Rebirth of the Industrial Tycoon

In the conference room, several financial experts have realized the seriousness of the problem.

Although the leaders of the insurance company looked ignorant, they could feel from the expressions of the experts that what Li Weidong said was a very serious matter.

If the increase in subprime loan default rate is only a few percent, it will be nothing more than drizzle for the huge U.S. economy. It will only cause some losses to banks and reduce the credit of lenders.

In the United States alone, there are more than 2,000 banks with a scale of more than 300 million U.S. dollars, with assets exceeding 19 trillion U.S. dollars. The money lost from the suspension of supply, evenly spread over the assets of 19 trillion U.S. dollars, is just a drop in the bucket.

The default of CDS is much more serious, mainly because the nesting doll is too big, which also magnifies the financial risks caused by the default of CDS exponentially.

But even so, a CDS default will cause a localized financial problem, at most similar to the Internet bubble in 2000, which the US economy can sustain.

However, if you add CDO, it will be a comprehensive financial risk. It will be a nuclear attack on the entire financial system of the United States. It is definitely not alarmist to trigger a global financial crisis.

The entire CDO process is a secured debt obligation, which is a certificate that packages all possible cash flows together, repackages them, and then puts them on the market in the form of a product.

This cash flow can be bonds, debt, premiums, CDS, etc., all of which are fixed income products and can predict future returns. In other words, this CDO itself is a fixed income security.

You can think of a CDO as a pile of IOUs. When the IOUs expire and the borrower repays the money, the borrower will receive benefits. But if the borrower fails to repay the money when it is due, he will suffer losses.

There is nothing wrong with CDO itself. Splitting and repackaging various cash flows is equivalent to diversifying investments and reducing risks.

But the people responsible for splitting and packaging cash flow have problems. No matter how good the financial products are, they can't stand up to the playful operations of Wall Street financial institutions!

The initial CDOs contained relatively high-quality cash flow, that is, IOUs that could be cashed.

But there is only so much high-quality cash flow, and there is not enough to sell, so financial institutions began to mix some less high-quality cash flow into CDOs. For example, high-risk products such as MBS and CDS generated by subprime loans.

This is equivalent to good products and bad products. For example, if you buy a box of good apples, you have to buy a rotten pear.

Later, the financial institution discovered that I had too many rotten pears and too few good apples, so it simply increased the proportion of rotten pears. If you buy a box of good apples, you have to buy a box of rotten pears.

But customers are not fools. When I buy a box of apples, one rotten pear is acceptable. But in a box of apples, half of them are rotten pears. I will definitely stop doing this. Only a fool would buy it!

So Wall Street financial institutions carried out another wave of cunning operations, that is, when splitting and reorganizing products, they made it as complicated as possible so that customers could not understand how many good apples and how many rotten pears there were.

As mentioned before, something like CDS is to sell insurance to insurance companies and then continue to play nesting dolls. This nesting doll model is very suitable for performing tricks during spin-offs and reorganizations.

For example, a bank lends a subprime loan of RMB 1 million, then goes to an insurance company to buy CDS, and gets a Contract No. 1. The insurance company then goes to another insurance company, buys insurance for Contract No. 1, and gets a Contract No. 2.

By analogy, in the end, 10 contracts were created for the 1 million subprime loans, ranging from Contract No. 1 to Contract No. 10.

The financial institution splits Contract No. 1 to Contract No. 10 into 100 parts, then selects 10 parts and packages them together to form a CDO, which is sold on the market.

When investors saw this CDO, they had to understand what was in it, so they picked out a contract and found it was Contract No. 10.

Contract No. 10 is the insurance against Contract No. 9. If the buyer wants to know what is in Contract No. 10, he has to go to Contract No. 9, and if he wants to know what Contract No. 9 is, he has to go to Contract No. 8. By analogy, when you finally find Contract No. 1, you discover that it turned out to be the insurance for the 1 million subprime loan.

