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Financial Policies Dich Vu Tai Chanh Chuyen Nghiep
Project & Commodity Financing PROFESSIONAL FINANCIAL SERVICES
Procedures & Documents Services Financiers Professionnels
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Professional Advice & Introduction: Commodity Financing. Project Funding. Self-Liquidating Loans. Assets Management. High Yield Investment Programs. Discounting Documents PN,L/C,SL/C,BG. Banking and Insurance Documents. Secured Financial Procedures. Doc.Texts. Transactions of Precious Stones, Metals. Asset Management
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PRIVATE PLACEMENT PROGRAMS
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| | | HYIP WAS ALREADY A POPULAR FINANCIAL METHOD
IN POOR COUNTRIES
HIGH YIELD INVESTMENT IS NOT A NEW INVENTION OF A SELECTED GROUP OF HIGHEST BANKERS, BUT THIS WAS A POPULAR METHOD PRACTISED IN THE CORNER OF A VEGETABLE MARKET LONG TIME AGO IN POOR COUNTRIES.
By Prof.Dr.NGUYEN PHUC LIEN, Economist
Geneva 08 February 2004
This history of High Yield Investment Program is real. Readers can ask for confirmation from any Vietnamese people who knew the Ben Thanh Market in Saigon. This is the history of Mr.CHA GIA (from India or Pakistan) who lends cash to poor women buying and selling vegetables in this Market.
The Banker CHA GIA (from India or Pakistan)
This Banker has small capital, for example $ 100. In Ben Thanh Market , there are very poor women who have to take care alone of her 4 children after the death of her husband in the Vietnam War. They sell soups along the roads or vegetables in the Market early in the morning. These poor women have no capital at all. The Banker Cha Gia know them very well and personally.
This Banker comes every day to a corner of the Market. In the morning, he lends $100 to a woman who sells vegetables. At noon, this woman returns $100 to him, plus $5 interest. In the afternoon, he lends the same amount $100 to other woman who sells soups along the roads. About 18h00, this woman returns to him the capital $100 plus $5 of interest .
The Banker Cha Gia realizes 2 lending operations per day. His net profit is $10 per day. If he works 5 days (5 banking days) per week, his profit is $50 per week, i.e. he takes 50% per week.
For a regular HYIP Program, the Trader realizes trading operations during 40 weeks. For our Banker Cha Gia, during 40 weeks per year, his profit per year will be :
$50 x 40 weeks = $2’000.00
It means that our Banker Cha Gia can realize a Profit of 2’000% per year. That is really the High Yield Investment Program (HYIP) of our Banker Cha Gia.
If you go to Banks, for example UBS, DEUTSCH BANK, CITIBANK, BANK OF AMERICA… and you ask their Junior Bankers if they can give you a Profit 50% per year, they will declare immediately that it is impossible !!!
But the above example of our Banker Cha Gia shows really that the realization of 2000% profit is possible.
Explanation of the Possibility of HYIP
The Junior Bankers from UBS, DEUTSCH BANK, CITIBANK… declared the impossibility of realizing 50% of profit because they have habitude of thinking of interest rate per year, for example 5%, 6%... per year. They cannot imagine that our Banker Cha Gia can realize interest rate 5% daily, even 10% per day. Each day of our Banker Cha Gia is equivalent to one year of the Bankers in UBS, CITIBANK…When our Banker Cha Gia works during 20 days per month, the profit will be equivalent to the Bankers in UBS…who have to work during 20 years.
The Profit is the result of an EXPLOITATION CYCLE. Each turnover (rotation) of an exploitation cycle will give a profit or loss. An exploitation cycle can be finalized during two years, one year, one month, one week, one day or one hour.
In order to get high profit during a fixed period, we have to repeat many times the exploitation cycle, i.e. we have to reduce the time of realizing a cycle. That is the principle of SPEED ACCELERATION of exploitation cycle.
A countryman cannot accelerate the cycle of season of tomato. In industry, the acceleration depends on physic condions of production.
In Banks, the exploitation cycle of BUY/SELL bank instruments can be done with very short time. Each exploitation cycle, banking operation, can be finalized during one day or one hour.
