OCTOBER 2008
Greetings & Salutations:
This last month, one of the Business Lyceum Attendees ...
who wishes to remain anonymous ... wrote to ask:
"In your e-Letter, you say you have been involved
in Offshore Banking. So, where can I buy a Letter of Credit
to use as collateral for a loan?"
YES ... I was, indeed, involved in Offshore Banking at one
time. Built the Bank up to over $21 Million in assets in
less than 9 years - but - that's another story, for another time.
-- In response to your question, lemme tell ya all about
...
LETTERS OF CREDIT
Although the term "Letter of Credit" (or "L/C")
has a specific meaning, the term has been so abused and misused
by con-men and assorted fools even some bankers don't know what
a Letter of Credit is.
A TRUE STORY -- only the names have been withheld
to protect the guilty:
In the early 1970s, I was able to set-up a deal to buy frozen
seafood (lobster & shrimp) overseas at a very attractive
price. -- I, in turn, offered to sell that seafood to a buyer
in Florida at a nice profit; saving the buyer money as well.
The buyer went to his bank and had a Letter of Credit issued
to my company in the amount of $120,000 for the first monthly
shipment of seafood.
Fearing loss in the mail, the buyer's bank asked for the name
of my bank, so they could transmit the Letter of Credit by courier
to my banker. Upon receipt, my banker was to do nothing
more than turn the Letter of Credit over to me, so I could proceed
with arranging the delivery of the seafoods to the buyer.
Upon receipt of the Letter of Credit by courier, my banker
REFUSED to turn the Letter of Credit over to me. -- His comment
was, "I can't turn this over to you until you deposit
$120,000 with our bank."
At that time, I was banking with the 'oldest' bank in the
State; established before the Civil War (notice I didn't tell
you what State). And, the banker who made the comment and
held my Letter of Credit was the President of the bank; well
over 60 years of age; with nearly 40 years experience in banking.
It took 5 lawyers and 10 days for the banker to turn the Letter
of Credit over to me ... and ... I had to publicly apologize
to the banker for what I had called him in front of his personnel.
By the way, although that happened a good many years ago,
I find even today many bankers still don't really know what a
Letter of Credit is. That's why you scare them to death
when you ask them to issue a Letter of Credit for you.
If you think the misunderstanding on the part of some bankers
is ridiculous, consider this. -- All too many otherwise intelligent
people envision a Letter of Credit as some mystical piece of
paper; writ in Old English form, that magically opens the door
to the international financial markets. And, they honestly
believe that Letters of Credit can be bought, like any other
commodity, on the open market for any intended use.
Anyone who offers to 'sell' you a Letter of Credit is a con-man
or worse (unless, of course, they are selling "banker's
acceptances;" which is a completely different financial
game).
So ...
What is a Letter of Credit?
To best answer that question, it will be easier to break that
question down into two other questions. -- What is a letter?
... and .. What is Credit?
A 'Letter' is a piece of written correspondence from
one party to another. -- 'Credit' is confidence in the
ability of a person to fulfill financial obligations.
Therefore, a Letter of Credit is a 'letter' from one party
to another expressing confidence in (giving 'credit' to) a person
to fulfill a financial obligation.
Although there are a wide variety of generally accepted forms
of Letters of Credit used in the banking industry, a Letter of
Credit can take any form; as long as it is a written document
(letter) expressing confidence in someone to faithfully fulfill
a financial obligation.
You could write a Letter of Credit yourself, for someone else.
A very simple form might be:
"TO WHOM IT MAY CONCERN: I know John Doe.
He's a good old boy. I trust him. You can sell him
up to $1,000 worth of goods on credit. If he doesn't pay
you, I will."
That is a Letter of Credit.
Now, John Doe has a Letter of Credit. But, if the merchant
doesn't know you, John Doe still won't be able to buy anything
on credit from the merchant.
On the other hand, if the merchant knows you and trusts you
to pay the bill, John Doe will be able to buy up to $1,000 worth
of goods from the merchant against your reputation (credit).
When a bank (or other financial institution) issues a Letter
of Credit for you, it is exactly the same as your simple Letter
of Credit for John Doe. -- The bank is saying that, under the
terms and conditions expressed in their letter, they will guarantee
that you will fulfill your financial obligation to some third
party; or they will fulfill that obligation for you to some third
party and collect the money from you.
Since all of the banks in the world are connected (directly
or indirectly) through their various corresponding relationships,
the bank issuing the Letter of Credit is replacing your credit
(because the receiving bank doesn't know you) with the bank's
credit which is known in the industry. But, if the bank
issuing the Letter of Credit isn't known to the receiving bank,
it may be necessary for the receiving bank to 'confirm' the credit
of the issuing bank through another bank (or banks) who does
business with both the issuing and receiving banks.
Now ...
How do you get a Letter of Credit to use as collateral
for your Loan?
Simple. -- Let's say, you are trying to get a Letter of Credit
for $1,000,000. --All you have to do is prove to some bank that
YOU can be trusted $1,000,000 worth. But, since the issuing
bank will be putting their credit on the line for you, you will
have to provide the issuing bank with at least $1,000,000 worth
of collateral. That means YOU have to have $1,000,000 worth
of collateral to pledge to the bank, so that bank can issue a
Letter of Credit for $1,000,000 as collateral for your loan from
another bank.
There ... ain't that simple?
It appears quite obvious (to me anyway), that the Attendee
asking the question is probably involved in some kind of Self-Liquidating
Loan deal ... anywho, 'buying' a Letter of Credit is usually
part and parcel of such confidence games. -- As a matter of fact,
the above is an excerpt from my book, "Self-Liquidating
(Arbitrage) Loans" .. which has been used by a number
of state's Attorneys General in the conviction of Self-Liquidating
Loan confidence men.
Besides explaining Letters of Credit, in "Self-Liquidating
(Arbitrage) Loans," I also explain Collateral Houses,
Certificates of Deposit, Prime Bank Notes, and all the other
financial instruments and applications used in Self-Liquidating
Loans. -- I even have a picture of a Prime Bank Note in
the book and tell you where you can get them.
You can get your personal copy of "Self-Liquidating
(Arbitrage) Loans" at:
Can you stump the old master? --
Betcha can't!
Over the past 50 years (man and boy), I have made bundles
of money in direct selling, service contracting, wholesale merchandising,
entertainment (I was a professional Trumpet player, vocalist
& Radio Announcer), freight forwarding, import/export, retail
merchandising, warehousing, real estate, electronics manufacturing,
finder's fees, closeout merchandising, financial brokerage, business
consulting, steel fabrication, gold and coal mining, offshore
banking, mailorder, writing, and publishing. -- That being the
case ...
No matter what business you're in ... whether you're just
starting, well on your way, or at the top of the heap ... I've
probably been where you are, done what you are doing. -- So ...
Anytime you have a question about 'how' to do something in
your business - or - if you have any comments about anything
I've said in issues of this e-Letter; or if you want to add your
2 cents worth ... just "ask" me or "tell"
me.
Send your Questions, Comments or 2 Cents Worth
to ...
with "Question" - "Comment"
- or, "2 Cents Worth" in the SUBJECT.
If I, personally, don't have an answer to any question you
may ask, I will contact some of the professionals in your field
of endeavor (I will probably know one or more personally) to
get the real 'skinny' for you.
Note: If you want to ask a question anonymously
just tell me so when you send in the question. -- Nobody but
you and I will know who asked the question.
Copyright - 2008, J.F. (Jim) Straw. All rights reserved.