Learn about Bailout 6: Getting an equity infusion Video

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Learn about Bailout 6: Getting an equity infusion

Welcome back and I’ve made these balance sheets so messy. I think it would make sense to redraw. I'll clean up a little bit. So what’s our new balance sheet after we’ve unloaded a lot of those assets, so let me assets. So now the book value, all I have now. I have a little bit of cash. Let me write that down. I had one billion dollars of cash. Let say everything is well right to be there, so you know, one billion of cash and just so you know, you know banks need cash to operate. It can’t just use all its cash to pay off things because they would be able even transact with its customers or they pay its rent or you know send its executives on there leer jets, whatever it needs to do. But anyway you have one billion of cash, so you might have been thinking, why then just use its cash to unload some of that? Well you always have to keep some cash online just to conduct business and actually that’s called working capital. But anyway back to the point of this video. So you have one billion dollars in cash and at least the management of this company thinks it has four billion dollars worth of residential CDO and this is toxic stuff that’s the focus of this government bail out which is really historic in its proportion. Then I'll talk more about that later and on the liabilities side, so liabilities. What was left? I think I had called it loan C. all right liabilities in red just because there bad. There not bad but you know there’s something you owe, so there are not as pleasant. So loan C and we said loan C was three billion dollars and then what is the equity? I'll do that in yellow, equity. So the total assets where five billion in assets, right five billion in assets total assets. You have three billion in liabilities, so if you believe what the accountancy or the bank management has said about there assets. If you wanted to just liquidate everything, if you have five billion assets. You liquidate them, you got five billion dollars. You paid off your three billion in loan. You’ll be left with two billion dollars, so that’s the equity. And just so as a reminder, how many shares whether I think I originally said in the original video that we have 500 million shares. So each of those shares is 1500 million of this equity, so let see the book value per share. Let me write that here. The book per share is what, is going to be the book value, two billion divided by 500 million, so its 4 dollars. Remember when six dollars not too long ago but we have to take that those commercial morgues that we thought it worth 10 billion actually ended up being worth 9 billion. So we lost a billion dollars of our book value and a billion dollars translate to two dollars of the share price. Anyway, fair enough and you know maybe at this point the market value of the share. Let say the market value, market value, so that’s essentially the stock price if you would look up this company sticker price. Let say, its one dollar right because were like boy, you know after all this bears turns and lemon brothers. This is all getting a little nerve racking, so and they have this shady thing over here. So we have to be careful, so if the market value is one dollar. What are they saying about the assets? Or what are they saying about the equity? Well, what’s the market cap? If the share price times the number of shares, so that there saying essentially that the market cap and that’s equivalent to the market value of the equity with the market things, the equity worth that’s $1×500 million shares, so that’s worth 500 million or .5 billion. So the market is actually saying; no you don’t have two billion of equity. You only have half of billion of equity and it’s probably because I think this is worth a billion and a half left. But anyway well leave that aside for now but now were getting to the cracks of the issue. Two of those other loans, they came do no one was willing to renew the loans or give them new loans. So the company have to liquidate some of there assets in order to pay those loans now. Now were kind of, this is the end game. We have loan C and let say loan C comes due. So they say, hey you know what things are really shady. You’re assets, they look very similar to lemon brothers and bears turns, were not going to renew your loan. You go out to the credit market. You try to issue bunch. You try to do anything you can, no ones willing to give you a loan just because there are all a little bit scared. So what do you do? Well you have to pay three billion dollars of loans. You just have to, right because no one is willing to give you three billion dollars. Well you say out of this cash, I cant use all of it, if I just wanted to operate bare bones maybe I could give .5 billion cash but that’s not going to help my situation at all, right because that I still would have two and a half 0505 left. So you’re like wow, I'm in a situation where I have to sell these CDO’s, so now all my models and all my assumptions are going to see if there were even vaguely accurate, right, if these things are worth, really worth four billion dollars. So I go out there and I try to sell my CDO’s. I tried to sell them for whatever I can get for them because I have to sell them and one there’s no market for them because just there’s a lot of people who want to unload them but there’s not really anybody who’s keen on buying it. So they might not even be any market, for you like no I want to sell them. So you just you know, you broadcast it out to every hedge fund and private equity fund and every bank out there, and you say who wants to buy my CDO? In some private equity firm comes to you, okay well you know I think that those things are pretty toxic but there probably worth maybe something. I'm pretty optimistic about the real state market and maybe in 10 years. They might come