How do i industry sign banking georgia iou
today we want to start our get back to our discussion about banking and the uses of funds for banks if you recall they've got these dollars come in coming in now they've got to put them to work the first two things that banks do is they acquire liquid assets we called primary reserves and secondary reserves in a meaningful sense banks have very little control over primary reserves now there's one item in there the excess reserves at the Fed that they don't have to hold banks can't control that and so what happens is when a deposit comes in you remember this story the bank cap if it's a checking account they have to set aside 10% and medium sized and large banks set aside 10% on reserve but if a hundred dollars comes in and they set aside 10% into required reserves the other 90% the other $90 is 100 is an excess reserve it's liquid assets it's at either in the vault or at the Fed and they don't have to hold those so as soon as possible they get rid of those and so even though it's possible to have four of these items the required reserve the excess reserve correspondent balances at other banks and then the check items in the process of collection even though there are four items here banks try to keep one of those at zero and the way they do that is they say hey if we need a liquidity we're not going to keep the funds at the Fed we're going to acquire secondary reserves these are liquid assets also but they earn interest okay and usually not a lot of interest but still they earn interest and I gave an example some of those sell fed funds or the same thing with the repurchase agreements which is that collateralized Fed Funds a third thing Treasury bills a fourth thing a CD issued by a marketable CD issued by some big bank another thing commercial paper these are the types of things that banks hold for liquid assets now after bankers get all the liquidity they need they don't anymore they always need liquidity and they need to hold enough but they don't want anymore because the interest is either zero or at a very low rate okay and so after they get all the liquidity they need then they say our next concern is profit and so to earn a profit they make loans and so really if you look at this and we're doing one two three and there will be another category we're talking about these in order of priority what did the what does the bank do first with funds the first funds it gets it's got a hold some extra are some required reserves so the first funds coming into banks banks start holding these primary reserves after they've got all the primary reserves they need then they say hey more dollars coming in I'm gonna get some liquidity but a secondary reserves and as the dollars keep coming didn't they say I don't need any more liquidity I don't need any more whatever these primary reserves are correspondant balances and so forth now my next thing that I need is profit and even though it's third on the list the dollars have to sort of filter down to this level banks want to get as much as possible to the profit category this is about sixty five percent of bank assets it's roughly the value of all the deposits coming into banks roughly there's no necessary connection I'm just saying that's about two-thirds of bank assets let's talk about loans just in general terms loans are promissory notes what does that mean technically speaking alone is not an IOU you know that's easy to say IOU but that is not what a loan is here an IOU says I owe you money I acknowledge the debt it doesn't say I'm gonna pay you off it doesn't say I'm gonna pay interest it says I owe you money what you really are talking about with alone is a promissory note I promise to pay you under certain circumstances on certain dates add an interest rate and so forth it's a promissory note okay there are other aspects of this there are fixed versus adjustable interest rates on loans it depends on who's doing the borrowing as to what's most common most of us when we borrow money most of us individuals are going to get a fixed interest rate loan that's most of us as individuals most home loans two-thirds of home loans for example are going to be fixed interest rates that's a ballpark figure most of us will get a fixed interest rate on a car loan we go in we negotiate we say what's the interest rate they tell us a number we say yes or no fixed interest rate a lot of business loans are adjustable interest rates there's a formula and they say something like okay here's how we set the interest rate on your loan and as supply and demand changes in credit markets we already went over that loanable funds model as supply and demand changes and interest rates change in credit markets then the interest rate you pay will change also and roughly a third of home loans are set that way there will be a formula there and it says as interest rates and credits markets change your mortgage interest rate will change but anyway so most of us like I say as individuals are going to see the fixed interest rates another aspect of loans to highlight is term versus call loans most of us as individuals are gonna have term loans where there is a specific maturity date here's a home owned it's a 30-year loan here's a car loan it's a four-year loan and so forth specific date there are call loans that most of us as individuals do not get but much more common for business borrowers here's what a call loan is it can be ended at the discretion of either the borrower or the lender you could go to a bank and negotiate a call loan usually had a pretty good interest rate and the understanding is this the banker can call you and just say hey at the end of the week Friday we want that money back and you say oh my gosh I bought a million dollars from you and they go yeah and that means bring me a million dollars Friday and you go what am I supposed to get that and what's the answer rob a bank I don't know