Chapter seven hundred and fourth financing

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

Although the leader of the insurance company is based on an ignorant face, from the expression of the expert, we can feel that what Li Weidong said is a very serious matter.

If it is only a few percent of the increase in the subprime loan unsupply rate, for the huge economic volume of the United States, it is nothing more than a drizzle. It is nothing more than a loss of banks and a decrease in the credit of lenders.

In the United States alone, there are more than 2,000 banks with a size of more than 300 million US dollars, and their assets exceed 19 trillion US dollars.

The default of CDS is much more serious, mainly because the doll sets are too large, which also magnifies the financial risk caused by the default of CDS.

But even so, the CDS default is to cause localized financial problems, at most similar to the situation of the Internet bubble in 2000, and the economic size of the United States can support it.

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

The whole process of CDO is a secured debt certificate, which is a certificate that packs all possible cash flows, repackages them, and puts them on the market in the form of products.

This cash flow can be bonds, debts, premiums, CDS, etc., all of which are fixed-income products, which can predict future returns. In other words, the 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, you can get the benefits. But the person who borrows the money does not repay the money when it is due, and then there will be losses.

There is no problem with CDO itself. Splitting and repacking various cash flows is equivalent to diversifying investment and reducing risks.

However, the person responsible for splitting and packaging the cash flow has a problem. No matter how good financial products are, they can't stand the financial institutions on Wall Street.

In the initial CDO, there are some relatively high-quality cash flows, that is, IOUs that can be cashed.

But there are only so many high-quality cash flows, and there is not enough to sell if you sell them, so financial institutions have begun to mix some less high-quality cash flows into CDOs. For example, high-risk products such as MBS and CDS generated by subprime loans.

This is equivalent to a good product and a bad product. If you buy a box of good apples,

Gotta buy a rotten pear by the way.

Later, the financial institution found that I had a lot of rotten pears and few good apples, so they simply increased the ratio of rotten pears. If you buy a box of good apples, you have to buy a box of rotten pears.

But the customer is not a fool. I buy a box of apples, and I have a rotten pear, which is acceptable. But half of the apples in the box are rotten pears, I'm sure I'll quit this, only a fool would buy it!

As a result, financial institutions on Wall Street carried out another wave of cowardly operations, that is, when splitting and reorganizing products, they tried to make them as complicated as possible, so that customers could not understand how many good apples and how many bad pears there were.

As I said before, the CDS thing is to sell insurance to insurance, and then keep nesting dolls, and this nesting doll model is very suitable for slapstick operations during spin-offs and reorganizations.

For example, the bank lent out a subprime loan of 1 million yuan, and then went to the insurance company to buy CDS, and made a contract No. 1. The insurance company then found another insurance company, bought insurance for the contract No. 1, and made a contract No. 2.

And so on, in the end, the 1 million subprime loan, the nesting doll set out 10 contracts, namely contract No. 1 to contract No. 10.

The financial institution splits contracts No. 1 to No. 10 into 100 copies, and then picks 10 copies and packs them together to form a CDO, and sells them on the market.

When investors saw this CDO, they had to understand what was in it, so they picked out a contract and found that it was contract number 10.

Contract No. 10 is the insurance for Contract No. 9. If the buyer wants to know what is in Contract No. 10, he has to look at Contract No. 9, and if he wants to know what Contract No. 9 is, he has to go to Contract No. 8. And so on, and finally find the contract No. 1, will find out that it turned out to be the insurance of the 1 million subprime loan.

Then the buyer pulls out another CDS contract from the CDO, maybe the contract number 10 of another nesting doll, then he goes to the contract number 9 of another nesting doll, and so on, going through another troublesome process.

The tricky operation of Wall Street financial institutions is to put a lot of dolls' contracts No. 10 into the CDO, so that it is impossible for the buyer to find out what is in the CDO.

Some economists liken a CDO like opening a blind box, but in fact this thing is more ruthless than opening a blind box.

The blind box is just that you don't know what's inside before you open it. When you open the blind box, you can see what's inside at a glance.

However, the CDO packaged by Wall Street, not only do you not know what is in it before you buy it, but even if you open it after you buy it, you do not know what is in it.

And because there are too many nesting dolls in CDS, sometimes the financial institutions responsible for splitting and reorganizing CDS don't even know what I'm selling in this CDO!