In trading Program, i.e. the commerce of Financial Instruments, the Trader can realize 3-5 trading Operations per day. This Speed Acceleration of Rotation (Turnover) of exploitation cycle allows the Trader to obtain very high return per day. When you ask the Trader how much he can give you the profit per week, per month, he will reply to you that it depends on how many trading operations he can realize per day.
Actually, with the rapidity of the electronic communication and with the screening the financial instruments, the Traders and Bankers can accelerate better the speed of realizing a trading operation. Consequently, the Profit becomes higher during a fixed period of Program.
Conclusion: our above Banker Cha Gia can realize two exploitation cycles (two operations) per day and he gets 2000% of profit per year. The Traders and Bankers in UBS, CITIBANK…, with their quickness of electronic communication and with the financial products ready on screen, can realize better than our Banker Cha Gia the speed acceleration of operations, and consequently a higher Profit.
Prof.Dr.NGUYEN PHUC LIEN, Economist
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PRIVATE PLACEMENT FOR HIGH RETURN
by Prof.Dr.NGUYEN PHUC LIEN, Economist
(Published in 1999. Reviewed 25/12/2003)
The people tell that the Private Placement has realized very high return (‘’miraculous profit’’). Some Clients or traditional Bankers smile in saying: ‘’ That’s miracle! There is no Père Noel in finances, mostly in Banks !’’. Some people are often repeating: ‘’That’s FED ! We have to follow FED’s Rules ! FED can give Paradise but FED may become Lucifer !’’.
In this document, we try to reply theorically to these opinions:
(a) MIRACULOUS PROFIT IS NOT A MIRACLE
(b) MECHANISM OF ISSUANCE & DISTRIBUTION CHANNELS OF FED
A. MIRACULOUS PROFIT IS NOT A MIRACLE
High profit depends on three factors: amount of capital, interest rate and time of investment. HYIP doesn't make miracle to have high interest rate but utilizes readily feasible banking techniques to realize trades in normal conditions of market interest rates. There is no miracle if we understand these banking techniques. Indeed, the people comment that this is a miracle because they compare the hign profit with a very small amount of initial investment.
Again, three contributing factors to profits are: interest rate, capital and time of investment. Interest rate in HYIP is the rate received by each Trade of bank intrumentss. In commercial competitive market, it's absolutely not frequent to obtain exceptional high price for trades. Bank Trader in HYIP doesn't take much attention in activating this aspect of high prices.
Bank Traders particularly manipulate financial techniques to act on two following contributing factors to profits: the amount of capital and the time of investment. The technique of financial multiplier is used to swell the capital reserved to a precise trade; the technique of reduction of time for realization of each trade gives the possibility to obtain profit from the real time of investment as per from a very long period of investing funds in the future.
1. Technique of swelling capital
Please take example of "Snowball". A initial small snowball rolls down a slope and becomes a bigger snowball. By the same way, an Investor puts an initial small amount of funds. Bank Trader will make it bigger to invest in HYIP. The technique of multiplication of the initial investment consists of issuing Bank Guarantee, then discounting it; issuing new Bank Guarantee, then new discounting of this one;...this rotation is repeated many times. That's the method of swelling capital. The multiplication is realized by two steps:
a. Leasing of bigger amount of funds to invest
With a small amount of initial investment, for example 200'000, the Program Manager can arrange a leasing of a bigger amount, for example 1'000'000 for investment. This is the first swelling of capital. Other swellings are realized as per in the following step.
b. Utilization of Financial Multiplier and of the repetition rifle of issuing and discounting Bank Guarantee to swell Funds
(i) Financial Multiplier
The economic Keynesian Multiplier can be applied to monetary circulation through banking system. That's the Financial Multiplier. For example, a Commercial Bank receives a cash 100'000 and it must keep 20% in permanent deposit. Then this Commercial Bank can liberate 80% as loan into circulation. The Bank knows that it will receive again cash from circulation, then can liberate 80% as loan. Total amount through repetition of liberating bank notes in circulation is equivalent to initially received cash 100'000 multiplied by 5 (k = 1/(1-80%) = 5 : Financial Multiplier). If we compute the profit with interest rate 6% applied to total credit 500'000 (100'000 x 5), it will be 30'000 a year. If we think only of the initial capital 100'000, this profit is 30%. It's HIGH YIELD, with normal interest rate, but with a total capital swollen by Financial Multiplier
1 1
k = ----------- = ----- = 5
1 - 80% 20%
1
100'000 x k = 100'000 x ----------- = 100'000 x 5 = 500'000
1 - 80%
500'000 x 6% = 30'000 --------------> 30'000 / 100'000 = 30%
(ii) Financial Multiplier and repetition of issuing, discounting Bank Guarantee.
