MTL - Reborn Capital Empire-v2 Chapter 722 Toxic Assets: Synthetic CDOs
Chapter 722 Toxic Assets: Synthetic CDO
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Stephen Bryan has worked **** Wall Street for half his life, with a lot of experience and knowledge. But he has never seen U.S. real estate expand like this. He believes that more than one person can see the risks, but everyone is reluctant to make profits at their fingertips, and they all believe that they can cash out before the crisis. In the end, it turns out that no one is God and wants others to be the pick-up man. In the end, everyone became a pick-up man.
Although Guo Shouyun agreed with Stephen Bryan's caution, he did not want to leave the field so early. You must know that the nearly 100 billion US dollars of CDOs held by Phoenix Bank are all equity bonds, which are often referred to as subordinated bonds. The interest is around 6-8%.
Don't think that's not high, since the Fed lowered the federal funds rate below 1% after 9/11, conventional loan interest has not exceeded 2%. Compared with Huaxia's deposit interest and loan interest of nearly 8%, it is simply incomparable. Therefore, it seems that CDOs with stable and high returns have become the best choice for investment institutions.
Buyers are huge and one of the main reasons for the subprime mortgage crisis.
The nearly 100 billion CDOs held by Phoenix Bank can bring in more than 5 billion US dollars in operating income every year. This money is not a small sum. If you sell it, there will be no more.
Of course, in Guo Shouyun's view, gold, futures, and stocks have higher returns than CDOs. However, bonds are needed in the asset pools of bond funds and hybrid funds under the wealth management department and asset management department of Phoenix Bank. Compared with corporate bonds with moderate interest and high risk, real estate CDOs are more suitable. As for government bonds and local government bonds, the interest rates are too low.
"Stephen, the prudence in dealing with high-risk issues is indeed commendable. But I don't think mid-2005 is an appropriate time." Seeing Stephen Bryan's disapproving look, Guo Shouyun smiled lightly, "Stephen, know What is a synthetic CDO?"
"Synthetic CDO?"
This new term not surprisingly aroused Stephen's curiosity.
"That's right!"
Guo Shouyun nodded. It is still November 2004, more than half a year before Lehman Brothers invented the highly toxic asset such as synthetic CDO.
“CDOs based on real estate mortgages are divided into senior, intermediate and subordinated. Originally, the price of subordinated CDOs was very low, but as the U.S. real estate derivatives market became hot, these subordinated CDO bonds also became popular. These low-priced sub-prime CDOs are sold at the priority price. Real estate mortgage lenders and commercial banks once again divide these sub-prime loans into priority, intermediate and sub-prime according to different risk levels.”
"But it is divided into different levels of CDOs, which are essentially subprime loans. Rating agencies will still not give high ratings, and banks and real estate mortgage lenders will not get the benefits they want. Therefore, Bear Stearns thought for everyone. One solution: find a commercial insurance agency like AIG to insure these bonds.”
"AIG and other commercial insurance institutions have found that the real estate market in the United States is very hot, and there is basically no possibility of being unable to repay. Looking at the history of real estate development in the United States over the past 100 years, even during the low tide of real estate, there has never been an entire market. Collapsed situation. So, commercial insurance agencies including AIG provide different levels of guarantee for first, intermediate and subordinate CDOs.”
"With these guarantees, the risk of these bonds is undoubtedly greatly reduced. When commercial banks and real estate mortgage lenders found the three major rating agencies, Moody's, Standard & Poor's and Fitch, they got different grades such as A, B, and C. rating."
"A-grade and B-grade are quickly bought by investment institutions such as mutual funds and large pension funds because of their relatively low risk. But C-grade CDOs have low market demand because of their high risk. This is also the general trend of the US real estate industry. Happening."
Stephen Bryan nodded, looking forward to what Guo Shouyun said next.
"Financial institutions don't want any losses in their hands, especially when the U.S. real estate market is so hot, they should squeeze every cent of profit from it. But if the C-level subprime mortgage doesn't change the risk, few people will invest. So what should we do?" Guo Shouyun's eyes flashed with a trace of light, "At this time, the synthetic CDO will appear."
Guo Shouyun brought his coffee, and then took the sugar bowl that was on the side into his hand, took out a sugar cube and gestured to Stephen Bryan.
"I assume this sugar cube is an A-grade subprime loan insured by an insurance agency, and this cup of coffee is a C-grade subprime loan."
