This ad was before they over-leveraged their capital assets and took bad bets on sovereign debts.
If you put a down payment of 10% on a loan, you can essentially get 9 times more money instantly.
Use this money to purchase some security or something marketable, make some money, keep the down
payment, and pay off the loan with whats left plus interest.
For example: with a $10 down payment you get $90 more dollars for $100 total, and must pay 0.25%
weekly interest rate on the $90 at the end of the week. Buy a series of stocks with the $100 that
result in a net gain of 2% and you have $102. Subtract the $90 loan and the 0.25% of $90 (0.225).
You made $11.775 that week on $100. Now in the real world, you actually had $10 million, which is
100,000 more, and you made $1,177,500. A whooping 11.7% gain in funds.
And this is a low-end. Quite often money managers can get more than 2% gain if they are
knowledgeable, have a large supply of funds and ample time, and also lucky. Of course, they lose
two or more percent as well. But losing $1,177,500 for 20 weeks and making $1,177,500 or more the
other 32 weeks is still a minimum of $14,130,000 a year for flipping assets worth $10 million.
That's a 41% increase for the year. The banks will roll-over the loans, no problem, if they are
confident of a 41% yearly gain..
Now consider that the FED begin to limit downpayment requirements to 2% or less. Thus enabling this
skimming of froth to remain profitable longer. The banks and large asset funds like MF Global had
their geniuses flipping assets and marketable paper with hordes of cash reserves chasing these
profits. And the the Price got so far above the actual profitable value of the asset, or the
dividends per share.
Would you want an asset that paid you $1 every 3 months, if the asset was $150? At $4 a year, you
are getting less than 3% a year. Or would you want an asset that had no dividends? What if the
stock tanks or the business goes bankrupt? You might as well buy bonds, which are loans made by
governments and various large businesses. Bonds are safer because governments and large businesses
defaulting on their loans occurs much less often than the general population of various businesses
that sell stock on the various stock exchanges.
Instead of insisting on the down payment regulations, however, they lowered them, because all the
big boys were loving the game, and started to justify their foolish speculative mania, and thereby
threw kerosine on the fire.
A bond is a loan that is sold to various investors who trust that institution receiving the loan
will pay off the debt. Say you need $100 and are willing to pay $5 for the use of the $100 at the
end of the week. This is 5%. So you divide the $100 into 20 bonds at $5 a piece, with a promise
that you will pay a extra quarter at the end of the week, or 5.25. In the real world this is
actually relected against the initial value. Hence a $5 bond is worth $5 when redeemable after a
week, but you only pay $4.75.
A stock is a business's initial method of raising funds to pursue a certain business operation.
Once the business is in operation, the business can obtain loans against capital or against revenue
streams. The business might also sell commercial bonds, rather than getting funding from a bank,
because they might get a favorable interest rate. After the initial offering, the value of a stock
is that it allows you an income stream based upon dividends. Stocks that don't yield dividends are
only valuable if the stock goes up in value over time. In these cases, there might be valid reasons
to believe a stock is solid because the company is solid; but still without dividends, the only
point of owning a stock can be that you expect it will gain in value over time.
Now what if it becomes overly difficult for all of these brokers at computers to generate 1% gains
and more often to get 3% loses. Then it becomes difficult for banks to roll-over loans, because
everyone is doing it. And then all of the inflated assets begin to slide. The whole house of
puffed up assets begins to fall, exacerbated by the vast 35 to 1 loan to asset ratios coexisting
with decreasing asset prices.
Now why did the tax payers bail-out these morons? So they could do it again? Have we learned a
lesson at all?
The lesson : you can only skim the froth from the investment dollars of the nation and misallocate
investment for so long before the system crashes. When the various markets of asset classes and
marketable paper become valued for the price more than their profitability, the market becomes a
time bomb that will burst beyond the containable bounds of man's making.