where you're gonna get it no they don't say rob a bank here's what they say I'll tell you what assuming that you're a good risk you come in and you sit down and we will issue you a thermal we'll make you another one and you can pay that one off that's very common if they just kind of have their doubts about you they might just say I don't know who are you gonna get it you bring us that money and if you don't believe money then you're in violation of our agreement and we'll take the next step whatever is next you've got collateral out there you own that building well that'll be our building or whatever the agreement is but the point is call loans term loans now how would you like to do that go out and borrow I don't know ten thousand fifty thousand hundred thousand million dollars how would you like to go borrow a bunch of money and every time the phone rings you say oh my gosh hello yeah bring us a million dollars just stop answering the phone right that won't do it they'll send somebody out so you cannot really avoid that and by the way when it says call that doesn't mean telephone call it just means it can be called back in so here's the deal borrowers kind of hate that and since borrowers kind of hate it that reduces the demand for funds of those kinds and the reduction and the demand for funds pushes the interest rate down and then the lenders how do they feel they love that if they give you money and you don't have to pay back for five years they're going oh okay I mean alright but if they can just call you up and have that money back at the end of the week then they go that makes me feel good so those suppliers say oh I like those call ins big supply of funds so if there's not much demand and there's a big supply both of those are pushing interest rates down so what you're gonna see is car loans low interest rate and then you're gonna see term loans with a higher interest rate yes sir pardon me oh they spent the money that's why we borrow money right we don't go out bar a million bucks and then just put it in a trash can or something like that or like in the bottom drawer waiting for the phone to ring we spent that money well that's your problem how do you pay it back I don't know call another banker come see me I'll convert this to a term loan at a more favorable interest rate for me or sell some bonds you know you got other assets you've got any bonds you got any corporate stock sell them bring the title and uh the deed to your property down here we'll make you another loan or we'll just take your property but you know you don't get that call on where you just say well look if you call me and you want that million dollars back maybe I'll give up maybe not they'll get it right cuz that's a million bucks so I don't know maybe I think they'd start off breaking a few fingers just kidding anyway but how do they get it I mean that's what happens when there's a car loan by the way there are some people that go borrow money not only from a bank but from stockbrokers and stuff like that but they're borrowing money to buy stocks and bonds and those are call ones and sometimes the phone rings I've had these phone calls hey this is a margin call you owe less money oh I do yeah uh-huh it's one o'clock why don't you get down here by 4:00 with that money for what day no for today oh okay now we've got two choices either you bring us money meaning just bring them a check better be a good one or break the fingers no what do they say we're holding some stock of yours down here we'll sell the stock market still open but we got to have our money this is our deal and you say okay and then you either sell the stock or bring them a check and now the point is though don't get into these deals if you just go I don't have any money well then don't be doing that get a turn when you know when it's got to be paid off there are monthly payments and so forth were you gonna say something an acceleration clause if if you don't live up to that you're into the agreement then that's what we call default and then there's no more deal hey we got a contract with you it doesn't say IOU then what they can say is this look you on this promissory note it says you're gonna have such-and-such collateral now you no longer have that bring us collateral and then they may work out with you the details of how long or they can just say oh you're not gonna bring collateral that's what you're telling me okay then you know this piece of paper we got that we all signed and you didn't live up to your in we want our money back and by the way that is fair I mean it's not fun but it's fair because here's the deal when you go down and the bank gives you this note and you sign notes and you sign that note and they sign that note you hold your hand out and say give me my money and if they said no what would you say hey you crook they give you that money they'd write you a check right then and if they don't right I mean hey I'm calling the police are you kidding I just signed this piece of paper I promise to make all these payments to you you're giving me nothing and so as soon as they give you and they fulfilled their part of the deal it's up to you to fulfill your part of the deal and if it's tough then you know what you do is you go down there and sit down with them and say I need to talk to you I got a terrible situation here I know I signed that I know you've got that money coming you haven't done anything wrong I can't live up to the deal what can we work out and if you don't do that and if you just stop answering the phone stop going to the door stuff like that you're in trouble I don't think I told you about one time I had had a bank account at one bank and I borrowed money for a house at another bank and so then I signed up for automatic payments just electronic transfers would be made between these banks to make these house payments every month and so then what happened was one time my phone rang