back, so I'm willing to give you one billion dollars for that, those CDO’s, right. So essentially, you know what’s the market price of something? It’s the best price that someone is willing to give you for something. So the market price of this because you shopped it around. You’ve gone to the market. You’ve gone to everyone you can. The market price for this is essentially the market is offering you one billion dollars for this CDO. So what do you do? Well if you sell it for one billion dollars is that help your situation? If you sell this for one billion dollars, you get a billion dollars here. You have a billion dollars of cash. You have a total two billion dollars that still won’t pay your loan. You’re still going to be bankrupt and even more the company management, their very stubborn. They day you know what, one if I sell it. I'm going to be bankrupt and I think that just some kind of fire “sale price” but that, that’s not the real price. All of a sudden for the first time in my career when I was getting, you know I was getting 30 million dollar on your bonus. I have heavily believed in the market. But now I'm in denial of the market. I say you know what, the only reason why, you know I'm only getting a billion dollar for this is because everyone is afraid and these things if someone where to just hold them to maturity, if someone would just to hold these assets for the 30 years over which you know there morgues, the underline morgues will just you know pay out. Someone is going to collect roughly four billion or maybe at worst three and a half billion. So I'm not going to do this but really you have no choice. So what you try to do is you say well can someone give me some type of a loan? Can someone type it, you know just lend me some money in the short term, so just I could get this paid off and I would be willing to give this as collateral, right. Collateral on loan is you give me a loan and you take this as collateral and if I don’t pay the loan you just keep the asset right. And that’s essentially what the fed was doing. The fed traditionally only gives loan if you give something really nice as collateral like you know treasuries or essentially just treasuries. And they still take a little discount of your collateral like if you give the Federal Reserve a dollar of treasuries. They might give you 80 cents of loans but over this whole credit crunch. The fed is gotten looser and looser in terms of what it’s willing to accept as collateral. So actually the fed I don’t know the details of how toxic of an asset they were willing to take as collateral but they started loosing it up to pretty toxic assets. So maybe you get a loan but let just put that aside right now. But this is the situation where facing. You have a bank and its essentially being forced or it proceeds at force into bankruptcy even though it thinks that it has positive equity. So you get a loan from the fed or someone else if they willing to take this kind of toxic stuff as collateral. Let’s assumed that there not for now. The other option is you can recapitalize. You can get someone to invest in the firm. You can sell equity in the firm and get some more cash to pay off this loan if you can convince someone that know your is really in the future going to be worth a lot more. This is just a stressful situation. So you go to some sovereign wealth fund and that’s just the way of saying some foreign government that’s been could collecting dollars because they’ve been selling in this oil or cheap manufactured goods. So you got all those at look, you know we are the super you know where Goldman brothers or you know where lemon sacks. We are these great brands in the banking industry. Would you like to have a piece of this thing that represents American capitalism? And they say, sure you know will be interested in investing. So they say, well you know what the market price is a dollar and you know I think that’s probably little distress. So well be willing to pay a dollar and 50 per share and will buy I don’t know, will buy. Let see how much do you need. Well buy two billions shares at a dollar at 50 per share. So what happens? So let say the sovereign wealth fund. There are going to buy two billion shares at a dollar at 50 per share. So now what is the balance sheet look like? So two billion of dollars at 50 per share. They’re essentially giving you that is equal to three billion dollars right. So now you get three billion more in cash, so this becomes four billion but you can’t get something for free. So what will happen? Our liabilities increasing? Well no our liabilities aren’t increase. They didn’t give us a loan right. They invested in us. They essentially bought shares of the company. They bought two billion shares. So how is does that get accounted for? Well instead of our share count being 500 million shares. This is how many shares before we had before. The company essentially created two billion new shares. So now the company has 2.5 billion shares. So now we have 2.5 billion shares and in something interesting what is the new book value of the shares? So what are our total assets 4 billion plus 4 billion? Its eight billion of assets. Our liabilities are still three billion. Now our; the value of our share after the investment and you could kind of call this the post value. The post money evaluation or book value is five billion, right. Eight billion minus three billion and now what’s the book value of our shares? See five billion divided by five hundred, oh no sorry divided by 2.5 billion, its two dollars per share. So our new book value is two dollars per share and that’s interesting because at some place in two dollars per share, and this is two dollars per share. At some place in between our old book value and the price that the company paid right or the sovereign wealth book fund paid a dollar at 50 per share. But anyway, I just wanted, I just realized I'm out of time. I'll continue this in the next video.

