Mohit Sewak - CSCP (by APICS), Lean- SixSigma (by KPMG), MBA (from Great Lakes). Mobile- +91-95 85 64 65 33. e-mail: mohit@sewak.in
31 Dec

Identifying Revolutionary MegaTrends

Posted by Mohit Sewak     Category: Megatrends
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Identifying Revolutionary MegaTrends

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Clayton Christensen (of Harvard University), did years of research in various industries to find out that ONE thing, or indication that later turns into a revolution in any industry.
Clayton studied the Disk Drive/ Storage industry (as he believed this industry to be the Fire-Fly industry to study innovation), and closely monitored all the 116 variants of the disk drives from its inception till that date. After studying this industry, some very interesting and important insights were revealed, which were applied in all other industries of all times for validation, and were found successful in all of them.
In his book, “The Innovator’s Dilemma”, Clayton Christen has described, such innovation which has the potential of driving away the Industry Leader out of business, and changing the landscape of the entire Industry as a “Disruptive Innovation” (as it disrupts the industry, and its present leader), and the technology that this innovation brings with it as the “Disruptive Technology”.
He says that there are basically two types of innovation, and any new technology in any industry can be classified as either “Low Market”, or “New Market”. It is the identification of the type of innovation that gives us the power to predict the future changes in ANY INDUSTRY, and make our moves accordingly. Some of the salient points to identify WHEN a disruptive innovation is due is:
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When does a disruptive innovation hits any market?

Whenever the market leader in any industry, through constant innovation, and research, reaches a point that his products/ services are no longer targeted towards the mass market, but only a selected niche high tech/ knowledgeable/ expert users in the industry then the market is ripe for a disruptive innovation that invents a technology to make the some of the existing features of the existing products, cheaper, and easier to operate and understand for the mass market.

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Let us take the example of the health care Industry:

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Today we see that we need an expert radiologist to read our X-Rays and diagnose fracture/ defects in our bones. This is because the X Rays are too fade to be read by any patient/ a non expert Doctor. The primary reason for this is that when the X Rays reflects from our bones, it scatters away thus fading the film.

Now, someone has made a special type of X ray machine, and film arrangement, that has small 15microon holes in it, in such positions that the light does not scatter, and the prints are as clear as photograph from a digital camera. So the patient himself can hold it in his hand to take an INSTANT photograph of his effected leg, see the print then and there in his home (its a portable hand-held machine, which produces instant digital prints), and then decide whether he needs to go the orthopedics, or physiotherapist.

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Thus the major points to look out in an industry are:.

a. Which are the highest paying jobs in any Industry, and hence which are those areas in the industry where you require an expert to do the job, and hence is expensive.
b. The industry leader is bust developing and researching high tech product for the highest order of problems in the industry (as he logically should, as he is the only one who can do so, and also earns good margin with them).
c. if the existing technology can be made SIMPLER, and INEXPENSIVE enough that it can be used by NON EXPERT practitioners/ mass people of the industry.
d. and the above moves brings IMPROVEMENT in the life of all.

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But what should the Market Leader do when he sees a small firm coming up with such disruptive innovative?

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One way or the other, if such an innovation has been made, then it remains only a matter of time before it brings about the demise of the market leader, and such an occurance cannot be prevented.

If the market leader resist such a technology, then although he can delay its propagation, but sooner or later it will reach its destined status. On the other hand, if the market leader himself adopts, and assists the development of such a technology, then it only bring about its end sooner than later. This is because such innovations typically very low margins in the beginning (for a long time). These not only dissolves the high margin atypical to the type of new innovation that the market leader is use to, but also its rate of returns are less that the invested cost of the capital in the firm, thus leading to destruction of the share holder’s wealth, and crash in its share prices, thus finally bringing it to the death bed, sooner than expected. Also in this case the leader will deprive itself of hugs margins that are still due at the higher end where it alone has the capabilities to devolve/ introduce advanced products, and absorb any remaining market value at the high end.

So the ONLY WAY out for the industry leader is to make an entirely ISOLATED firm, and let it assist and adopt this new technology. This new firm will certainly has lower costs, and flexible structure, lower return expectations, and hence it can survive the initial bad times. Later on this company will become as big as, or bigger than the present leader (parent company), then either the two should merge, or the leader be allowed to die its natural death, and the daughter company be allowed to become the NEW INDUSTRY LEADER.

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30 Dec

What is a Bankruptcy Remote Entity (BRE) ?