Then the buyer draws out another CDS contract from the CDO, which may be contract number 10 for another matryoshka doll, and then he goes to find contract number 9 for another matryoshka doll, and so on, and goes through another troublesome process. process.

The cunning operation of Wall Street financial institutions is to stuff a lot of matryoshka contract No. 10 into the CDO, so that it is impossible for the buyer to find out what is in the CDO.

Some economists liken this CDO to opening a blind box, but in fact this thing is worse than opening a blind box.

The thing about blind boxes is that you don’t know what’s inside before you open it. When you open the blind box, it’s clear what’s inside.

However, for a CDO that has been packaged by Wall Street, not only do you not know what is inside before you buy it, but even if you open it after buying it, you will not know what is inside.

And because there are so many nesting dolls of CDS, sometimes the financial institutions responsible for splitting and reorganizing CDS don’t even know what they are selling in my CDO!

Regardless of economics or sociology, this is something difficult to imagine. If you are selling something, you don’t know what you are selling, and this thing has been sold for tens of trillions of dollars!

How could such a confusing financial product not have huge financial risks? Once it explodes, it will be difficult for the global economy to follow suit.

In the end, Wall Street’s shady operations made it difficult for investors to even figure out what was in the CDOs they sold, and this gave rise to another problem:

As an investor, I don’t even know what the company I’m investing in is, so how should I choose a product? There are so many CDOs on the market, which one should I invest in?

At this time, professional rating agencies come into play.

Although investors don't know what's in those CDOs, they can look at the credit ratings of the CDOs. Those with high ratings must be products with good credit, and those with low ratings must be products with poor credit.

This is just like when we watch movies and TV series on weekdays. If you don’t know whether the movie is good or not, and you don’t want to make mistakes, then take a look at a certain rating of the movie.

When I look at a certain film with a score of 9, it must be a good movie. I dare to go into it, and I may even feel that it would be a pity to miss it. Even if you don't understand what the movie is about, you will instinctively feel that this is an awesome movie.

If a certain film gets a score of 2, it is definitely a bad movie and you don’t want to watch it. Even if you watch it, you should watch it with a critical eye and try to find faults in the movie as much as possible.

Movie ratings help moviegoers choose movies, while American credit rating agencies help investors choose products to invest in.

An investor wants to buy a CDO product. Although he doesn’t understand what’s inside, when he sees that Standard \u0026 Poor’s rated this CDO as AA, he will feel that this is a product with good credit. The product is worth investing in.

And when he sees that Standard \u0026 Poor's has rated this product only as C, investors will know that the credit of this product is relatively average, and investment will face a relatively high risk of default.

In theory, there is no problem with credit ratings, but the premise of all this is based on the professionalism and fairness of the rating agencies.

The problem is that both S\u0026P and Moody's are commercial institutions, and they depend on their ratings for their livelihood!

If a rating agency gives a CDO a lower rating, they lose that customer.

The result is that since 2007, both Standard \u0026 Poor's and Moody's have never rated U.S. CDO products below grade A!

In other words, a certain CDO product may contain subprime-related CDS. Not only are there a bunch of matryoshka dolls, but these dolls are about to face default. If it is rated, it may not even be rated B. As a result S\u0026P and Moody's gave it an A rating.

When investors see this A rating, they are fooled and buy it.

It's like a movie with very high ratings, but after watching it, you find out what kind of crap it was! Then it suddenly dawned on me that such a high score must have been earned through spending money.

The same is true for investors buying CDO products, but when they wake up, they have lost all their money.

At the beginning, Li Weidong named the American rating agency's excessive rating of CDO. At this time, when he thought of Wall Street's cunning operations on CDO, people with certain financial knowledge would immediately understand that this is equivalent to rating. Institutions and financial institutions work together to steal investors’ money.

For those who have never been on Wall Street, this kind of saucy operation is indeed a bit unbelievable. This is not engaging in finance, it is simply fraud!