Consider example of investing initial amount 100'000 and compute swollen capital. Each "Trade" consists of a cycle of buying and selling bank instruments to get profit. Capital and Profit are ensured by bank security instruments and these instruments can be discounted to reenter into following trade cycle of Program, i.e. Issuing Bank Guarantee, then Discounting it, for 90% for example, to add capital to amount invested in new trade cycle. The repetition of cycle of Issuing, Discounting Bank Guarantee will swell the initial amount invested into Program by technique of Financial Multiplier computed in following table
TRADE DISCOUNTING, FOR 90%, BANK INSTRUMENT OF PRE- ADDED
CYCLE VIOUS CYCLE TO ADD CAPITAL INTO CURRENT CYCLE INVEST.
--------- -------------------------------------------------------------------------- ----------------
0
Period1 100'000x0.9 = 100'000 100'000
0 1 1
Period2 100'000x0.9=(100'000x0.9 )x0.9 = 100'000x0.9 = 90'000 90'000
1 1 2
Period3 90'000x0.9=(100'000x0.9 )x0.9 = 100'000x0.9 = 81'000 81'000
2 1 3
Period4 81'000x0.9=(100'000x0.9 )x0.9 = 100'000x0.9 = 72'900 72'900
3 1 4
Period5 72'900x0.9=(100'000x0.9 )x0.9 = 100'000x0.9 = 65'610 65'610
4 1 5
Period6 65'610x0.9=(100'000x0.9 )x0.9 = 100'000x0.9 = 59'049 59'049
............ ........................................... = ..... ....................
37 1 38
Period39 ...............=(100'000x0.9 )x0.9 = 100'000x0.9 =........... .......................
38 1 39
Period40 ...............=(100'000x0.9 )x0.9 = 100'000x0.9 =........... .......................
---------- ---------------------------------------------------------- ------------ ----------
TOAL SUM OF 0 1 2 3 4 5 38 39
INVESTMENT = 100'000 (0.9 + 0.9 +0.9 +0.9 +0.9 +0.9 +...+0.9 +0.9 ) x ?
Consider:
40 40
x - a 0 39 1 38 2 37 3 36 4 35 38 1 39 0
-------- = a x + a x + a x + a x + a x +...+ a x + a x
x - a
If x = 1 and a = 90% = 0.9, then:
40 40
1 - 0.9 0 1 2 3 4 38 39 1 - 0 1
------------- = 0.9 + 0.9 + 0.9 + 0.9 + 0.9 +...+ 0.9 + 0.9 = -------- = ----- = 10 = k
1 - 0.9 1-0.9 1-0.9
TOTAL OF SWOLLEN CAPITAL INVESTED = X = 100'000 x 10 = 1'000'000
In summary, the swelling of amount of initial investment concerns: (i) utilization of initial small amount to lease a bigger sum; (ii) then, utilization of technique of Financial Multiplier and repetition of Issuing & Discounting Bank Instruments in order to swell the leased bigger sum. It's this activating on amount invested that explains HIGH YIELD in normal conditions of market interest rate. There is no miracle
2. Technique of speed acceleration of trade
The third factor which influences Profit is the time of investment. The longer period of investment will give higher Profit. For example with annual interest rate 6%, we must invest 100 to get profit 6. If we want to have 12, me must invest 100 during 2 years. If we invest 100 during 40 years with 6% as fixed annual interest rate, we will get total profit 240.
Each year is called an investment cycle. The banking technique is to realize this investment cycle during a shorter period by speed acceleration of its realization. Bank Trader accelerates the speed of buying and selling bank instruments with shortest time, for example during 2, 3 days or one week. If we consider one week with interest rate 6% as an investment cycle when we invest 100, we will get 6 as profit for one week. If 40 investment cycles are realized during one year, we will get 240 as profit for one year.
