Demise of a great company - Blackberry

Long time ago when phones were evolved, there was a great company named Research in Motion (later known as Blackberry) arrived in the consumer market. It was equipped with its tiny mouse on the phone and soon it became a favorite of enterprise users due to its email messaging, web browsing and proprietary Blackberry messenger. It was not only considered expensive but a status symbol for all its users. There was pride in user's eye when they held their phone out and say without saying "Hey! Look I got a Blackberry" and others used to get the picture of this guy as some hotshot in the company.

Then there comes the time of Smartphone and touch screen technology brought by Apple. In 2007, Apple announced its revolutionary iPhone and it was an immediate hit. Imagination turned into reality through this new technology. Consumers don’t need to use physical keypads on the phone anymore. U.S. consumer accepted and loved it with great pride, even though it was a costly affair. Soon after web search giant Google, came up with new operating system, Android and first version of android touch phone in 2008. Though it was not as great as iphone but being an open source operating system it created a new ecosystem and allowed the mobile manufacturing companies to build the touch screen phones like iphone.

Now, after 6 years of Apple and Google innovation we see several great phones with specs of a computer in tiny handheld mobile device. Market is flooded with smart phones and because of apple innovation and Google initiatives, now more than 1.1 billion people are carrying the world around in their Smartphone. But what happened to Research in motion (RIM), why was it left behind in its own game? How did Apple’s iPhone really become Blackberry killer?

In my opinion, it was not the Apple iphone but Blackberry itself which dropped the ax on its feet. Was it too blinded by its own pride and success that it forgot to see this coming and when it did realize? Or it forgot to innovate, the core competencies it came with? Google, fairly a new company was one which recognized this new technological innovation and its prospect in future and jumped right away in this new adventure. But I still wonder.. what were Blackberry's management doing? Why did they pick it up so late that it almost becomes a stranger among its own users? Why did they love their physical keypad so much that they believed that consumers would not ditch their loyalty? But consumers have evolved with the technological advancement and don’t want to be left behind. Even in the developing market like China and India, people started using Smartphone and blackberry was no longer a status symbol. Thanks to Google and its open operating system which made possible for everyone to own a smartphone. When Blackberry recognized this mistake and came with its new revamped software and touch phones Blackberry Z10, it was already long forgotten by the market, as people were so busy searching for next Android and iOS phones.

In recent trail of bad news, Blackberry seems to be dying but I hope that they would not give up and will come up with new innovations, which will not only bring them back in the market but also bring back the investor’s confidence. At the end, competition brings innovation and affordability and it is always good for customers.

Structured Finance

In very simple words, structured finance can be said a tool to reduce the risk from the assets kept under borrowers hand and also to regenerate the money from the same.

It can also be said that in order to use the money which is not with lender in order to lend it again so that money circulation in the market is increased. The structuring of such cash flow to the institution and the market can be said structured finance. In this way the assets or loans are not only securitized but also it provides the desirable return which helps the essential users like mutual fund, pension fund and others to keep their portfolio return maintained and attractive in the market.

Now a day, structure finance is termed more as CMO (Collateralized Mortgage Obligation), ABS (Assets Backed Securities), MBS (Mortgage Backed Securities), CDO (Collateralized Debt Obligation) or CLO (Collateralized Loan Obligation) instead collectively called structured finance.

The important part of structured finance is Securitisation, which can be described as the pooling of the bundle of assets of same class under different category to make them more transparent in terms of return and risk related to such kind of assets.

Securitisation is done through tranching the assets or mortgages. The main purpose behind this is to categorise the assets with different return and risk which suits and fulfil the investor’s purpose. This also allows the cash flow from the underlying assets to divert to the tranche having the priority for the unharmed tranche from the risk.

These tranches are then rated by the public and private rating agencies, which increases the investor confidence and provide them options according to their risk bearing capability. In that way if investors want more security on their invested money, they will go for higher rated tranches with less return.

The Assets backed securities are more risky than the others to reduce the risk and securitize them credit enhancement tools are used. It provides support to prioritise and superior tranches in terms of risk absorption. There are few techniques which are used as a credit enhancement. They are:

Over collateralization
Excess interest
Subordination
Insurance
Excess spread

CMO (Collateralized Mortgage Obligation)

CMO stands for Collateralized mortgage obligation. CMO is a hedge instrument where a banks which has given several personal loans of different type, does not want to wait till the maturity to get that loan amount back, so it sells those collaterals to SPV (Special Purpose Vehicle) whose sole function is to securitize those collateral into a bond, called tranches. Tranche is German word which means slice. The collections of tranches are called deal. This deal is then sold to investors to invest on their risk appetite capability.
Each tranches has unique 9 digits CUSIP (Committee on Uniform Security Identification Procedures) ID which is international recognised. These tranches has different type of payment methods for example interest only or principal only.

The formation of the CMO instrument can be seen in the figure-1. This shows how the loans collaterals are converted into a bond obligation. This kind of instrument is very less risky because these are backed by some assets. Each tranche is rated by the credit agencies based on the backed security and then handed over to underwriters. These credit rating agencies also enhance the credit of the Tranches by using certain tools and techniques. There are certain types of tranches which are supported by government.