Posted by Mohit Sewak     Category: Finance, Securitization
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What is a Bankruptcy Remote Entity (BRE) ?

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A Bankuptcy Remote Entity (BRE), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
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Example 1: – High Risk/ High Leverage Project Financing

.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
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Example 2: – Securitization of Risky Loans/ Mortgage Instruments.

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As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)

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.

Other Posts Related to Securitization:

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1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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Follow Mohit on TwitterSubscibe to Mohit's RSS FeedsFollow Mohit on LinkedInFollow Mohit on FacebookMail to MohitUtsav Marriage Lawn and Wedding ServicesMohit's Blog

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(7) Comments
30 Dec

What is a Special Purpose Trust (SPT) ?

Posted by Mohit Sewak     Category: Marketing
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What is a Special Purpose Trust (SPT) ?

.
.
A Special Purpose Trust (SPT), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.

Example 1: – High Risk/ High Leverage Project Financing

.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.

Example 2: – Securitization of Risky Loans/ Mortgage Instruments.

.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)

.
.

Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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.

Follow Mohit on TwitterSubscibe to Mohit's RSS FeedsFollow Mohit on LinkedInFollow Mohit on FacebookMail to MohitUtsav Marriage Lawn and Wedding ServicesMohit's Blog

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(2) Comments
30 Dec

What is a Special Purpose Company (SPC) ?

Posted by Mohit Sewak     Category: Finance, Securitization
.

.

.

What is a Special Purpose Company (SPC) ?

.
.
A Special Purpose Comapny (SPC), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.

Example 1: – High Risk/ High Leverage Project Financing

.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.

Example 2: – Securitization of Risky Loans/ Mortgage Instruments.

.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)

.
.

Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

.

.

Follow Mohit on TwitterSubscibe to Mohit's RSS FeedsFollow Mohit on LinkedInFollow Mohit on FacebookMail to MohitUtsav Marriage Lawn and Wedding ServicesMohit's Blog

.

.

.

.

(0) Comments
30 Dec

What is a Special Purpose Entity (SPE) ?

Posted by Mohit Sewak     Category: Finance, Securitization
.

.

.

What is a Special Purpose Entity (SPE) ?

.
.
A Special Purpose Entity (SPE), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.

Example 1: – High Risk/ High Leverage Project Financing

.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.

Example 2: – Securitization of Risky Loans/ Mortgage Instruments.

.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)

.
.

Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

.

.

Follow Mohit on TwitterSubscibe to Mohit's RSS FeedsFollow Mohit on LinkedInFollow Mohit on FacebookMail to MohitUtsav Marriage Lawn and Wedding ServicesMohit's Blog

.

.

.

.

(0) Comments
30 Dec

What is a Special Purpose Vehicle (SPV) ?

Posted by Mohit Sewak     Category: Finance, Securitization
.

.

.

What is a Special Purpose Vehicle (SPV) ?

.
.
A Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.

Example 1: – High Risk/ High Leverage Project Financing

.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of  limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
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Example 2: – Securitization of Risky Loans/ Mortgage Instruments.

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As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
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Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
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1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)

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Other Posts Related to Securitization:

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1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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27 Dec

What is Securitization?

Posted by Mohit Sewak     Category: Finance, Securitization
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What is Securitization?

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Securitization is the process of issuing securities against mortgaged (asset backed) loans. Such securities can in turn be  called:
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1. Asset Backed Securities (ABS), or
2. Asset Backed Obligations, or
3. Mortgage Backed Securities (MBS), or
4. Mortgage Backed Obligations, or
5. Collateralized Debt Obligations (CDO), or
6. Collateralized Debt Securities (CDS), or
7. Collateralized Loan Obligations (CLO), or
8. Collateralized Mortgage Obligations (CMO).
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Securitization is one of the methods to reduce the risk in such loans by risk pooling (a concept meaning that the average risk per entity reduces when a number of entities pool in to share a common, and fixed risk).

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Reasons for and advantages of Securitization:

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Securitizatuiion started back in early 70’s, in the US, with an intent to provide liquidity to the banks, so that they could provide more mortgage loans for buying assets/ houses, and hence increase the depth of the banking system, and also provide an opportunity to the common Americans to own a home.

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Any commercial bank (whether in United States or any part of the World), after reserving the assets required by all the regulations (as CRR- Cash Reserve Ratio, SLR- Statutory Liquidity Ratio, etc.) of the Central/ Federal Bank’s, is left with typically only 70%-75% of it’s total assets as loanable reserves. As a typical duration of a mortgage backed loan can range from a period of 10-30 years, it implies that a bank’s loanable money is locked for the next 30years say, and it can give no further loan for such a long period if it were to carry all the previously given loans into its books (as loan assets).

