A Tutorial On Managed Buy/Sell Private Placement Programs: Chapter 1

INTRODUCTION

This document explains some of the obscure or unclear aspects of Private Placement Opportunity Programs (PPOPs). PPOPs are also known under other names, such as Private Placement Programs (PPPs) or Private Placement Investment Programs (PPIPs). This study is the result of several years of expert personal experience and testimony, and is explained from the viewpoints of both an client and a broker.

TOPICS

Before tackling the topic of Private Placement Opportunity Programs, it is important to discuss the basic reasons for the existence of this business. This discussion includes the basic concept of what money is and how it is created, controlling the demand for money and credit, and the process of issuing a debt note, discounting the note, and selling and reselling the note in arbitrage transactions.

THE BASIC REASONS FOR PPOPS

MONEY CREATION

First and foremost, PPOPs exist to “create” money. Money is created by creating debt.

For example: You as an individual can agree to loan $100 to a friend, with the understanding that the interest for the loan will be 10%, resulting in a total to be repaid of $110. What you have done is to actually create $10, even though you don't see that money initially.

Don't consider the legal aspects of such an agreement, just the numbers. Banks are doing this sort of lending every day, but with much more money. Essentially, banks have the power to create money from nothing. Since PPOPs involve trading with discounted bank-issued debt instruments, money is created due to the fact that such instruments are deferred payment obligations, or debts. Money is created from that debt.

Theoretically, any person, company, or organization can issue debt notes (again, ignore the legalities of the process). Debt notes are deferred payment liabilities.

Example: A person (individual, company, or organization) is in need of $100. He generates a debt note for $120 that matures after 1 year, and sells this debt for $100. This process is known as “discounting”. Theoretically, the issuer is able to issue as many such debt notes at whatever face value he desires – as long as borrowers believe that he's financially strong enough to honour them upon maturity.

Debts notes such as Medium Terms Notes (MTN), Bank Guarantees (BG), and Stand-By Letters of Credit (SBLC) are issued at discounted prices by major world banks in the amount of billions of USD every day.

Essentially, they "create" such debt notes out of thin air, merely by creating a document.

The core problem: To issue such a debt note is very simple, but the issuer would have problems finding buyers unless the buyer "believes" that the issuer is financially strong enough to honour that debt note upon maturity. Any bank can issue such a debt note, sell it at discount, and promise to pay back the full face value at the time the debt note matures. But would that issuing bank be able to find any buyer for such a debt note without being financially strong?

If one of the largest banks in Western Europe sold debt notes with a face value of €1M EURO at a discounted price of €800,000, most individuals would consider purchasing one, given the financial means and opportunity to verify it beforehand. Conversely, if a stranger approached an individual on the street with an identical bank note, issued by an unknown bank, and offered it for the same sale price; most people would never consider that offer. It is a matter of trust and credibility. This also illustrates why there's so much fraud and so many bogus instruments in this business.

LARGE DEBTS' INSTRUMENTS' MARKET

As a consequence of the previous statements, there is an enormous daily market of discounted bank instruments (e.g., MTN, BG, SBLC, Bonds, PN) involving issuing banks and groups of exit-buyers (Pension Funds, large financial institutions, etc.) in an exclusive Private Placement arena.

All such activities by the bank are done as "Off-Balance Sheet Activities". As such, the bank benefits in many ways. Off-Balance Sheet Activities are contingent assets and liabilities, where the value depends upon the outcome of which the claim is based, similar to that of an option. Off-Balance Sheet Activities appear on the balance sheet ONLY as memoranda items. When they generate a cash flow they appear as a credit or debit in the balance sheet. The bank does not have to consider binding capital constraints, as there is no deposit liability.

A Tutorial On Managed Buy/Sell Private Placement Programs: Chapter 1

About the Author

Related Topics

Other Related Topics