Because of speed acceleration of investment cycle, each week is considered as one year of investment realized under normal conditions and consequently if the Program realizes 40 trade cycles during one year, the total profit is equivalent to that from investment during the whole period of 40 normal years. This aspect explains the very high profit as a miracle. In fact, this profit is of normal conditions, but because of speed acceleration trade cycle, i.e. the reduction of real time of investment, the profit equivalent to that of investment during 40 years is realized only in one year. It's not correct to say "high yield". Indeed, it's better to say that this is a normal profit realized during a miraculously short time of one year.
Bank Trader has enough techniques to accelerate speed of trade rotation, i.e. to reduce miraculously the time of realization of a trade cycle. Indeed, if this is a commodity trade, a dealer cannot reduce enormously the time of transaction cycle because of physical conditions of commodity, of its transport...But for a transaction of bank instruments, it's perfectly feasible the reduction of time of realization. This commerce is not under physical conditions as per of those of commodity. Bank Trader needs only some minutes to sign and to send electronic informations...for the realization of a transaction cycle.
In summary, the speed acceleration is perfectly realized for a trade cycle with purpose of obtaining profit during very short time equivalent to profit during a very long period under normal market conditions. 40 weeks of investment are equivalent to 40 years under normal conditions of inverstment. The normal profit from investment during 40 years is obtained during 40 weeks.
All the above Techniques combined with the Mechanism of Issuance and the Application of ‘’Fractional Lending’’ in FED’s Credits on Off-Market show that the MIRACULOUS PROFIT OF PRIVATE PLACEMENT IS ABSOLUTELY NOT A MIRACLE !
B. MECHANISM OF ISSUANCE & DISTRIBUTION CHANNELS OF FED
The above highly profitable Trading Program exists as a result of the United States FEDERAL RESERVE (FED) practice of securing short term to medium-term liquidity outside of customary On-Market channels. The FED BANK has registered a small number of high volume Traders to facilitate and maintain a secure, Private Placement Capital Market to fund its liquidity requirements. The FED Contracts with Europe’s most Credit worthy financial Institutions to trade large blocks of their Corporate Bank Paper, which are then distributed through the Federal Reserve’s Private Capital Market. In return, these European Banks receive ledger entry Federal Reserve Credits, that can be used as cash equivalent Assets. In this Trading, all issuance of Bank Paper and FED Credits are maintained Off-Market and Off-Balance Sheet.
The Banks Benefit by using the Credits to increase their ‘’Fractional Lending’’ capabilities. Fractional Lending is standard in all commercial bank lending and simply means that over time, Banks are allowed to lend more money than they actually have as reserves on their Balance Sheets (Please see the above paragraphs concerning Financial Multiplier, Technique of swelling Capital, Acceleration of Trades).
Federal Regulations in all Western Countries set the Ratios between Bank Assets and Loan outstanding. In most Countries the Ratio for Cash or Cash Equivalents (Liquid Assets) to Loans outstanding, is 6 to 12 times Liquid Assets, i.e. with USD.1 cash, they can give for loans USD.12; with USD.1’000’000, the loans outstanding can be USD.12’000’000. The FED Credit mechanism described above provides an Off-Market, relatively inexpensive, form to increase Liquid Assets, which then allow Banks to use a FED Credit as reserves and increase their lending capacity. That is the swollen capital in circulation regarding the initial small cash amount.
For example, if a Bank receives a FED Credit of USD.8’000’000. It can borrow from the FED discount desk 10 times this amount , i.e USD.80’000’000; and then lend it out to its customers at a 5% profit, i.e. USD.4’000’000 by operation (Trade). If we divide the profit USD.4’000’000 by the initial amount USD.8’000’000, the percent of profit will be 50% by operation. This operation can be repeated several times during a short period. The very High Yield is explained, not by the the interest rate of each operation, but by the swollen Credits outstanding and by the repetition several times of this swollen Capital during a short period. With 5 operations during a week for the swollen amount USD.80’000’000 from the initial FED Credit USD.8’000’000 and only with normal Interest Rate 5%, the Profit will be 500% weekly at total. This is not a miracle !