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Therefore Securitization helped banks to remove such loans from its books, so that it can give further loans to the needful, (while also complying with the percentage cash, and liquidity reserve ratios as required by the central/ federal bank) thus serving the twin purpose of:
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1. Increasing its own profit, by in effect, being able to give larger amount of loans than stipulated by the central bank:
2. Increasing the depth of Mortgage loan, and Real Estate/ Housing market in the country, by providing more loans (at a reasonable rate of interest) for such purpose.
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Other Posts Related to Securitization:

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1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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(0) Comments
27 Dec

What is a Collateralized Debt Security (CDS) ?

Posted by Mohit Sewak     Category: Finance, Securitization
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What is a Collateralized Debt Security (CDS) ?

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Going by the dictionary meanings, Collateralized Debt Security or a CDS, should have meant any loan, or security, taken against a collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CDS’s.
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Therefore the technical definition of CDSs would be:

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Collateralized Debt Securities (CDSs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.

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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

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1. Asset Backed Securities (ABS), or
2. Asset Backed Obligations, or
3. Mortgage Backed Securities (MBS), or
4. Mortgage Backed Obligations, or
5. Collateralized Debt Securities (CDS), or
6. Collateralized Loan Obligations (CLO), or
7. Collateralized Mortgage Obligations (CMO).

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These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
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Other Posts Related to Securitization:

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1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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(0) Comments
27 Dec

What is an Asset Backed Obligation (ABO) ?

Posted by Mohit Sewak     Category: Finance, Securitization
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What is an Asset Backed Obligation (ABO) ?

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Going by the dictionary meanings, Asset-Backed Obligation or an ABO, should have meant any loan, or security taken against any asset kept as a collateral (anything to back up a loan, for eg. a mortgage). But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as ABO’s.
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Therefore the technical definition of an ABO would be:

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An Asset-Backed Obligation is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets.

This pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.

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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

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1. Asset Backed Securities (ABS), or
2. Mortgage Backed Securities (MBS), or
3. Mortgage Backed Obligations, or
4. Collateralized Debt Obligations (CDO), or
5. Collateralized Debt Securities (CDS), or
6. Collateralized Loan Obligations (CLO), or
7. Collateralized Mortgage Obligations (CMO).
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These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
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Other Posts Related to Securitization:

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1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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(0) Comments
27 Dec

What is a Collateralized Loan Obligation (CLO) ?

Posted by Mohit Sewak     Category: Finance, Securitization
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What is a Collateralized Loan Obligation (CLO) ?

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Going by the dictionary meanings, Collateralized Loan Obligations or a CLO, should have meant any loan taken against any collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CLO’s.
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Therefore the technical definition of CLOs would be:

Collateralized Loan Obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches.

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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

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1. Asset Backed Securities (ABS), or
2. Asset Backed Obligations, or
3. Mortgage Backed Securities (MBS), or
4. Mortgage Backed Obligations, or
5. Collateralized Debt Obligations (CDO), or
6. Collateralized Debt Securities (CDS), or
7. Collateralized Mortgage Obligations (CMO).

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These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
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Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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(0) Comments
27 Dec

What is an Asset Backed Security (ABS) ?

Posted by Mohit Sewak     Category: Finance, Securitization
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.
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What is an Asset Backed Security (ABS) ?

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.
.

Going by the dictionary meanings, Asset-Backed Security or an ABS, should have meant any loan, or security taken against any asset kept as a collateral (anything to back up a loan, for eg.  a mortgage). But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as ABS’s.
.

.

Therefore the technical definition of an ABS would be:

.

An Asset-Backed Security is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets.

This pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.

.

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Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Obligations, or
2. Mortgage Backed Securities (MBS), or
3. Mortgage Backed Obligations, or
4. Collateralized Debt Obligations (CDO), or
5. Collateralized Debt Securities (CDS), or
6. Collateralized Loan Obligations (CLO), 0r
7. Collateralized Mortgage Obligations (CMO).
.
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These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
.
.

Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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Follow Mohit on TwitterSubscibe to Mohit's RSS FeedsFollow Mohit on LinkedInFollow Mohit on FacebookMail to MohitUtsav Marriage Lawn and Wedding ServicesMohit's Blog

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(0) Comments
27 Dec

What is a Collatralized Debt Obligation (CDO) ?

