The fund manager moneygoround
Lets say I am a fund manager I have borrowed $6 billion in Yen from Japan at cost of 1.2% I use this money to buy sterling on the FX markets.
I then use this sterling to buy a $6 Billion mortgage backed security. It contains 13,000 mortgages. It yields 5.84% or $350 million. Lets say I bought it from HBOS in 2003 for example.
Every year I take the $350 million in sterling from the security and convert it to Yen on the FX markets to repay my Yen denominated debt servicing of $72 million. Pocketing an annual difference of $278 million.
Now if the interest rates in Japan rise this will eat into my profits. If people begin to default this will eat into my profits. If the pound gets weaker this will eat into my profits. If Yen gets stronger this will eat into my profits.
Lets say I constantly run complex models to try and evaluate the risk of each of these events.
I may be able to sell my security for more or less than the $6 Billion I paid for it. Depending on world markets and how they affect my profit margin.
Bearing in mind that mortgages are sold in high street banks almost purely so they can be formalised into securities and sold on to the likes of fund managers.
I can sell it whenever I like, for whatever I want, to whoever I can. It is just a contract to hold a liability in exchange for a yield.
If I decide I don’t want to hold mortgage back securities and other fund managers agree, the market value of such securities would fall, demand would wane and high street banks would have less incentive to grant such large numbers of mortgages. Because the sale of mortgage backed securities would be less lucrative.
Who has more power over the property market?
A fund manager or a BBC journalist with 3 BTL’s?
Now Citigroup has assets worth about $1.2 trillion they probably have 50 - 150 similar sized funds. Does Gordon Brown have more power than their CEO?
That’s just 1 bank.
Why do people insist the government can save the market from a crash? It’s because they don’t know s**t.
