Chapter 547 The Dinosaurs of Wall Street

As early as June 7, Bear Stearns, the fifth largest investment bank in the United States, announced that two of its hedge funds would stop redemptions.

Frightened and confused investors soon discovered that the two Bear Stearns funds held large amounts of securities related to subprime mortgages.

Regarding the move to stop redemptions by two of its hedge funds, a Bear Stearns spokesman also said that this was an action to protect investors because the actual value of the asset is higher than its current market pricing.

"We think the fund has a good portfolio that can survive until the market returns to normal, and we believe stopping redemptions will best protect investors' long-term interests."

Prior to this, Sowood Capital, a hedge fund that manages US$3 billion of Harvard University's assets, lost nearly half of its asset value in just one month due to its holdings in subprime mortgage businesses.

But until this moment, Wall Street was still unaware of the coming storm...

On July 19, 2007, the Dow Jones 30 industrial stock average price index in the New York stock market hit a record high, exceeding the 1,400-point mark for the first time.

Until this time, in the eyes of investors, the "fluctuations" in the real estate market had only affected companies related to the issuance of subprime loans, while other industries were still thriving and their stock prices continued to rise.

Even senior executives of some investment banks and banks are not aware of how widespread subprime loan-related bonds will be implicated.

The current situation is like a pustule growing out of the American financial system, but no one has discovered this fact. They only think that physical pain occurs occasionally, and it will only cause pain when the pustule is popped and cannot be hidden. Face this irreversible deterioration...

Barron, all you need to do is wait quietly for those pustules to be punctured one by one...

It's just "foreplay" now.

When banks and investment institutions discover that they own so many subprime mortgage bonds, the subprime mortgage crisis is about to officially break out.

Just as July rolls around, secretly, something is changing.

On June 14, the two hedge funds owned by Bear Stearns declared bankruptcy.

Over the next two weeks, the publicly traded triple-B subprime mortgage bond index fell nearly 20%...

Black swan funds thus profited handsomely from their bet agreements on CDO bonds and the expected profits from CDS bonds.

"For some time before this, they always used the excuse of 'systemic failure' to delay the settlement of our CDO bond bets, but in July, those investment banks finally began to take the initiative to find us and prepare 'Let's have a good talk'..."

During the phone call, Phelan O'Neill, general manager of Black Swan Fund, said this to Barron.

This is also a problem encountered by some funds that are currently short-selling the subprime crisis, especially some small funds - they have held short-selling chips for too long and need to make profits to stabilize investor confidence, but for those investment banks Specifically, they believe that the previous decline in subprime mortgage-related bonds can be controlled in the short term, so they continue to use various excuses to delay the settlement of those short-selling products.

But it was not until July that they finally began to face up to this problem and found that if they continued, their losses would become greater and greater. Of course, the majority of investment banks who are aware of this are not yet in the majority. These investment banks are already considered Very responsive...

It's so ridiculous. After the bankruptcy of two of Bear Stearns' funds, many investment banks did not even realize the dangers.

People in the future will wonder how they could be so slow - but if you imagine how many businesses those big investment banks have, it is impossible for their top management to have time to confirm the true situation of each business. It all requires step-by-step bottom-up feedback, but departments that have actually incurred losses often do not report their losses to their superiors as soon as possible. Instead, they first find ways to cover it up in order to solve it on their own...

It is not until they realize that they cannot solve the problem alone that they are able to report the losses.

Just like now, some investment banks, including Goldman Sachs Group and Morgan Stanley, have finally felt pain from the tails of their dinosaurs to their heads...

On June 29, the day when Apple publicly launched the iPhone 1, the Black Swan Fund finally received a call from Morgan Stanley. The other party was a senior vice president of Morgan Stanley. He said that Morgan Stanley Lee needs to confirm whether the price of CDO in the market is "fair" for the current betting contract on CDO bonds held by Black Swan Fund with them...

The next day, Goldman Sachs Group also contacted the Black Swan Fund, and their attitude was even more straightforward. Goldman Sachs hoped to talk to Phelan O'Neill about resolving the gambling agreement between them, and Goldman Sachs expressed that it hoped to purchase the Black Swan Fund. Some short-selling chips in their hands - they know that the one holding the most such chips in the market currently is Black Swan Fund, a previously unknown "small fund company".

Goldman Sachs' attitude also shows that the moment of market reversal has now come. Goldman Sachs, the fastest-reacting company, is ready to switch lanes - the Global Alpha Fund they manage has suffered huge losses on subprime loans, and they have decided As quickly as possible, switch from betting on the subprime mortgage market to betting on this market...

In fact, Morgan Stanley is the most unwilling to admit failure among the betting "clients" of the Black Swan Fund.

A week before Phelan O'Neill made this call to Barron's, the Black Swan Fund had officially notified Morgan Stanley of the credit default swap product (CDS) they had sold to the Black Swan Fund more than half a year ago. ) has turned favorable for black swan funds.

The value involved in this batch of CDS has reached US$5 billion. According to the calculation of the Black Swan Fund model, Morgan Stanley currently needs to pay US$1.5 billion to the Black Swan Fund. Of course, Morgan Stanley can still continue the stalemate. But when they are notified next time, I am afraid that the amount they need to pay for this CDS bond may exceed US$2 billion, or even US$3 billion...

When they first received this notice, Morgan Stanley did not want to believe the results at all. They claimed that the correlation of thousands of 3B-rated bonds in their batch of CDO products was very low, so several bonds Just because something goes wrong, doesn't mean they're worthless.

"According to our model calculations, these CDS bonds have not allowed you to earn that much income, only less than US$200 million at most..."

Black Swan Fund did not explain too much about Morgan Stanley's "persistence", but told them that this was just a good-faith notice, and perhaps they could wait some more time to confirm the settlement price of the bond.

Time is on the side of the Black Swan Fund. The large amount of short-selling chips in their hands puts the Black Swan Fund in a favorable position, so they are not in a hurry. What is anxious should be the "clients" who bet against them.

Sure enough, a few days later, Morgan Stanley took the initiative to find the Black Swan Fund. At that time, Morgan Stanley already needed to pay the Black Swan Fund $2 billion for this batch of CDS...