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Welcome back and I’ve made these balance sheets so messy. I think it would make sense to redraw. I'll clean up a little bit. So what’s our new balance sheet after we’ve unloaded a lot of those assets, so let me assets. So now the book value, all I have now. I have a little bit of cash. Let me write that down. I had one billion dollars of cash. Let say everything is well right to be there, so you know, one billion of cash and just so you know, you know banks need cash to operate. It can’t just use all its cash to pay off things because they would be able even transact with its customers or they pay its rent or you know send its executives on there leer jets, whatever it needs to do.

But anyway you have one billion of cash, so you might have been thinking, why then just use its cash to unload some of that? Well you always have to keep some cash online just to conduct business and actually that’s called working capital. But anyway back to the point of this video. So you have one billion dollars in cash and at least the management of this company thinks it has four billion dollars worth of residential CDO and this is toxic stuff that’s the focus of this government bail out which is really historic in its proportion. Then I'll talk more about that later and on the liabilities side, so liabilities. What was left? I think I had called it loan C. all right liabilities in red just because there bad. There not bad but you know there’s something you owe, so there are not as pleasant.

So loan C and we said loan C was three billion dollars and then what is the equity? I'll do that in yellow, equity. So the total assets where five billion in assets, right five billion in assets total assets. You have three billion in liabilities, so if you believe what the accountancy or the bank management has said about there assets. If you wanted to just liquidate everything, if you have five billion assets. You liquidate them, you got five billion dollars. You paid off your three billion in loan. You’ll be left with two billion dollars, so that’s the equity. And just so as a reminder, how many shares whether I think I originally said in the original video that we have 500 million shares. So each of those shares is 1500 million of this equity, so let see the book value per share. Let me write that here. The book per share is what, is going to be the book value, two billion divided by 500 million, so its 4 dollars.

Remember when six dollars not too long ago but we have to take that those commercial morgues that we thought it worth 10 billion actually ended up being worth 9 billion. So we lost a billion dollars of our book value and a billion dollars translate to two dollars of the share price. Anyway, fair enough and you know maybe at this point the market value of the share. Let say the market value, market value, so that’s essentially the stock price if you would look up this company sticker price. Let say, its one dollar right because were like boy, you know after all this bears turns and lemon brothers. This is all getting a little nerve racking, so and they have this shady thing over here. So we have to be careful, so if the market value is one dollar. What are they saying about the assets? Or what are they saying about the equity?

Well, what’s the market cap? If the share price times the number of shares, so that there saying essentially that the market cap and that’s equivalent to the market value of the equity with the market things, the equity worth that’s $1×500 million shares, so that’s worth 500 million or .5 billion. So the market is actually saying; no you don’t have two billion of equity. You only have half of billion of equity and it’s probably because I think this is worth a billion and a half left.

But anyway well leave that aside for now but now were getting to the cracks of the issue. Two of those other loans, they came do no one was willing to renew the loans or give them new loans. So the company have to liquidate some of there assets in order to pay those loans now. Now were kind of, this is the end game. We have loan C and let say loan C comes due. So they say, hey you know what things are really shady. You’re assets, they look very similar to lemon brothers and bears turns, were not going to renew your loan. You go out to the credit market. You try to issue bunch. You try to do anything you can, no ones willing to give you a loan just because there are all a little bit scared. So what do you do?

Well you have to pay three billion dollars of loans. You just have to, right because no one is willing to give you three billion dollars. Well you say out of this cash, I cant use all of it, if I just wanted to operate bare bones maybe I could give .5 billion cash but that’s not going to help my situation at all, right because that I still would have two and a half 0505 left. So you’re like wow, I'm in a situation where I have to sell these CDO’s, so now all my models and all my assumptions are going to see if there were even vaguely accurate, right, if these things are worth, really worth four billion dollars. So I go out there and I try to sell my CDO’s. I tried to sell them for whatever I can get for them because I have to sell them and one there’s no market for them because just there’s a lot of people who want to unload them but there’s not really anybody who’s keen on buying it.

So they might not even be any market, for you like no I want to sell them. So you just you know, you broadcast it out to every hedge fund and private equity fund and every bank out there, and you say who wants to buy my CDO? In some private equity firm comes to you, okay well you know I think that those things are pretty toxic but there probably worth maybe something. I'm pretty optimistic about the real state market and maybe in 10 years. They might come back, so I'm willing to give you one billion dollars for that, those CDO’s, right. So essentially, you know what’s the market price of something? It’s the best price that someone is willing to give you for something. So the market price of this because you shopped it around. You’ve gone to the market. You’ve gone to everyone you can.

