Chapter 517 CDO and CDS

So far, Barron's entire layout for the subprime mortgage crisis includes three parts: North America, Europe and Asia.

Among them, in North America, the subprime loan bond market, which was the source of the subprime mortgage crisis, and the related real estate and financial industries were directly targeted at the Black Swan Fund, the Wall Street fund he acquired.

Since the second half of last year, Black Swan Fund has successively received US$4.1 billion in funds from IC Capital and Blue Valley Capital. Through early long investments in subprime loan companies and related debt and other products, it has successfully increased the value of these funds. to over $5 billion.

After that, they started short selling related products.

The most profitable part here is shorting subprime loan debt CDOs and purchasing subprime mortgage swap default products CDS.

For example, shorting CDOs means that the Black Swan Foundation directly signs a gambling agreement with the issuers of those debts, that is, the major investment banks on Wall Street, "borrows" CDO debts from them, sells them, and then waits until these debts fall to waste. After the price, buy and return...

At that time, when real estate was still hot and house prices were still rising, this kind of short-selling behavior seemed to be a complete "death-seeking", so those institutions were still very happy to have someone give them money for free.

Now Black Swan Fund has signed CDO gambling agreements with different amounts with a long list of "giants" including Merrill Lynch, Citibank, Lehman Brothers, UBS, Deutsche Bank, Goldman Sachs Group, etc., which involves Fund targets range from nearly 10 billion to 1 billion US dollars - because these investment banks are inherently competitive with each other and will keep their client information and investment trends confidential, so in fact they all just think there is a "faint" The fund company that has gone against the trend and bet against itself to give away money...

They never imagined that this fund company was not "lost," but directly crazy, betting against almost all investment banks involved in the CDO business in the market.

It has to be said that although Goldman Sachs is known for its greed, it is also the most cautious. The gambling agreement they signed with the Black Swan Fund involves the smallest amount of funds, only US$1 billion.

As for the credit swap product CDS of subprime loans, not only was the price very low at that time, but also because of its form, it could exert great leverage. Therefore, the scale of funds involved in the CDS held by the Black Swan Fund was even larger. .

Speaking of subprime loan CDS products, in fact, they are an insurance product, with premiums usually paid every six months and the terms fixed.

To give an example, the Black Swan Fund can purchase a 10-year credit default swap product on a subprime mortgage loan worth $100 million at a price of $500,000 per year.

In other words, the total premium that the Black Swan Fund should pay is US$5 million in total over 10 years - if within 10 years, these subprime mortgage loans are repaid on time and there is no default, then their US$5 million is equivalent to paying If you pay the premium, the insurance company will make money in vain.

But if a subprime mortgage default occurs during this 10-year period, the Black Swan Fund will receive $100 million in compensation from the insurance company.

Therefore, you can simply think of this as a bet. One party believes that these loans will not cause default, and you use 5 million in 10 years to participate in the bet. If the other party succeeds, you will pay him 5 million US dollars. If the other party succeeds, you will pay him 5 million US dollars. Fail and you get $100 million.

Of course, these figures are only examples. In reality, premiums and compensation are priced according to the credit rating of those subprime loans. The premium of the CDS bond corresponding to a 3A-level CDO bond is definitely very different from that of a 3B-level loan.

Because AAA-level CDO debt is "considered" to be high-quality debt, the possibility of default by the other party is extremely low, so the corresponding premiums are low.

But in fact, many of these AAA CDO debt are just packaged to look low-risk - Wall Street has many ways to package them like this, making it difficult to see the difference.

The Black Swan Fund has specially hired some people to conduct in-depth research on these related claims, so as to find out those types with the highest probability of default among the AAA CDS claims that can be more profitable, so as to increase the final return.

And you need to know that these premiums are paid in installments. If a 10-year CDS bond defaults in the first year, you only need to pay one year's premium to get the final compensation. According to the previous example , they should have paid a ten-year premium of US$5 million for a US$100 million mortgage, but if the subprime mortgage crisis broke out within a year, then they actually only paid a one-year premium of US$500,000.

This is equivalent to adding an additional leverage to the original leverage. As long as the time when the subprime mortgage crisis broke out does not change, this is a ten-fold leverage with no additional risk at all!

The most interesting thing is that, also because of the greed of Wall Street, in order to increase the supply of the CDS debt market, they do not match one mortgage CDO product with one CDS product at all, but often one CDO product, corresponding to three, or even more CDS products.

To put it simply, it is a $1 million house. If the loan cannot be repaid, the insurance company will usually pay the $1 million.

But they took out three insurance policies on the mortgage loan of this house, so if the loan cannot be recovered, these insurance companies will have to pay a combined compensation of US$3 million!

Now you know why when the subprime mortgage crisis happened, the United States asked the government to fund the rescue. According to their method, if the government does not come forward, the entire financial system, including banks, insurance, and stocks, will be ruined.

It has to be said that Wall Street is indeed home to the smartest people in the United States. They use various carefully designed financial products to gain profits and use financial derivatives to their advantage.

But at the same time, because they are too smart, those complicated financial products quietly gather a large amount of capital investment and accumulate huge risks, tying the global financial industry to this big ship bound for the iceberg.

In addition to investing in CDOs and CDSs, Black Swan Funds have also made arrangements in the stock market - no way, it is certainly impossible for them to invest all their funds in CDOs and CDSs, because when the subprime mortgage crisis comes, those The funds that investment banks and insurance companies can actually pay for compensation are limited. Even with the amount of funds they are involved in now, they will definitely have a considerable part of the compensation funds, and they need to negotiate with the other party.

In this case, even if you make more money in these places...

I'm afraid that this part of the funds can be recovered, so there is no need to waste the principal investment.

So they invested all the remaining funds in short selling the stocks of related companies and banks.

Once the subprime mortgage crisis breaks out, it is normal for the stocks of companies that issue subprime loans and many related banks to plummet by 90%, and many even go bankrupt.

Therefore, short selling of these stocks will also bring huge profits to the Black Swan Fund.

In fact, black swan funds only account for part of the short selling in the U.S. stock market.

The main force in short selling in the stock market is still carried out by the New York branch of DS Group. They have invested a total of 5 billion US dollars in this short selling!