Because of the Off-Balance Sheet nature of these Credits, the Banks can make significant profits by using only the good faith and credit of their Bank and the FED Credit, without the security of Traditional Capital Markets. If a banker knows by heart only these traditional Capital Markets, he can criticize this ‘’miraculous profit’’ and advises negatively the investors who want to enter into Private Placement HYIP !
Given the limited liability and significant profit making potential for the bank created by this ledger credit mechanism, the FED gives a Credit and Contracts to repay an amount which is a steep discount (15% to 40%, depending on the term of the Paper) from the stated maturity value of the Bank Instrument, issued by the Bank through the FED’s Private Capital Market Profits from Bank core lending Activities easily cover this Discount and provide a substantial Profit to the Bank through the Banks use of Fractional Lending (These points have been explained in the previous Paragraphs).
The Benefit to the Federal Reserve is that it has the interest free use of the proceeds from the sale of the European Bank Instruments, through maturity of those Papers. Due to the Off-Market nature of the proceeds, these funds can be used for any purpose the FED chooses. This point explains the necessity of introducing to FED the useful economic, humanitarian Projects. As with the Banks, the FED issues Credits to the Banks using only the good faith and credit of the United States Government. This good faith ledger entry credit is acceptable to the Banks as the only means by which the proceeds from the sale of their Bank Instruments are secured. In the future, we may see this faith and credit from European Union Reserve.
This mechanism also allows the FED (maybe EUR in future) to avoid the security associated with the common practice (pratice of ‘’traditional’’ bankers !) of the On-Market borrowing through the issuance of Treasury Bonds or the printing of Cash. Repayment of these Credits upon maturity is most often done through issuance of new Bank Instruments, otherwise known as ‘’Rolling Over’’. New Issuance of Bank Papers will succeed Old Issuance of Bank Instruments at their maturity without showing Cash.
This Off-Market, PRIVATE PLACEMENT, Capital Market maintained by the FED thrives due to the fact that the FED regulated institutional Investors (Insurance Companies, Pension Funds, etc.) which are the major source for all Capital Investment, cannot fund capital into securities which have not yet been issued. That is the management of the future capital. Private Investors however, are not restricted in this manner. The FED mechanism requires funds to be escrowed prior to the issuance of the Bank Paper. In effect, each Issuance of Bank Paper through the FED requires Bridge Financing. The same requirement exists on all ON-Market Issuances on Wall Street where the Investment Banks, in Groups, use their Capital to underwrite and fund Issues. Each Individual/Company Investor contributes to the FED Issuance. The securities are often then resold and distributed through normal retail Channels to Institutional Investors and Individuals. In the case of the FED’s Private Market, high net worth Individuals serve as the Underwriters, pooled together by TRADERS or PROGRAM MANAGERS. These Individuals exist in the FED’s Private Channels of distribution. They purchase the Bank Paper at the HIGHEST POSSIBLE DISCOUNT offered by the FED through their TRADER NEWORK and resell it to the Institutional Buyers at the LESSER DISCOUNT. This explains the high returns.
As with the Investment Bankers and their On-Market Issues, this Private FED Market generates a significant Trading Spread. This spread, typically 7% to 25%, depending on the term of the Bank Paper being TRADED, is the essence and source of the SUPERIOR PROFITS, ‘’MIRACULOUSLY HIGH YIELD’’. Succesfull TRADERS can utilize the same pool of funds to purchase and resell blocks of Bank Paper as often as two or five times per week.
Bank Paper is issued in minimum amounts of USD.10’000’000. Investment Funds below USD.10’000’000 can only be invested if a Trader or Program Manager is willing to accumulate Funds to create a pool of USD.10’000’000 or larger. Because of the Issuance of Bank Paper at minimum level USD.10’000’000, the Investors with amount below USD.10’000’000 have often to wait for the delay of entry, while the Investor from USD.10’000’000 and up can enter easily into the Program.
Prof.Dr.NGUYEN PHUC LIEN, Economist
Licence in Mathematical Economy (Econometry)
Graduate at University in Computer Science
Doctor in Economy/Finance (Stock Exchange Market)
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