When the words fell, Guo Shouyun threw the sugar cube into the coffee cup, and then began to stir with a spoon. Noticing his movements, Stephen Bryan's eyes lit up, and a flash of enlightenment flashed in his mind.
"After such a mix, the situation of the entire asset pool is very different. The C-grade subprime loans that were originally high-risk and could not be sold, now because of the lower-risk A-grade bonds, the risk of the entire asset pool is The level is greatly reduced. Except for the investment bank that designed this financial model, no one knows the specific situation of this asset pool. Insurance institutions, including investment institutions and investors, only see the overall rate of return and risk of this asset pool. Therefore, the original selling The C-level subprime loans that did not go out were so smoothly sold at the price of B and even A-level bonds. This is ... synthetic CDO. But we all know that CDOs based on subprime loans are garbage, and synthetic CDOs are CDOs are garbage in garbage, ice in drugs. When the entire market collapses, synthetic CDOs will be the first to collapse, and then the entire market!”
Guo Shouyun flicked the coffee cup with his right hand, and with a 'bang bang', the coffee cup was dumped instantly, and a piece of coffee inside was also sprinkled.
Although it was coffee, Stephen Bryan was thinking of the real estate market in the entire United States, the financial institutions of the United States as the crisis spread, and the world.
In an instant, even Stephen Bryan, who had experienced half his life on Wall Street, felt startled.
He knows the urine of those Wall Street counterparts very well. If they know the news of synthetic CDO, they will definitely design it and bring it to the market. Wall Street can do anything for profit. As for the risks, shareholders and 300 million Americans pay the bill anyway. They will leave with their generous bonuses and pensions.
Stan O'Neal buried Merrill and got a $160 million pension. AIG's management, represented by Edward Liddy, received $165 million in compensation, but buried the world's largest insurance group.
Against the background of the subprime mortgage crisis, the management of financial groups that suffered heavy losses or collapsed such as Merrill Lynch, AIG, Lehman Brothers and Citigroup could retire with generous funds, which directly led to the subsequent 'Occupy Wall Street' movement. occur.
After chatting afterward, Stephen Bryan's heart was filled with shock because of Guo Shouyun's words.
"If so, the subprime mortgage crisis will be bigger than we thought before, no, bigger than the economic crisis that has happened in the past few decades!"
"Only God knows this kind of thing." After a pause, Guo Shouyun wiped the coffee spilled on the table with a tissue, "Stephen, the real estate industry is the backbone of the American economy, and this is a trillion-dollar market. And as a In a global financial center, the profits from U.S. real estate derivative bonds will attract the attention of almost all investment institutions in the world. Now all this is just dessert before dinner. The real climax has not yet begun, and we do not need to rush out of the market.”
Stephen Bryan nodded, and after calming himself down, he said, "It's just that this will make us take more risks!"
"If you want to get more profits, of course you have to take more risks. However, I won't really let Phoenix Bank go to the end, don't worry!"
With a response, Stephen Bryan stared at Guo Shouyun and said solemnly, "Can I know who came up with the idea of synthesizing CDO?"
"I promised the other party to keep it a secret, so I'm sorry, Stephen!"
He is not a fool, how can such a **** pot be deducted from himself~www.novelbuddy.com~ Looking at Guo Shouyun's apologetic expression, Stephen Bryan doubts that this kind of bond he has never heard of is from the other party's handwriting . And with his own understanding of the other party, he completely has this ability and talent. But since the other party denied it, as a business partner, he couldn't really pursue it. This can damage the intimate relationship between the two parties, and it can be harmful to anyone.
"Stephen, the idea of synthesizing a CDO is not difficult, it's easy to come up with. I believe that even without our conversation today, someone on Wall Street, where the world's best financial talents are concentrated, will definitely have the same idea." Guo Shouyun read He glanced back.
Stephen Bryan nodded slowly after a moment of contemplation.
"Bruce, as a friend, how big do you think this crisis is? Does it compare to the Great Depression?"
The so-called Great Depression is the economic crisis in 1929, which spread from the United States to the world, directly led to Japan's invasion of China, the rise of the Communist Party, and changed the political and economic situation of the world. It remains in the minds of Americans and is hard to forget.
"Stephen, I'm not God. I don't have an answer for this kind of future, and I can't possibly have an answer. ... Also, it's not like your usual you."
Stephen Bryan also knew that he was not calm, after taking a deep breath, he smiled bitterly: "As we accumulate more and more data, the sense of crisis brought about by US real estate mortgage bonds is getting heavier and heavier. The feeling of the sword of Damocles hanging above your head is really hard to calm down."
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