Friday, May 23, 2014

Utilizing Bankable Collateral

No one can dispute the fact that it is more difficult to obtain a loan of any kind in today's banking environment that it was just a few years ago. The bursting of the real estate bubble has affected almost all facets of the credit market both directly and indirectly. The advent of more in depth client information data, steps taken by Homeland Security enforcing anti-money laundering measures, the general tightening of credit restrictions, and the fact that almost no local banker has any true impact on credit decisions have come together to dramatically change the face of credit facilities in the United States. One could easily say that the lending community is for the most part unsure as to its path. Congress is attempting to establish deeper oversight in all levels of banking and finance. Banks have failed and either been taken over or simply closed. The cumulative result has resulted in making things difficult at best when making application for a loan at the personal level and nearly impossible when pursuing a business loan.

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With this in mind one of the few bright spots has been the establishment, or reestablishment if you listen to old school bankers, of collateral influenced lending. In other words loan scenarios in which the loan is truly secured by collateral that the bank, or other financial institution, can attach and easily liquidate if there is a loan default. As we know loan collateral used to almost always consist of the offering of receivables, contracts, equipment, inventory, or real estate. In each case the collateral was somewhat difficult to deal with in that if attached it would have to be collected, discounted, fulfilled, or sold over time. With that in mind it is easy to comprehend why bankable collateral is fast becoming the flavor of the day.

Over the past decade or two it seems that banks and other lending institutions have gradually pulled away from liquid collateral. The reason for this is probably two fold. First is the fact that mortgage lending is always at the forefront of the market and directly affects the rest of the market. This is because mortgage lending is what the public is generally best acquainted with. No money down, no income verification, no document, 125% loan to value, and other mortgage products were commonplace, and therefore quickly became what the public was acquainted with and had become used to. This then is what was expected in all other facets of lending as well. Therefore all lending became more competitive as institutions were forced to become creative in the other aspects of their business. The second factor that came into play was the development of derivatives and the new world that they brought about. In many cases to fill up the basket necessary to support a derivative other credit products had to be brought forth. This then drove the need for product in the form of closed loans. This need for closed loans meant an easing of credit requirements and a creative new look at what comprised collateral. In many cases true collateral was displaced by the proposed value of future payments. Future payment value is based on Genuine liquid collateral is, and always will be, a bankable commodity. If a lending institution can attach an item that has a known value, is not perishable, and can easily be liquidated, then that item will carry both an intrinsic vale and a true bankable value. This type of value is not only easy to recognize in its market format it is easy to establish a bankable value as well. Therefore the lending institution can quickly establish a market value through historic market data that is both easily discernible and fully transparent. The institution will then establish costs associated with the time and expense of liquidating the collateral that is involved, calculate a risk averse discount to cover such, and establish the bankable value of the collateral at hand.

In an attempt to make the matter a bit clearer and more in line with contemporary practice and ease of transportability there are firms that accumulate bankable collateral assets and then place them in the form of transferable financial instruments in the form of perpetual demand notes. These perpetual demand notes, most commonly referred to as collateral notes, are then fully backed by bankable quality collateral that exhibits the necessary qualities of having true market liquidity, an exchange traded value, are nonperishable, carry a high demand rate, and are easily identifiable. In other words if there is a loan default the lending institution makes a call against the collateral notes. The note provider then covers the demand by liquidating an appropriate portion of the bankable collateral that directly backs the note. In that there is a daily traded exchange and a ready and established market the process is both simple and efficient.

Although once an almost exclusive tool of large Wall Street firms and available only to their top clients it is easy to see why collateral notes are gaining popularity and being sought out by businesses of all sizes for use as a means of securing financing necessary to further their operations on all fronts.

The question has to come up as to just what qualifies as bankable collateral. As stated earlier the collateral must carry the traits of carrying an easily identifiable intrinsic value, must be traded daily on a globally recognized exchange, must be easily identifiable, and must be nonperishable and therefore not carry forth what could be referred to as a shrinkage ratio in perishable items. Although most exchange traded commodities, such as crops, pork bellies, and other produce would qualify in most areas. They would all fall short due to the fact that they are all perishable. This is why the push in bankable collateral seems to be toward the metals markets. Metals are easily identified. They have an intrinsic value that is easily recognized by the general public. They are traded daily on several global exchanges and therefore carry a transparent value that is easily established. Are easily stored, counted, and secured. But possibly most importantly are nonperishable.

We are experiencing an upward push in the overall metals and mineral markets for just this reason. Unlike diamonds or other gemstones there is no subjectiveness when establishing value. For example, it has been said that if you were in the jungle and came across a native he would recognize the intrinsic value of a piece of gold. While we have no empiric study to equate to I think most of us would more or less agree with this fable. That may well be the reason that we have seen the steady upward climb of gold and some of the other precious metals that has taken place over the last few years.

Nonetheless, what we are now and seemingly will continue to experience is a shifting away from fancy derivatives and financial instruments that very few can decipher, and a return to core values based on bankable collateral made up of perpetual demand collateral notes. A return to the transparency and understanding of exchange traded metals being utilized as the underlying value for these collateral notes. All coupled with the invasion of the heretofore tightly controlled Wall Street type security financing that was only made available to the large and influential institutions by Main Street businesses of every kind and every size. This may well be the cornerstone of the financial growth, job creation, and overall stability that we are all seeking. If so it would seem that the future holds bright and true.

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