Chapter 704 Financing in hand

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

Although the insurance company's leaders were ignorant, they could tell from the expert's expression that what Li Weidong said was a very serious matter.

If it is only a few percent increase in the subprime loan default rate, it is nothing more than a drizzle for the huge economy of the United States. It is nothing more than a little loss for the bank and a reduction in the credit of the lender.

In the United States, there are more than 2,000 banks with a scale of more than 300 million US dollars, with assets of more than 19 trillion US dollars. The little money lost due to loan cuts is evenly apportioned to 19 trillion US dollars in assets, which is just a drop in the bucket.

The default of CDS is much more serious, mainly because the set of dolls is too big, which also makes the financial risk of CDS default magnified geometrically.

But even so, CDS defaults will cause localized financial problems, at most similar to the situation of the Internet bubble in 2000, which can be sustained by the size of the US economy.

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

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

This cash flow can be bonds, debts, insurance premiums, CDS, etc., all of which are fixed-income products that can predict future earnings. In other words, this CDO itself is a fixed-income security.

You can think of a CDO as a pile of IOUs, and when the IOUs expire, the borrower will repay the money and get the proceeds. However, if the borrower does not repay the money when it is due, it will cause losses.

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

But the person responsible for splitting and packaging the cash flow has a problem. No matter how good a financial product is, it can't stand up to the financial institutions on Wall Street to play tricks!

In the original CDO, there were some relatively high-quality cash flows, that is, IOUs that could be cashed.

But there are only so many high-quality cash flows, and it is not enough to sell them, so financial institutions began to mix some not-so-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,

I have to 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 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. I buy a box of apples and have a rotten pear, which is still acceptable. But in a box of apples, half of them are rotten pears, I will definitely quit, only fools will buy them!

So the financial institutions on Wall Street carried out another wave of operations, which is to make it as complicated as possible when splitting and reorganizing products, so that customers can't understand how many good apples and how many rotten pears there are.

As I said before, things like CDS are to sell insurance to insurance, and then continue to make dolls, and this kind of dolls is very suitable for show operations during spin-offs and reorganizations.

For example, a bank lends out a subprime loan of 1 million, then goes to an insurance company to buy CDS, and makes a contract No. 1, and the insurance company finds another insurance company to buy insurance for contract No. 1, and makes a contract No. 2.

By analogy, in the end, for the 1 million subprime loan, the matryoshka set out 10 contracts, namely contract No. 1 to contract No. 10.

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

And when investors see this CDO, they must know what is in it, so they pick out a contract from it and find that it is contract No. 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 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, after finally finding Contract No. 1, it turns out that it was the insurance for the 1 million subprime loan.

Then the buyer draws another CDS contract from the CDO, which may be contract No. 10 for another matryoshka, and then he goes to find another contract No. 9 for matryoshka, and so on, and experienced another troublesome situation. process.

The operation of Wall Street financial institutions is to stuff a lot of doll 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 kind of CDO to opening a blind box, but in fact this thing is more ruthless than opening a blind box.

The thing about the blind box is that you don't know what's inside before you open it. When you open the blind box, what's inside is clear at a glance.

However, not only do you not know what's inside the CDO packaged by Wall Street, but even if you open it after buying it, you don't know what's inside.

And because there are too many sets of dolls in CDS, sometimes the financial institutions responsible for splitting and reorganizing CDS don't even know what is sold in my CDO!

Regardless of economics or sociology, this is hard to imagine. You sell things alone, you don’t know what you are selling, and this thing has been sold for tens of trillions of dollars!

How can this kind of muddled financial product not have huge financial risks, once detonated, it will be difficult for the global economy to follow suit.

The wild operations on Wall Street, in the end, I couldn’t figure out what was in the CDO I was selling, and investors couldn’t figure out what was in the CDO, and this created another problem:

As an investor, I don't even know what the 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 inside those CDOs, they can look at the credit ratings of CDOs. Those with high ratings must be products with good credit, and those with low ratings must be products with poor credit.

It's like we watch movies and TV shows on weekdays. If you don't know if the movie is good or not, and you don't want to start a trap, then take a look at the rating of a certain section of the movie.

Seeing that a certain film has a score of 9 points, it must be a good movie, and I dare to enter the pit at all, and 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 feel that this is a great movie.

If you watch 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 will watch it with a critical eye and try to find faults in the movie as much as possible.

Movie ratings help movie viewers choose movies, and credit rating agencies in the United States help investors choose products to invest in.

Investors want to buy a CDO product, although he does not understand what is inside, but when he sees that the standard \u0026 Poor's rating of this CDO is AA, he will feel that this is a good credit The product is worth the investment.

And 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 average, and the 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 professionalism and fairness of rating agencies.

The problem is that both Standard \u0026 Poor's and Moody's are commercial organizations, and people rely on ratings for food!

If the rating agencies give the CDO a low rating, they lose the customer.

As a result, since 2007, neither Standard \u0026 Poor's nor Moody's has ever rated U.S. CDO products below grade A!

In other words, a certain CDO product may contain CDS related to subprime mortgages. Not only are there a bunch of dolls, but these dolls are about to face default. Standard \u0026 Poor's and Moody's gave it an A rating.

When investors saw this A rating, they were fooled into buying it.

It's like a movie with a very high rating, and then you see it and find out what kind of shit it was made of! Then it suddenly dawned on me 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 all their money.

At the very beginning, Li Weidong named the high ratings of CDOs by American rating agencies. At this time, when he thinks of Wall Street’s tricks on CDOs, people with certain financial knowledge will immediately understand that this is equivalent to ratings. Institutions and financial institutions partnered to pit investors' money.