and I said hello and I said mr. wire and I said yes and there was a woman on the other end it just had a very soothing voice and she said oh I wanted to just call and see if you had had a chance to make your house payment and this would be like the tenth or fifteenth of the month I wondered if you'd had a chance to make your house payment this month and I said oh yeah I'm sure that that's been taken care of and she said oh okay well we'll just check our files and I said okay thanks bye so I hang up and then like two days later hello Oh mr. Warrick this is whenever her name was Nancy this is Nancy over at the bank again and you know we checked and we just haven't seen that come in and I've waited a couple days here you know time for the mail to be delivered here our last couple days and nothing has shown up and could you check that again and see if you paid that and I said I know it's been paid there's no question about it it's paid every month and she says oh okay okay if you wouldn't mind just check into that and she's very soothing you know like so I don't like run I guess and to Mexico and so then I just think nothing more about it this is done I mean it's been going on for years you know no problem so then a couple days later mr. white this is Nancy over at the bank again and we were going to have one of our I can't remember now the term but our couriers will be out in your neighborhood and about an hour two and just wondered if they could stop by and get that check from you and I said no I'm not even gonna be here in an hour I got to go to work and I said I don't know what's the matter down there but I've been paying my bills and you guys have dropped the ball I don't know what's the matter we sure would like to have that courier stop by and I said well I'm not gonna be here I'll be calling you again mr. Waring yeah whatever you know and then like the next time there's the courier showed up and so I give him a check this was like four times and so then I'm thinking what in the heck is going on so come to find out I mean it took a couple days to backtrack but I call the bank and I go what the heck is happening this other Bank is calling me and they didn't get their money and stuff I couldn't go no no we have we sent the money you know the my checking account bank we sent the money I don't know what's going on so this went on for a few days and there were a few phone calls back and forth we sent the money we sent the money and but I in the meantime I gave the courier another check he was very pleasant and a young man not college age here's something happen the banker that I was doing checking account with it was taken over by another bank with the headquarters in I think st. Louis and then they had new you know like their accounting and paperwork and computer software and all was different they converted all these things you know here at this local bank over into their software and stuff like that and so I automatically had this payment being made - at the time it was Bolton's Bank boatman's no longer exists it's been taken over by a couple times by other banks anyway so they've got this deal automatic payment to boatman's bank and so rather than making a payment to boatman's bank in this town they sent it to boatman's bank where the bank holding company was the headquarters that's the address they had in their software and so what happened was is my monthly mortgage check was sent to st. Louis and somebody and this all got back track and they said oh I'm wondering what this is and they set it down over in a box like a cardboard box of mail that came in and they don't know who it's for and there it said and it sit there for like three weeks before this all kind of came back and they said oh yeah we wondered what that was about so anyway meanwhile I found out how banks follow up on these kinds of things but they were gonna get their money and you know like I dodged the courier once I'm not honestly the first like two phone calls it's just like there's some mix-up and that's why I told him you're just confused it's there and then come to find out no it wasn't there their money was sitting in st. Louis but by the way their banking company had the money it's just that not the local bank that was supposed to get it it was the bank holding companies they had their headquarters up there and that's where it was all so anyway they're just thinking we got a deal and you live up to your end or just pay us
off that's okay if you don't do your part that means you don't want to do business with us anymore so you go your way and we go our way but when you go your way you pay us off and we'll be even so anyway we got that all straightened out oh by the way then and I would advise us if you get into this situation I went down to my bank and I asked to talk to the president actually a branch manager and I said hey you know what I want you to do I want you to go in there and dictate a letter and you write that letter and send it to the bank I loan me the money for my house and you tell them this was your fault this was not my fault they say well okay we'll do that and so then that all got straightened out that way she was so nice though Oh mr. Wyrick you know and always kind of whispering and I didn't want to spook me I guess and I was kind of spooked after about that the first time she said we want a courier to show up and it was very inconvenient for me so I said no but then I knew when they call back that couriers gonna they probably told him to beat me up and break a couple fingers if I wouldn't pay so I paid secured versus unsecured loans and secured loans versus unsecured loans refers to collateral security is collateral so they're collateralized and uncollateralized loans now most of us are providing some kind of collateral when we borrow money right a house would be the the biggest loan most people get and the way and I've already put the numbers up but the