and Short of the Repo Trade

February 27, 2010 / admin posted in Uncategorized / No Comments

So we know that a Repo Trade is basically a repurchase agreement used against assets, typically against listed securities.  Who funds this transaction and why is very important for any client to find out as there are some whose goals are counter to the client’s goals.

When someone buys a stock, they are said to be going Long, meaning they are purchasing with the hope that the shares will increase in value.  The opposite, to Short, is when shares are borrowed and sold hoping the price decreases in value and the shares can be bought back at a lower price to close the transaction.  An example, shares are borrowed and sold at 25 and bought back to close out at 20 meaning a 5 point profit per share for the short.

The bulk of the firms that offer this program, commonly referred to as a Stock Loan Program, are funded by Private Equity groups or Hedge Funds. Often their purpose is to take the shares in order to short them or to cover existing short positions.  So what? What that really means is they are lending against the client’s shares hoping to give them back at the end of the loan period at a lower value or nearly as bad, to sell to cover an existing position.  That somehow doesn’t seem right.

If you are considering one of these stock loan programs, ask the general question of who funds it?  Here at Southern Lending Solutions, we are fortunate in that we have a top global reinsurer that funds our Securities Lending Program.  The difference is the shares allow our reinsurer to write more reinsurance, their primary line of business.  It also means that as the shares increase in value, they can write even more reinsurance and gain as our clients gain and if the shares decrease in value, they share in the loss with the client as it means they cannot write as much reinsurance.  Our reinsurer’s goals are in line with our client’s goals.

We know (and you should too)  that no one who makes a loan to our clients does so without knowing they can make $$ from doing so but at least if our funders and our clients goals are properly aligned with each other then everyone stands to gain from the transaction.

Stu

Southern Lending Solutions

What is a Repo Trade?

February 25, 2010 / admin posted in Uncategorized / No Comments

A repo trade (repurchase trade) is an agreement to lend against an asset that allows for its repayment (the repurchase part) to remove the lien/pledge/encumberance against that asset.

Repo trades are the most common with securities where the securities are blocked or physically transferred away with the right to repurchase by paying the loan off and removing the pledge/encumberance from the shares.

They are a great way to utilize what many seem to consider a dead asset, their own personal securities or the company’s own treasury stock. However, all repo trade programs are not created equal.

Some actually lend against your securities in the hopes they decline in value. Crazy, huh? Well its true. We will show you why and how coming up in the next few entries.

Stu

Southern Lending Solutions

Commercial Bank Lending Down 7.5% in 09

February 24, 2010 / admin posted in Uncategorized / No Comments

The Washington Post reported that the largest decline in bank lending year over year since the 1940′s occurred in 2009.  Bank lending declined 7.5% over 2008 to $587 billion.

Other asset quality indicators worsened in the 4th quarter including Net Chargeoffs (accounts considered uncollectible) up 37% over ’08.  This rate represents the highest rate for NetChargeoffs in the 26 yrs that statistics have been kept on the figure.

The worst of it may be over but it still seems pretty far from over.

Stu

Southern Lending Solutions

Hello world!

February 23, 2010 / admin posted in Uncategorized / No Comments

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