What's more, China's financial supervision is much stricter. As an insurance company, you can not compensate for this or that, but you must definitely face up to the supervision of your superiors.

Sure enough, a leader of an insurance company immediately said: "Isn't this a lie? Don't the US regulatory agencies just care about it?"

"They really don't care!"

The answer this time was not Li Weidong, but Chen Aisi.

As a former Wall Street black warrior, Chen Aisi is very familiar with the strength of financial supervision in the United States. Of course, he is very aware of how ineffective the supervision of American financial regulatory agencies is.

Li Weidong followed Chen Aisi's words and said: "If the U.S. financial regulators had done something, they would have already started supervising the subprime loan market!

From an overall financial perspective, the low threshold and disorderly lending in the subprime mortgage market, the large number of subprime mortgage MBCs, and the infinite nesting dolls of subprime mortgage CDS can only be regarded as gestating a bomb.

In the end, these high-risk financial products formed a CDO, which was equivalent to pulling a fuse to the bomb. The excessive ratings from rating agencies ignited this fuse.

But this is not the most terrifying thing. As long as a basin of water is poured on it before the fuse burns out, the crisis can be resolved, and the person who can pour water on it is the US financial regulatory agency.

But they did nothing at all, allowing the fuse to burn slowly, and eventually burned to the bomb. The result was naturally that the bomb exploded. Now, most of the fuses have been burned, and the time for the bomb to explode is not far away. "

Director Sui next to him also helped and said, "Chairman Li, I almost understand. Let me narrate it from the beginning. Please listen to what I said, am I right?"

Because U.S. banks use large-scale loans in the financing process, they cannot afford a high foreclosure rate, and the U.S. subprime mortgage loan foreclosure rate is rising and will soon exceed what banks can bear.

Once the banks cannot bear it, the subprime loan market will collapse, and MBC and CDS related to the subprime mortgage market will be linked. If MBC and CDS default, it will be linked to related CDOs.

If a CDO defaults, it will affect the entire U.S. financial system. If there is a problem with the U.S. financial system, it will affect the global finance and trigger a global financial crisis. Is this what you mean? "

Li Weidong nodded: "That's what it means at the financial level. At the same time, we must also consider the economic level. The subprime loan market collapsed, a large number of houses were cut off, the U.S. real estate market will also shrink, and real estate-related industries will also shrink. been greatly affected.

At the same time, the suspension of housing supply will lower the credit rating of home buyers, thereby affecting normal consumption. The shrinkage of the real estate market will also affect consumption. Under the linkage of many aspects, problems will occur in the entire consumer market, which will affect the United States. economy.

The United States is the world's largest consumer market. If the United States is not smooth, the whole world will suffer, and the global economy will then experience a certain recession. Coupled with the financial crisis mentioned earlier, under the double blow, a global economic crisis is likely to break out.

The global economic crisis will also cause many chain reactions, such as debt crises in some highly indebted countries, currency depreciation caused by the economic crisis, which will push up energy prices, and supply shifts caused by costs. "

When it came to the global economic crisis, the people present could no longer remain calm, and everyone's expressions became serious.

Finally, one of the leaders spoke: "Chairman Li, listening to you is worth ten years of studying. The lesson you taught us today has really benefited us a lot!"

"I just made a blind analysis and made a fool of myself in front of several experts." Li Weidong immediately said modestly.

The leader continued: "Chairman Li, we have to digest the content of your class today. How about we stop here today?"

"That's fine. All the leaders are very busy. I'm honored to be able to spare your precious time and listen to me chatting here. Then I'll take my leave first." Li Weidong said immediately,

Li Weidong also knew that what he said today would be discussed within the insurance company in the coming time.

"I'll see off Chairman Li." Director Sui stood up and said.

Director Sui sent Li Weidong out of the conference room, but the others still sat where they were and did not move.