Posted by Mohit Sewak     Category: Securitization
.
.
.

What is a Collateralized Debt Obligation (CDO) ?

.
.
.

Going by the dictionary meanings, Collateralized Debt Obligations or a CDO, should have meant any loan taken against any collateral (anything to back up a loan, for eg. an asset as a mortgage).

But in structured finance (a sector of finance that was created to help transfer risk using complex legal and corporate entities), we take this definition a step forward to call any security formed/ derived (these come under financial derivatives) as a result of securitization of such underlying mortgage backed loans/ debts/ fixed-income assets as CDO’s.
.

Therefore the technical definition of CDOs would be:

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.

.

Some other names by which these securities are called are (There can be minute or no differences among such terms which we will be discussing later, but broadly speaking they all mean the same thing):

.

1. Asset Backed Securities (ABS), or
2. Asset Backed Obligations, or
3. Mortgage Backed Securities (MBS), or
4. Mortgage Backed Obligations, or
5. Collateralized Debt Securities (CDS), or
6. Collateralized Loan Obligations (CLO), or
7. Collateralized Mortgage Obligations (CMO).
.
.
These asset backed securities can be further re-securitized to form CDO2 (CDO Squares), which in turn can be further re-re-securitized to form CDO3 (CDO Cubes), and so on. This is a complicated process and will be discussed in a separate post.
.
.

Other Posts Related to Securitization:

.

1. What is Securitization?

2. What are CDO/CDS/CLO/ABS ?

3. What is a SPV/SPT/ SPE/SPC ?

4. TERIM model of Securitization.

5. Advantages and Disadvantages of Securitization for different Parties ?

6. How Securitization led to the Sub Prime Crisis ?

7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?

8. What is Tranching ?

9. Some Global facts and figures related to Securtization.

10. Problems with Structured Finance.

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(0) Comments
20 Dec

Marketing Research – The Japanese Way

Posted by Mohit Sewak     Category: Marketing, Research Review
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Marketing Research – The Japanese Way

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Japanese also want accurate information about their markets like US and European competitors do. However, they do not blindly rely on market research. They put much more faith in information that they directly get from wholesalers and retailers in the distribution channel.

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Japanese style MR (Marketing Research) relies heavily upon: -

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1. Soft data:- Obtained from visits to dealers and other channel members
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2. Hard data:- About inventory levels, shipments, retails sales etc.
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Some examples illustrating the Japanese MR Style:

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1. Sony

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A Market research showed that consumers wouldn’t buy a tape recorder that wouldn’t record. But Sony’s chairman Akio Morita disregarded MR and went with his instincts to launch Walkman.
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Soft data gathering:
Senior and mid level managers get involved in collecting soft data.
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2. Canon:

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Canon sent 3 members to US to look into loss of sales to competitor Minolta. The head of the team, Tsuruta spent 6 weeks visiting camera stores, posing as a customer and browsing around. Later he would ask the retailer which camera he stocked.
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Soft data gathering:
Based on this soft data, Tsuruta decided to sell canon exclusively through specialty dealers serving an upscale high quality niche market.
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Hard data gathering:
Japanese managers look at inventory, sales and other info to see item’s actual movement through various channels. They look at monthly product movement records (weekly for key stores) and syndicated turnover and shipment statistics for competitors.
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Monitoring Channels:

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The Japanese employ “one step at a time” management style for decision making. After analyzing hard and soft data they make incremental changes in product features, packaging and promotional efforts.
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Some exapmles illustrating the Japanese’s “One Step at a Time” Marketing Strategy:
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Kao Corp. analyzes point of sales data weekly and wholesale inventory and sales statistics monthly. When P&G introduced diapers in Japan in 70s, Kao Corp. captured 90% market share. Kao and others, through tight channel monitoring, changed product features quickly to suit customer tastes and cause P&G market share to plummet to 8%.
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Strong Vertical Integration:

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Japanese have more tight control on their distribution channels than do most US and European corporations. They also change jobs less frequently than the Americans. As a result they are in a better position to develop expertise in the concerned field.
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Generalist Managers:

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Japanese don’t have many business schools and do not believe in formal management education. Marketing isn’t a specialized function in Japan. For e.g: Honda’s senior managers spent 50% of their time visiting and talking to dealers and distributors.
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Consensus based decision making and reliance on Intuitive Judgment:

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Most Japanese corps have a few product lines and so managers and employees at all levels can learn more easily what it takes to survive in the business. They believe in bottoms up approach rather than top down approach in US.
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Conclusion:

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With increasing internationalization and global businesses, there is blending of japans and western practices. Westerners are adopting Japanese style of MR and trying to get close to the customer and fine tune product lines, while Japanese are adopting more formal western MR practices.

