Who the Hell Are You?
America is a Great Place. The Three Great Things about America are Life, Liberty, and Property. Other countries look up at America, up on the hill, shining brightly, and it stirs their souls. They immediately start figuring out how they can get some money from us. The Residential Mortgage Backed Security has become a favorite. Securities are widely traded in the investment world. They are generally thought of as porkbellies, or barrels of oil, or feeder cattle, or shares of Boeing stock. A piece of Boeing stock of course does not give you the keys to a Boeing aircraft of your own. One can buy a million barrels of September oil, and sell it in December, and make a boatload of money. You don't even have to wait for December!. People always need oil. You can get them over a barrel, and make one million times $3.25 or so, and you don't even have to drill it, pump it, transport it, or refine it. That's the nasty part you leave to others. In Ruritania, the King owns all the property. In America, the peasants can own property, and a peasant woman can be King, in her own home. The RMBS, properly structured, enables the peasant woman to buy a home in 2007, and you the investor can make money until 2037, and you don't have to deal with the peasants. They can fix their own refrigerator, or buy a new one if they want one. Securities do have a few risks, from AAAA+ to Cccc-, or worthless, but we don't talk about the worthless ones. They're too scary. A thousand porkbellies are eighty thousand pounds of bacon. Some of the discrete porkbellies are only fifty pounds, but they're offset by the hundred pounders. The processor gives you eighty thousand pounds of bacon. The processor keeps the extra bits, and makes chitlins. A billion dollars of Residential Mortgage Backed Securities, with discrete mortgages of $183,000 each is 5,464 Residences, some bigger, some smaller. If you're an investor, you'd probably like a little overcollateralization, maybe 5-8%, or 400 extra residences. If you're packaging the investment, you're going to need a haircut of 20% or so, say 1,200 more residences. That means you'll need about 8,064 residences to fill the tranches so everyone is comfortable about the risk. That comes out to $1,475,712 for book value, or $475,212 earned at issue day [very conservatively speaking]. Of course, you're dealing with Other People's Money, so do you really care? I'll be Gone, You'll be Gone, it's Somebody Else's Problem. I'm Somebody From Texas. I do not tolerate money-changers in my father's country.
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AuthorDave McCrae is a retired engineer now settled in Oatmeal, Texas. I trained as a nuclear physicist and for a brief time was able to hold positions operating a small cyclotron, a large computer (CDC-6400 BITD) and as a medical researcher. After a weekend in Cleveland, and learning to weld, I left academia and joined Clan MacRae, constructing large buildings, setting complex machinery, devising manufacturing processes, and operating deepwater submersibles. I had too much fun, and made too much money. The cyclotron was kind of quaint, punch card computers are pretty much extinct, and we still have issues with cancer. Archives
November 2018
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