This brief account aims at helping you find out about some of the obscure, or unclear, aspects relating to the Private Placement Opportunity Programs (PPOP), also known as Private Placement Programs (PPP), or under other acronyms like Private Placement Investment Programs (PPIP), etc. There are lots of people who know something, but cannot grasp the whole picture.
The following account is based on our personal experience of several years in this business. To explain the involved matter, we will study it mostly from an investor’s standpoint and a broker’s standpoint.
Before speaking of Private Placement Opportunities (as PPO), we need to realize some basic reasons for the existence of this business. It means that there is a need to learn some basic concepts about what money really is and about how money is created and how the demand for money/credit can be controlled, and that someone can issue a debt note which can be discounted and sold then resold in an arbitrage transaction (the basic system for running most of these programs), etc.
THE BASIC REASONS
To fully understand what it’s all about, there are some basic principles that you must understand:
The first reason why this business exists is to create money. More money is created by creating debt. You as an individual can lend out USD100 to a friend and you can make an agreement where the interest for that is 10%, so that he must pay you back USD110. What you have done is to actually create USD10, even though you don’t see that money. Don’t consider the legal aspects of such an agreement, just the facts. Now, the Banks are doing this every day, but with much more money. Banks have the power to create money out of nothing. Since PPO involves trading with discounted bank issued debt instruments, money is created due to the fact that such instruments are deferred payment obligations (debts). Money is created out from debt. Theoretically, any person/company/organization can issue debt notes (don’t look at the legal aspects of it). Dept notes are deferred payment liabilities.
Example: A lawful person (individual/company/organizati on) is in need of USD100, so he writes a debt note for USD120 that matures after 1 year, which he then sells for USD100 (this is called “discounting”). Theoretically, the issuer is able to issue as many such debt notes at whatever face value he wants – as long as there are those that believe that he’s financially strong enough to honor them upon maturity, and thereby is interested in buying such debt notes. Dept notes like Medium Terms Notes (MTN), Bank Guarantees (BG), Stand-By Letters of Credit (SBLC), etc. are issued at discounted prices by some of the major world banks in a very large amount of Billions USD every day.
Generally speaking they do “create” such notes (debt notes)“out of thin air”, so to speak. That is, they only have to write the documents. It’s as easy as if you, as an individual, write a debt note. Now, the core problem: to issue such a debt note is very simple, but the issuer would have problems in finding a buyer, unless the buyer “believes” that the issuer is financially strong enough to honor that debt note upon maturity. Any bank can issue such a debt note, sell it at discount and promise to pay back the full face value at the time the debt note matures. But would that issuing bank be able to find any buyer for such a debt note without being financially strong enough?
An example: If you had USD1 Million, and had the opportunity to buy a debt note with the face value of USD1 Million issued by one of the largest banks in Western Europe for let’s say USD-800,000 a debt note that matures in 1 year, wouldn’t you then consider buying it if you had the chance to verify it? Now, if a Mr. Smith approaches you on the street and asks you if you want to buy an identical debt note issued by an unknown bank, would you consider that offer?