way that normally would work is if you're buying a house and we'll just use nice and easy numbers for this if you're buying a hundred thousand dollar house very often what they want you to do is put down $20,000 20 percent as the down payment and then they would make you a loan of the difference $80,000 okay and then the house itself is the collateral and that house has got your name on it but then the lenders got their name down there on that deed the house has gotten your name on it nobody else's but on the deed that gets recorded downtown there's somebody called the recorder of the deeds it officially keeps track of who owns these properties but on that deed it has the lenders name and so that means that that house cannot be transferred into somebody else's name without making sure that that lender has been paid off so anyway with a house you borrow the hundred thousand well you borrow the eighty thousand dollars and then you put this hundred thousand dollar house up as collateral and that says if I don't pay you you can come out see this house sell the house the terminology beyond the courthouse steps but sell that house get whatever you can out of it the bank would recover its money and then anything left over like if they could sell that house for ninety five thousand dollars they would keep 80 and give you back fifteen okay the only thing is if you wanted to be out of that house the easy thing to do is get yourself a realtor put the sign out front take some time and if you'll put your house out there for two or three months you'll get pretty much whatever its market value is maybe a hundred thousand dollars more or less but if they take that house and say we're gonna sell it today or this week they're not gonna get a hundred thousand dollars this week any more than you could get a hundred thousand dollars out of your house this week it takes time to do this stuff a lot of people want to look at it and walk through it and things like that and so anyway mmm a fast sale means they're not going to recover except for an in unusual circumstances anything like it's full value they're gonna recover eighty thousand bucks but that's a collateral collateralized loan by having collateral that lowers the lenders risk we've already talked about this riskiness and how if there's more risk higher interest rates so if there's collateral if the loan has security then there's gonna be a lower interest rate other things being equal and many of us cannot get an unsecured loan alone just based on our signature and a lot of us can't get loans of any size with just a signature very often the people who can do that was already somebody who's rich it's a low risk situation anyway so the person who's a wealthy person might go down and say I don't have a lot of cash but I have a lot of assets just not liquid assets and get a loan and maybe not provide any security just because it's known that they're all low risk and then they might get that loan in oil interest rate but they're getting the loan at a low interest rate because they have a lot of assets anyway okay but for other things if we just get 10 people and line them up then for those people the ones who have security and collateral those are the people who get lower interest rates the bigger this downpayment is this is a little bit like we're talking about the bank's capital this is lie a little bit like that same ideas here's what you put in this downpayment and the more you put in the safer that loan is for the lender right you remember we're talking about deposits and borrowing and capital and the more capital the owners put in that Bank the safer that Bank is the less likely it was to go broke well the bigger this downpayment the safer that loan is sometimes there's a 10% down payment sometimes less these and sometimes there's what they would call a hundred percent loan no down payment if a bank loans you a hundred percent of the value of that house and then you stop paying and they've loaned a hundred thousand dollars and they go out and seize that they have to sell it that banks gonna take a loss probably I mean it's possible they wouldn't but very likely they're gonna take a loss so that collateral is what makes that bank or that loan safer okay so these are just general things to be said about loans let's talk about a few different types of loans we're still talking about banks remember the number one loan at banks also a real estate loans by the way sometimes a term is used mortgage mortgage loans real estate loans okay this is about and it changes from year to year but about 60% of total loans ballpark figure okay these are very safe there's collateral and that makes them safe and F hav a guarantees at f-- H a Federal Housing Administration VA Veterans Administration these are government guarantees for basically lower-income people and for veterans and what's happening is this is the government is saying to the lender the bank savings alone and so forth hey if you loan this money we the government will make sure you don't lose on this deal if they can't make their payments then you take the house you sell it and then we'll come back and make sure that you didn't suffer a loss will make up for any shortfall when you sell that property shortfall if there is any okay so these are safe I mean home loans are safe if you don't get in the business of making 100 percent home loans or 95 percent and things like that which banks have done over the last decade why why would a bank make a hundred percent loan under ninety five percent alone well more interest but yes sir housing prices were going up so there's always this fiction of I'll lend you $100,000 $100,000 house a year from now that would be $110,000 house two years from now be $120,000 house if I have to seize that house in a couple years I'm gonna get my hundred thousand out of it that's one theory Network out as long as the housing prices are going up at