The market price for this is essentially the market is offering you one billion dollars for this CDO. So what do you do? Well if you sell it for one billion dollars is that help your situation? If you sell this for one billion dollars, you get a billion dollars here. You have a billion dollars of cash. You have a total two billion dollars that still won’t pay your loan. You’re still going to be bankrupt and even more the company management, their very stubborn. They day you know what, one if I sell it. I'm going to be bankrupt and I think that just some kind of fire “sale price” but that, that’s not the real price. All of a sudden for the first time in my career when I was getting, you know I was getting 30 million dollar on your bonus. I have heavily believed in the market.

But now I'm in denial of the market. I say you know what, the only reason why, you know I'm only getting a billion dollar for this is because everyone is afraid and these things if someone where to just hold them to maturity, if someone would just to hold these assets for the 30 years over which you know there morgues, the underline morgues will just you know pay out. Someone is going to collect roughly four billion or maybe at worst three and a half billion. So I'm not going to do this but really you have no choice. So what you try to do is you say well can someone give me some type of a loan? Can someone type it, you know just lend me some money in the short term, so just I could get this paid off and I would be willing to give this as collateral, right.

Collateral on loan is you give me a loan and you take this as collateral and if I don’t pay the loan you just keep the asset right. And that’s essentially what the fed was doing. The fed traditionally only gives loan if you give something really nice as collateral like you know treasuries or essentially just treasuries. And they still take a little discount of your collateral like if you give the Federal Reserve a dollar of treasuries. They might give you 80 cents of loans but over this whole credit crunch. The fed is gotten looser and looser in terms of what it’s willing to accept as collateral. So actually the fed I don’t know the details of how toxic of an asset they were willing to take as collateral but they started loosing it up to pretty toxic assets. So maybe you get a loan but let just put that aside right now.

But this is the situation where facing. You have a bank and its essentially being forced or it proceeds at force into bankruptcy even though it thinks that it has positive equity. So you get a loan from the fed or someone else if they willing to take this kind of toxic stuff as collateral. Let’s assumed that there not for now. The other option is you can recapitalize. You can get someone to invest in the firm. You can sell equity in the firm and get some more cash to pay off this loan if you can convince someone that know your is really in the future going to be worth a lot more. This is just a stressful situation. So you go to some sovereign wealth fund and that’s just the way of saying some foreign government that’s been could collecting dollars because they’ve been selling in this oil or cheap manufactured goods.

So you got all those at look, you know we are the super you know where Goldman brothers or you know where lemon sacks. We are these great brands in the banking industry. Would you like to have a piece of this thing that represents American capitalism? And they say, sure you know will be interested in investing. So they say, well you know what the market price is a dollar and you know I think that’s probably little distress. So well be willing to pay a dollar and 50 per share and will buy I don’t know, will buy. Let see how much do you need. Well buy two billions shares at a dollar at 50 per share. So what happens? So let say the sovereign wealth fund. There are going to buy two billion shares at a dollar at 50 per share.

So now what is the balance sheet look like? So two billion of dollars at 50 per share. They’re essentially giving you that is equal to three billion dollars right. So now you get three billion more in cash, so this becomes four billion but you can’t get something for free. So what will happen? Our liabilities increasing? Well no our liabilities aren’t increase. They didn’t give us a loan right. They invested in us. They essentially bought shares of the company. They bought two billion shares. So how is does that get accounted for? Well instead of our share count being 500 million shares. This is how many shares before we had before. The company essentially created two billion new shares. So now the company has 2.5 billion shares. So now we have 2.5 billion shares and in something interesting what is the new book value of the shares? So what are our total assets 4 billion plus 4 billion? Its eight billion of assets.

Our liabilities are still three billion. Now our; the value of our share after the investment and you could kind of call this the post value. The post money evaluation or book value is five billion, right. Eight billion minus three billion and now what’s the book value of our shares? See five billion divided by five hundred, oh no sorry divided by 2.5 billion, its two dollars per share. So our new book value is two dollars per share and that’s interesting because at some place in two dollars per share, and this is two dollars per share. At some place in between our old book value and the price that the company paid right or the sovereign wealth book fund paid a dollar at 50 per share.

But anyway, I just wanted, I just realized I'm out of time. I'll continue this in the next video.

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