More on LBO's, Stock Buy Backs, MBS, CDO's & Leverage
Stock buy backs use profit to repurchase and retire outstanding stock in a company, thus increasing the earnings per share by reducing the number of outstanding shares.
Its a sure fire "smoke and mirrors" way of making a company seem more profitable when actually business isn't all that hot.
Kinda like when unit sales are down in principal markets, yet profits are up on rising prices, emerging market sales & foreign currency exchange.
A leveraged buyout, or LBO, is an acquisition of a company or division of another company financed with a substantial portion of borrowed funds.
A leveraged buyout (LBO) or stock buy back occurs when a large amount of debt capital is used to replace equity capital.
Oh dear, I neglected to mention that many stock buy backs in recent years, have been funded by BORROWING the money, rather than recycling profits.
Cheaper to retire the equity debt with newer low interest rate bond debt. Are you starting to get the picture?
For the last 5 years, hedge funds and other institutional investors have been purchasing debt securities backed by risky and fraudulent mortgages (RMBS), and risky overvalued assets (LBO and stock buy back).
That wasn't bad enough, the brokerages involved have been over-valuing these risky assets with fantasy “mark to model” valuation methods, and puffed up stock valuations.
And that wasn't bad enough, the rating companies (S&P, Fitch's, etc.) have been rubber stamping the assets faster than USDA gets branded on a cow's ass.
And that still wasn't bad enough, the investors and holders then borrowed in a leveraged fashion against said over-priced securities.
Let me splain someding Lucy: Start adding up all the pieces of the leverage.
A home equity mortgage is itself a leveraged product, as it might be backed by a second lien on a home.
These mortgages are pooled into a home equity security (RMBS), which is another leveraged product.
The equity of these is bought by CDOs, which are another leveraged vehicle.
The equity in CDOs is supplied by hedge funds, which are also leveraged. A $1 of equity in a typical hedge fund might create assets of $1,000.
One thing is certain, leverage magnifies losses as much as it does profits.
Another certainty is that many of these securities have a automatic asset liquidation clause.
I.E. When the perceived value of the asset hits a certain threshhold, the asset is to be liquidated immediately.
Without a market or firm price, the illiquid asset cannot be liquidated.
However another liquid asset can be substituted and the funds used to cover the margin call or "loss" on the illiquid asset.
Are you getting the picture a little better now? I don't think this market is anywhere near getting out of the woods.
Its a sure fire "smoke and mirrors" way of making a company seem more profitable when actually business isn't all that hot.
Kinda like when unit sales are down in principal markets, yet profits are up on rising prices, emerging market sales & foreign currency exchange.
A leveraged buyout, or LBO, is an acquisition of a company or division of another company financed with a substantial portion of borrowed funds.
A leveraged buyout (LBO) or stock buy back occurs when a large amount of debt capital is used to replace equity capital.
Oh dear, I neglected to mention that many stock buy backs in recent years, have been funded by BORROWING the money, rather than recycling profits.
Cheaper to retire the equity debt with newer low interest rate bond debt. Are you starting to get the picture?
For the last 5 years, hedge funds and other institutional investors have been purchasing debt securities backed by risky and fraudulent mortgages (RMBS), and risky overvalued assets (LBO and stock buy back).
That wasn't bad enough, the brokerages involved have been over-valuing these risky assets with fantasy “mark to model” valuation methods, and puffed up stock valuations.
And that wasn't bad enough, the rating companies (S&P, Fitch's, etc.) have been rubber stamping the assets faster than USDA gets branded on a cow's ass.
And that still wasn't bad enough, the investors and holders then borrowed in a leveraged fashion against said over-priced securities.
Let me splain someding Lucy: Start adding up all the pieces of the leverage.
A home equity mortgage is itself a leveraged product, as it might be backed by a second lien on a home.
These mortgages are pooled into a home equity security (RMBS), which is another leveraged product.
The equity of these is bought by CDOs, which are another leveraged vehicle.
The equity in CDOs is supplied by hedge funds, which are also leveraged. A $1 of equity in a typical hedge fund might create assets of $1,000.
One thing is certain, leverage magnifies losses as much as it does profits.
Another certainty is that many of these securities have a automatic asset liquidation clause.
I.E. When the perceived value of the asset hits a certain threshhold, the asset is to be liquidated immediately.
Without a market or firm price, the illiquid asset cannot be liquidated.
However another liquid asset can be substituted and the funds used to cover the margin call or "loss" on the illiquid asset.
Are you getting the picture a little better now? I don't think this market is anywhere near getting out of the woods.
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