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(0) Comments
19 Dec

Mobile Marketing: The Adidas Case Study

Posted by Mohit Sewak     Category: Branding, Marketing, Research Review, Strategic Marketing
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Mobile Marketing: The Adidas Case Study

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As Adidas cannot spend as much as Nike on marketing communications (Adidas’ annual advertising and  promotional spending is $900 million only, compared with $1.4 billion for Nike), it has adopted more innovative, yet cost-effective, ways of reaching consumers, such as through mobile marketing.

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Between June and November 2004, some researchers held more than 20 hours of interviews with five senior managers at Adidas in Europe to discuss their efforts to incorporate new technologies and media (mobile marketing) within the company’s overall branding and marketing communications strategy.
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The Objectives were:

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1. Exploiting the Capabilities of Mobile Marketing:
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Taking advantage of mobile marketing’s unique capabilities can require substantial resources, but one solution is to partner with a content provider to develop a “personal mobile gateway,” somewhat similar to Apeoplee Computer Inc.’s iTunes, through which iPod users can purchase music recordings over the Web and manage those digital files in their personal libraries.

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2. Using Universal Appeals to Tap Into Global Markets:
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In its efforts to expand its brand across markets, MTV has managed to mix universal appeals with local tastes — a tactic that could be apeopleied to mobile marketing. The prospective purchaser of a luxury car, for example, might also be interested in an exotic vacation getaway, high-end sporting equipment and financial-investment vehicles.

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3. Addressing Privacy Concerns:
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Wireless communications are typically less secure than transmissions over fixed lines, and this raises a number of privacy concerns. In addition, the capability to connect with people continually throughout the day could result in intrusions into people’s private and public spaces.

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4. Aligning Value-Chain Partners:
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In mobile marketing, the value chain can consist of numerous stakeholders. For a company like Adidas, that chain might include back-end hardware supeopleiers (Nokia) and wireless carriers (Vodafone Group of the United Kingdom in Europe and New Jersey-based Verizon Wireless in the United States), specialized interactive and mobile communications firms, content providers (ESPN), traditional advertising agencies, and perhaps even partner brands (MTV). Who, for example, should manage strategy development and execution: the brand itself or one of its upstream value-chain partners?

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5. Integrating the Mobile Platform With Other Media:
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Companies should not treat the mobile platform as a stand-alone medium but rather as one component in an overall marketing strategy that must be integrated with others.

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6. Developing Mobile-Specific Metrics:
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One way to assess the effectiveness of a mobile-marketing campaign is to use traditional Internet measures, such as click-stream activity and the number of registrations, downloads and “pass-alongs.” But additional metrics that are specific to the mobile platform must be developed to fully determine the effectiveness and efficiency of mobile-marketing practices.

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19 Dec

Role of Mobile Marketing in Branding

Posted by Mohit Sewak     Category: Branding, Marketing, Research Review, Strategic Marketing
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The Role of Mobile Marketing in Branding

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Mobile marketing enable brands to achieve three objectives:

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1. Foster top-of-mind awareness and attitude formation: -
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In the music industry, recording labels and artists are employing mobile marketing to launch new albums. For example, the band New Order, which is attempting a comeback after several hit songs in the 1980s, is promoting its new compact disc through digital posters, song clips, ring tones and photos of the band members that can be sent directly to fans’ cell phones via infrared and Bluetooth technologies.
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2. Increase Consumer Involvement and Interaction: -
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Adidas, for example, enables consumers to download photos of its popular athletes, such as soccer star David Beckham, and digitally superimpose their own photographs on those images.
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3. Influence Consumer Response and Activation: -
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Currently, commuters in Japan can scan bus schedules with their phones and receive coupons from stores along their route. Those retailers can then track the redemption rate of those coupons. In the future, cell phones will likely be able to read the radio-frequency identification tags on items in stores, including clothes, shoes and sporting equipment.
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The Future of Mobile Marketing:

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The biggest question is whether consumers will be willing to accept (or opt in for) marketing communications on their cell phones or other hand-held devices. Key challenge in mobile marketing is to interact with individuals in a meaningful manner that adds value to the brand-consumer relationship without being intrusive. Most likely, mobile marketing will complement — and not replace — the traditional forms of advertising media, including TV and print, that allow brands significant reach and efficiency in terms of cost per thousand viewers.

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