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

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

Wall Street's sleazy operation, in the end, I can't figure it out. What's in the CDO I sell, investors can't understand it, and this also creates another problem:

As an investor, I don't even know what company I invest in, so how should I choose a product? With 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 CDO's credit rating. If the rating is high, it must be a product with good credit, and a product with a low rating must be a product with poor credit.

It's like we watch movies and TV series on weekdays. You don't know whether this movie is good or not, and you don't want to make a pitfall, so take a look at a certain score of this movie.

If you look at a certain movie with a score of 9, it must be a good movie, and you will dare to enter the pit, and you will even feel that it is a pity to miss it. Even if you don't understand what the movie is about at all, you will instinctively think that this is an awesome movie.

If you see a movie with a score of 2, it must be a bad movie, and you don't even 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, and American credit rating agencies help investors choose products to invest in.

Investors want to buy a CDO product. Although he does not understand what is in it, when he sees that the CDO is rated AA by Standard \u0026 Poor's, he will feel that this is a good credit. A product worth investing in.

When he saw that Standard \u0026 Poor's rated this product as only C, then investors would know that the credit of this product is relatively general, and investment will face a relatively large risk of default.

In theory, there is no problem with credit rating, but the premise of all this is based on the professional and fair basis of rating agencies.

The problem is that whether it is S\u0026P or Moody's, they are both commercial organizations, and people rely on ratings to eat!

If a rating agency gives a CDO a low rating, they lose the client.

The result is that since 2007, neither Standard \u0026 Poor's nor Moody's has ever rated a US CDO product lower than A!

In other words, a certain CDO product may contain subprime-related CDS. Not only does it have a bunch of dolls, but these dolls are all about to default. If they were to be rated, they might not even be rated B. As a result, Standard \u0026 Poor's and Moody's gave them an A rating.

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

It's like a movie with a very high rating, but after you watch it, you realize it's a shitty movie! Then I suddenly realized that such a high score must have been paid for.

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

At the very beginning, Li Weidong named the high rating of CDOs by the American rating agency. At this time, when he thought of Wall Street's sleazy manipulation of CDOs, people with certain financial knowledge immediately understood that this was equivalent to a rating. Institutions and financial institutions are partnering to trap investors' money.

For people who have never been in Wall Street, this kind of slapstick operation is indeed a bit unbelievable. This is not engaged in finance, it is simply a scam!

What's more, China's financial supervision is much stricter. As an insurance company, you can pay no damages, but you must face up to the supervision of your superiors.

Sure enough, a leader of an insurance company immediately said: Isn't it a lie to do this! Don't the US regulators care!

They really don't care!

It was not Li Weidong who answered this time, but Chen Aisi.

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

Li Weidong followed Chen Aisi's words and said: If the financial regulators in the United States had done anything, they would have already begun to supervise it at the level of the subprime loan market!

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

In the end, these high-risk financial products form a CDO, which is equivalent to pulling a lead to the bomb. And the over-rating of the rating agency ignited this lead.

But this is not the most terrifying thing. As long as a pot of water is poured out before the lead burns out, the crisis can also be lifted, and the person who can water it is the financial regulator in the United States.

But they did nothing at all, letting the lead burn slowly, and eventually burned to the bomb, and the result was that the bomb exploded. And now, most of the lead wire has been burned, and the time for the bomb to explode is not far away.

Director Sui, who was next to him, also helped: Chairman Li, I almost understand, I'm going to narrate from the beginning, so listen to what I'm saying, right?

Because U.S. banks use large-scale loans in the financing process, they cannot afford a high outage rate, and the U.S. subprime mortgage outage rate is rising and is about to exceed the bank's ability to bear.

Once the bank can't bear it, the subprime loan market will collapse, and at that time, MBC and CDS related to the subprime mortgage market will be linked, and if MBC and CDS default, they will be linked with related CDOs.

If the CDO defaults, it will link the entire US financial system. Problems in the US financial system will affect global finance and trigger a global financial crisis, right?

Li Weidong nodded: This is what it means at the financial level, and at the same time, we must also consider the economic level. The subprime loan market collapses, a large number of housing supply is cut off, the real estate market in the United States will also shrink, and industries related to real estate will also suffer. greatly affected.