worked out but they stopped doing that back in about 900 mm I don't know 2006-2007 would have been the peak in housing prices also banks would make these loans because they sell a lot of these loans and in the old days Fannie Mae and Freddie Mac buy the old days a few years ago Fannie Mae and Freddie Mac and say we're not buying those 100% loans of those 90% loans but then what happen is Fannie Mae and Freddie Mac under political pressure he started buying these loans he's quote subprime loans these higher risk mortgages they started doing and then also mortgage banks uh mortgage banks investment banks started doing the same thing as Fannie Mae and Freddie Mac which was come up with these mortgage-backed bonds and selling those bonds and they started buying these loans from banks over 90 and 95 and a hundred percent loans and so bankers would normally run from those loans and then they said I'm not gonna run from them because somebody will buy them here and they were selling them and then those loans got in the hands of like I say Fannie Mae Freddie Mac those mortgages Fannie Mae Freddie Mac or the investment banks and then that meant a bunch of bonds turned out to be you know lost money so anyway but we're going back in the other direction again where it would be harder and harder when I see the other day that this is some advertiser advertisement the president wants you to borrow money for a new house that's what they say just come right out and tell you that president didn't say that that's what some lenders wanting you to do that and they want to lend you you know subprime bonds and they want to loan you money and charge as much interest as they can and make you think everything's great so anyway I think we're due to regulation and so forth we're going back and also just a lot of banks went out of business from making these bad loans we're going back in this other direction okay 15 20 and 30 year maturities are the most typical a 15 year maturity is unusual the most usual maturities is a 30 year loan let me draw you a little picture because I know you like the pictures here's a 30 year loan is you get the money today and basically what's gonna happen let me put on a solid line is you're gonna just start making payments of mmm I wonder if I can do a calculation real fast here we go I think I know the answer but I'm not going to just make up something because you know this is college yeah I could make up some I have here a loan calculator let's take a $100,000 loan thirty years and I'm gonna set the interest rate at 6% and then pardon me here's our payments five ninety-nine fifty five a month within forty five cents of being six hundred dollars a month what did I say this is a hundred thousand dollar loan thirty years six percent that's our mortgage and so you're gonna make a payment of $600 a month for three hundred sixty times and I know you were thinking oh man six hundred hours a month yeah well think about doing it three hundred sixty times okay now let's do a thought experiment here for a second on the first day and I'm not working with any down payment maybe one hundred twenty-five thousand dollar house you put up some some down payment so they are lending you a hundred thousand dollars or whatever that's beside the point on this single day the first day you've got a hundred thousand dollars borrowed from them right six percent interest how much interest is at a year pardon six thousand dollars a year this is interest now six thousand dollars year how much a month because these are monthly payments how much a month out of that would that be five hundred dollars a month so I could come right up here and put a little mark it says look in that first payment here's your first monthly payment of 399 fifty-five right at $600 $500 would be interest was that making sense to you now what's true in the second month well here's what happened in a second month you started off only owing a hundred thousand dollars but now you paid off $99 and what 50 55 cents because you paid it uh this hasn't been so much easier if it were $600 but you paid $5.99 55 you owed five hundred for interest so 99 55 was to pay off the loan and so you no longer a $100,000 now you only owe ninety nine thousand nine hundred dollars and forty five yeah forty five cents so you owe a little bit less than before and so in the second month you do not owe $500 an interest because in the second month what I say this would be ninety nine thousand nine hundred dollars and forty-five cents that's your balance for the second month and so in the second month the amount of interest you owe is just a little bit less not much less how much less it would be 1/12 of the annual interest six percent on a hundred dollars I mean you've essentially paid off a hundred dollars so you are saving six dollars a year in interest and six dollars a year in interest divided by what twelve you're saving fifty cents and so the next month you only owe four hundred ninety nine dollars and fifty cents in interest but in a second month you're paying off a little bit more on that loan so the third month you all a little bit less interest and so what's happening is this over time the amount of interest you owe on that loan is going down and this is not a straight line it's curvature to it okay and it's gonna go down down down in the first month what you owe in principle $99 a fifty five cents was here it's just this difference between your $5.99 and your 500 that much is to repay the loan and over time that's going to go up and so why is it gonna go up because out of your almost $600 a month by nineteen I'm 55 if you owe less and less interest there is more and more left over to pay the loan off now what's this point this is the point out here where half of your house payment goes for paying off the loan and half goes for interest and it depends on the interest rate that you're paying but this is occurring someplace excuse