For those who have never been in Wall Street, this kind of show 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 not pay 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 it a lie to do this! Don't the US regulators ignore it!

They really don't care!

This time it was not Li Weidong who answered, but Chen Aisi.

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

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

From the overall financial perspective, the low threshold and disorderly lending in the subprime mortgage market, a large number of MBCs for subprime mortgages, and unlimited dolls for CDSs for subprime mortgages can only be regarded as a bomb that has been conceived.

In the end, these high-risk financial products formed a CDO, which was equivalent to pulling a fuse for the bomb. The rating agency's high rating, then ignited the root lead.

But this is not the scariest thing, as long as a pot of water is poured to extinguish it before the fuse burns out, the crisis can be resolved, and the person who can water it is the US financial regulator.

But they did nothing at all, allowing the fuse to burn slowly, and finally burned to the bomb, and the bomb exploded naturally. But now, most of the fuses have been burned, and the time before the bomb explodes is not far away.

Director Sui next to him also helped and said: Chairman Li, I almost understand it, I'll start the story from the beginning, listen to what I said is right.

Because American banks use large-scale loans in the financing process, they cannot afford a high foreclosure rate, and the foreclosure rate of subprime mortgages in the United States is rising, which will soon exceed the range that banks can bear.

Once the banks can't bear it, the subprime loan market will collapse, and then the MBC and CDS related to the subprime mortgage market will be linked. If the MBC and CDS default, they will link the related CDO.

If the CDO defaults, it will link the entire US financial system. Problems in the U.S. financial system will affect global finance and trigger a global financial crisis. Is that what you mean?

Li Weidong nodded: This is the meaning of the financial aspect. At the same time, we must also consider economic issues. The subprime loan market collapsed, a large number of houses were cut off, and the US real estate market will also shrink. The industries related to real estate will also suffer. have been greatly affected.

At the same time, the housing supply cutoff will reduce the credit rating of home buyers, which will affect normal consumption. The shrinking real estate market will also affect consumption. Under the linkage of many aspects, the entire consumer market will have problems, which will affect the United States. economy.

The United States is the largest consumer market in the world. If the United States is not doing well, the whole world will suffer. At that time, the global economy will experience a certain recession. Coupled with the financial crisis mentioned earlier, under the double blow, a global economic crisis is likely to erupt.

The global economic crisis will also cause many chain reactions, such as debt crisis in some highly indebted countries, currency depreciation caused by economic crisis will push up energy prices, and supply transfer caused by cost.

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

Finally, one of the leading leaders 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 immediately said modestly.

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

That's right, all the leaders are busy with their affairs. It's a great honor to spare your precious time to listen to my chatter here. Then I'll take my leave first. Li Weidong said immediately,

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

I'll see off Chairman Li. Director Sui said as he got up.

Director Sui sent Li Weidong out of the conference room, while the others still sat where they were, without moving.

Guessing that Li Weidong had gone far away, the leading 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 the perspective of a financial professional, it is very likely that it will develop towards the situation Li Weidong said.

That is to say, is there really a financial crisis, or even an economic crisis? the other party immediately asked.

There is a possibility. Director Wei went on to say: But one thing is certain, all investments in US real estate must be withdrawn immediately, and our other investments in the US financial market should also be re-cautious, so that at least avoid lost.

Professor Ye added: In addition, I also suggest that our business with American investment banks should also be reduced. 30 times leverage is too risky. Those investment banks in the United States dare to Gambling, we can’t gamble, it’s better to get back the funds 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 positions. If a large amount of money is lost because of the US subprime mortgage crisis, some of the people present here may be demoted.

However, Chen Aisi, a black warrior on Wall Street, said: I have a different opinion. I don't think it is necessary to withdraw capital at this time. Since the US subprime mortgage market is going to have problems, why don't we take this opportunity to sell short? You can make a lot of money!

Short the sub-prime mortgage market? How do you short it? This is not a stock, and there are ups and downs. Whether it is MBS, CDS or CDO, they all have fixed income. Professor Ye asked.

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

There is 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. With Wall Street's diabolism, some people will definitely make a lot of money by shorting.

But at that time, Wall Street did not have short-selling products for subprime loans, so a wise man thought, since there is no ready-made short-selling product, then I will find a way to make one myself.

This cleverness 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, then Goldman Sachs will pay me a sum of money.

Goldman Sachs thought, I'm afraid there must be a fool somewhere! Since you are willing to send money, Gao Sheng readily agrees.

And this great cleverness did not only pluck the wool of the Goldman Sachs family, such as Morgan Stanley, Deutsche Bank, Citibank, etc., they plucked the wool one by one.

This great cleverness 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 agreed to your financing of 1.5 billion US dollars. This is a great event. You have to treat me to dinner!

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

Then Li Weidong agreed: No problem, you choose a place, delicacies from mountains and seas, and you can eat whatever you want!

Li Weidong thought to himself, the financing of 1.5 billion US dollars has been settled, not to mention delicacies from mountains and seas, you can get a giant panda for you to lick twice, of course, just lick twice, and you have to send the giant panda back to the zoo after licking.

Why don't you eat barbecue? I know a restaurant that roasts the kidneys. It's very delicious! Director Sui seemed to like this kind of flamboyant food.

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

Hey, Chairman, there is something wrong with the acquisition of Jaguar Land Rover. Ford just sent a notice saying that the workers object to the acquisition!