At the same time, the interruption of housing supply will reduce the credit rating of home buyers, thus affecting normal consumption. The shrinking real estate market will also affect consumption. Under the linkage of various aspects, problems will arise 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 world will suffer, and the global economy will experience a certain recession. Coupled with the previously mentioned financial crisis, 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 will push up energy prices, and supply shifts caused by costs.

When it comes to the global economic crisis, everyone here can no longer keep calm, and everyone's expressions become serious.

Finally, one of the leaders in the lead said: Chairman Li, listening to your words is better than reading ten years of books. 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 said modestly immediately.

The leader continued: Chairman Li, we have to digest the content of your class today, or we will stop here today?

Also, all the leaders are busy with other people's affairs. It is a great honor to take your precious time to listen to me nagging here. Then I will leave first. Li Weidong said immediately,

Li Weidong also knows that in the next time, the inside of the insurance company will discuss what he said today.

I'm going to see Chairman Li. Director Sui stood up and said.

Director Sui sent Li Weidong out of the conference room, while the others remained seated and did not move their nests.

It was estimated that Li Weidong had gone far, and the leader in the lead asked, Director Wei, do you think what Li Weidong said might happen?

What he said is already happening. Director Wei nodded silently, and then said: From the perspective of the financial profession, it is very likely to develop towards the situation that Li Weidong said.

That is, 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 should be withdrawn immediately, and our other investments in the U.S. financial market should also be re-prudent, so that at least avoid lost.

Professor Ye added: Besides, I also suggest that our business dealings with American investment banks should also be contracted, 30 times leverage, the risk is too great, those investment banks in the United States dare to Bet, we can't bet, it's better to get your money back as soon as possible!

Several insurance company leaders nodded. These people are still more afraid of investment risks, not because they are afraid of losing money, but mainly because they are afraid of losing their jobs. If you lose a lot of money because of the sub-prime mortgage crisis in the United States, some of the people in the room might be demoted.

However, Wall Street Darth Vader Chen Aisi said: I have a different opinion. I think there is absolutely no need to withdraw capital at this time. Since there is going to be a problem in the subprime mortgage market in the United States, why don't we take this opportunity to short? You can make a lot of money!

Short the subprime mortgage market? How to short it? It's not a stock, there are ups and downs. Whether it is MBS, CDS or CDO, they are all fixed income. Professor Ye asked.

Professor Ye, I have noticed that recently, there is a CDS on Wall Street, which is dedicated to the credit default swap of MBS. 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 this bottom line now!

There is no shortage of financial talents on Wall Street. Of course, many people have already seen the hidden dangers of the subprime mortgage crisis. With Wall Street's urgency, some people will definitely make a lot of money by shorting it.

But at that time, Wall Street did not short the subprime loan product, so a clever person thought, since there is no ready-made short product, then I will find a way to make one by myself.

This clever man approached Goldman Sachs and said that I wanted to customize a credit default swap, or CDS, for the MBS bonds of subprime mortgages. If the MBS bonds default, Goldman Sachs will pay me some money.

Goldman Sachs said in his heart, I'm afraid there is a fool! Since you are willing to send money, Gao Sheng readily agreed.

And this big smart did not only slap the wool of Goldman Sachs, such as Morgan Stanley, Deutsche Bank, Citibank, etc., one by one.

This big smart is the subprime mortgage prophet Michael Barry, who is also the prototype in the movie The Big Short.

...

Director Sui's voice sounded from the phone: Chairman Li, our company has promised you a financing of 1.5 billion US dollars. This is a great event. You have to invite me to dinner!

Li Weidong let out a sigh of relief. It seems that the information on the subprime mortgage crisis is still very valuable. At least in the opinion of the senior management of the insurance company, this news is worth $1.5 billion in financing.

Then Li Weidong said: No problem, you can choose the place, the delicacies of the mountains and the sea, and eat whatever you want!

Li Weidong secretly thought to himself that the financing of 1.5 billion US dollars has been secured. Not to mention the delicacies of mountains and seas, he can get a giant panda to let you lick a couple of bites.

Why don't you just eat barbecue? I know a shop that roasts kidneys, and it's very delicious! Director Sui seemed to like this kind of flamboyant stuff.

The two made an appointment for the dinner. Li Weidong just hung up the phone when another cell phone rang.

Hey, Chairman, there is something wrong with the acquisition of Jaguar Land Rover. Ford just sent a notice that the workers are against this acquisition!