me out here at I don't know twenty two years I'm gonna put a question mark but it's way way way into the term of this loan before half of your money is used to pay off the loan more than half your money is going for interest most of the time of that thirty years and like I say there is no rule about how long that is but this is a fixed rate mortgage you see we're paying a fixed interest rate six percent okay questions about this if you have an adjustable interest rate loan then what they'll do is each year on the anniversary of whenever you borrow that money they'll send you a note in the mail and it'll say hey according to the formula we agreed on when we lend you the money the new interest rate on your loan is it could be six and a half percent could be four and a half percent I mean it varies it goes up and down and so now your new house payment is and then they'll tell you a different house payment but this is the standard kind of loan that people get where it's a fixed rate mortgage and they've had these fixed payments throughout the life of the loan most people but not everybody most people are not gonna hold that house until they've paid that loan off because most people are gonna move in ten years or 15 years or something like that either move to a different town or move to a different house bigger house smaller house anyway this is the nature of the beast and so anyway questions about this these loans the home loans but not business home loans are something called non-recourse and what here's what that means if you stop making payments the bank can come out and take your collateral probably the house for most people that's what it is if you stop making payments you default on the loan they can take your collateral and that's it with other kinds of loans typically with other types of loans if you stop paying they'll come take your collateral if that's not enough they just keep pursuing you but here with a non-recourse loan they have no recourse they can't go back on you any further than just the coddle and so what people do sometimes is if they let's say buy a hundred thousand dollar house they owe a hundred thousand and the value of that house goes down then they just say well that was a bad decision and turn it back to the bank and leave and the bank says yeah that was a bad decision we should know loan money to that person okay I guess the final thing I would say is this there are both these are not only home loans but home or business loans that is to say real estate loans include business business real estate commercial property loans and that's how you'll normally hear this referred to and these are really set up in a different way usually what's gonna happen with these kinds of loans I mean I drew a little picture this would be the nature of most home loans with a commercial property loan it's more like you're just paying interest let's say you go down to borrow a million dollars to buy I
on't know a strip mall or something like this you borrow a million dollars and what you do is over the next several years you just pay interest on it and you're not paying the house off here are the they loan off here you're paying the loan off you start up start off paying $100 a month out of your 600 is going to pay the loan off and then more and more and more finally in the last month you're paying virtually everything of that $600 virtually all of that goes to pay Illinois there's very little interest do it there but this the commercial property loans is more like you're just paying interest interest interest and then at the end of five or ten year period would be most common then it's all do now what do you do then go get another loan okay on maybe you've got some money build-up or you can pay some of it off but just go get another loan roll that loan over so and the terminology these are balloon notes is that how you spell balloon anyway I think it is when I start to say Oh who's making these loans for commercial property loans largely not totally there's no rule but the big lenders for commercial property loans are small banks community banks a disproportionate percent of all these loans are made by that is to say these commercial property loans are being made by community banks okay and that is an issue I mean whether those are safe or not okay I mean we normally think about oh the housing market got into trouble a lot of these mortgage loans went bad and that is true but there are a certain percent of these commercial real estate loans that are going bad as well okay second let me do some erasing here second category of laws that are very big very well-known C&I loans commercial and industrial loans these are business loans we call these banks commercial banks because of this they make loans to businesses and this is mainly to finance ongoing business activities inventories for example supplies don't get into a bunch of that stuff businesses need money for different things needing loans if they need money for their building then the business it's not called a sea a nylon it's a real estate loan if they need money for a building and then businesses also here's inventories of two kinds retail inventories the stuff you're gonna sell a car dealership will go down and borrow money buy cars put them out on the showroom floor and sell and sell those same with a motorcycle dealership so with what a retailer sells refrigerators or stereos okay another time and by the way a lot of just like drug stores grocery stores same kind of thing they're buying inventories to be sold another kind of inventory would be a raw material inventory like a utility company could borrow some money and go out and buy a whole bunch of coal and then pile that coal up and burn net to generate electricity well they borrowed the money but it's for a raw material rather than for some final product let's stop there for the day we'll pick up with the cni loans next time so long