Guessing that Li Weidong had gone far, the leader asked: "Director Wei, do you think what Li Weidong said is possible?"

"What he said is already happening." Director Wei nodded silently, and then said: "From a purely financial professional perspective, it is very likely that it will develop into the situation Li Weidong said."

"Is there really a financial crisis, or even an economic crisis?" the other party asked immediately.

"There is a possibility." Director Wei continued: "But one thing is certain, all investments in U.S. real estate must be withdrawn immediately, and our other investments in the U.S. financial market should also be cautious again, so that at least we can avoid lost."

Professor Ye added next to him: "In addition, I also suggest that our business dealings with American investment banks should also be reduced. The 30 times leverage is too risky. Those investment banks in the United States dare to We can’t gamble, so we might as well get our funds back as soon as possible!”

Several insurance company leaders nodded one after another. These people are still relatively afraid of investment risks, not because they are afraid of losing money, but mainly because they are afraid of losing their official position. If a large amount of money is lost due to the U.S. subprime mortgage crisis, one of the scapegoats sitting here might be demoted.

However, Wall Street Black Warrior Chen Aisi said: "I have a different view. I think there is no need to withdraw capital at this time. Since there is going to be a problem in the U.S. subprime mortgage market, why don't we take this opportunity to short-sell. I will definitely do it by then." You can make a lot of money!”

"Short the subprime mortgage market? How to do it? This is not a stock. It goes up and down. Whether it is MBS, CDS or CDO, they are all fixed income." Professor Ye asked.

"Professor Ye, I noticed that recently, there is a CDS on Wall Street, specifically for MBS credit default swaps. We can also use the same method!" Chen Aisi said.

"Is there such a thing?" Professor Ye opened his mouth in surprise, and then said angrily: "When I left Wall Street, they still had some bottom line. Why don't they even have such a bottom line now!"

There is no shortage of financial talents on Wall Street. Of course, many people have seen the hidden dangers of the subprime mortgage crisis. And with Wall Street's urinary behavior, some people will definitely make a fortune by short selling.

However, there was no short-selling product on Wall Street at that time, so a wise man thought that since there was no ready-made short-selling product, I would find a way to make one myself.

This great genius approached Goldman Sachs and said that he wanted to customize a credit default swap, also known as CDS, for MBS bonds of subprime mortgages. If the MBS bonds default, Goldman Sachs will pay me a sum of money.

Goldman Sachs thought, maybe there is a fool somewhere! Since you are willing to give money, Gao Sheng readily agreed.

And this great ingenuity did not just pluck out the wool of Goldman Sachs, but also plucked the wool of Morgan Stanley, Deutsche Bank, Citibank, etc., one by one.

This great genius is the "subprime prophet" Michael Barry, who is also the prototype in the movie "The Big Short".

…

Director Sui's voice rang from the mobile phone: "Chairman Li, our company has promised you US$1.5 billion in financing. This is a great event. You have to treat me to dinner!"

Li Weidong breathed a sigh of relief. It seemed that the information about the subprime mortgage crisis was still very valuable. At least in the eyes of the top executives of the insurance company, this news was worth US$1.5 billion in financing.

Then Li Weidong agreed: "No problem, you pick the place, the delicacies from the mountains and the sea, you can eat whatever you want!"

Li Weidong secretly thought, with 1.5 billion U.S. dollars in financing, let alone eating delicacies, you can get a giant panda for you to lick twice. Of course, it's just two licks. After licking, you have to send the giant panda back to the zoo.

"How about eating barbecue? I know a restaurant that sells roasted kidneys, which are particularly delicious!" Director Sui seemed to like this kind of spicy food.

The two made an appointment for the dinner. As soon as Li Weidong hung up the phone, another cell phone rang.

"Hey, Chairman, something went wrong with the acquisition of Jaguar Land Rover. Ford just sent a notice saying that workers are opposed to this acquisition!"