MTL - Reborn Capital Empire-v2 Chapter 753 financial leverage
Chapter 753 Financial Leverage
"Sell all Merrill Lynch's assets in the real estate field. Besides, in addition to retaining the shares of Bloomberg and Verizon, the remaining private equity investments should also be closed." Guo Shouyun said after thinking for a while.
"The growth of Berkshire Hathaway's stock has always been good. In addition, Huaxia Telecom and Modu Petrochemical have an annual return of more than 15%. If they sell now, would it be a pity. And the boss is not always optimistic about Huaxia enterprises. future?!" said Michael Moretz.
"It's optimistic. But you know my attitude towards the rapidly developing real estate in the United States, especially real estate financial derivatives."
Guo Shouyun has been bearish on the U.S. real estate industry for a long time, and not many people in the outside world know it. But it is no secret at the top of Phoenix Bank and Hanhua Holdings. But Michael Moretz thought he was a little too alarmist.
"Boss, the cyclical nature of the real estate industry is indeed something to be vigilant about. However, U.S. real estate has just entered a boom period. According to the past, it will be at least three to four years before it will enter the downward range. It is not too much to start preparing now. Early? And it will also make us miss out on a lot of great opportunities!”
"There are many channels for obtaining income, not necessarily real estate and derivative products. In addition, it has been 20 years since the last real estate cycle, and it is doubtful how much reference value is still there. In addition, more than 99% of the United States is now of financial institutions have entered the real estate and derivative products field, and the scale and growth rate are far more than before. In just two months in 2005, the scale of real estate derivative bonds, including CDOs and CDS, increased by nearly 76 billion US dollars. If By the end of the year, this scale will increase by at least 500-700 billion US dollars. This scale is too terrifying, I can't let Merrill take this risk." Guo Shouyun said firmly.
"...When I can't see the road ahead clearly, I'd rather be safe!"
Michael Moretz nodded after a moment of thought.
"If most of the investment in private equity is liquidated, where will the return money be used?"
"Gold spot! Under the premise that it is safe enough, triple the gold spot. This is also a hedge against future risks!"
During the subprime mortgage crisis, although toxic assets were concentrated in real estate and derivative financial products, as the largest financial crisis that broke out in the United States after 1929, it harmed the entire market. At that time, whether it is treasury bonds, corporate bonds, or stocks, there will be various degrees of decline.
As an investment bank, it is impossible for you to liquidate all the financial products that are falling left and right, which is also unrealistic. Therefore, the best way is to hedge from value-preserving products such as gold. Of course, CDS is also a good choice. However, with the lessons of American International Bank, whether it can get a claim at that time is a problem. Therefore, after much deliberation, gold is the safest. The market is large enough, the room for growth is also ideal, and the payment is fast.
"...But the opportunity is not very good now. The returned funds are temporarily placed in the company's account and reinvested when the node of the gold market comes."
In view of their current plans with Citi and Goldman Sachs, it is better to keep more liquidity in their own hands at this time.
Michael Moretz nodded. Practice in the past five years has proved that Guo Shouyun's ability to invest in futures products such as gold and oil far exceeds his own.
"Should we sell all of the real estate derivatives in the portfolio currently held by Merrill Lynch?"
Merrill Lynch manages $1.3 trillion in wealth, much of which is derived from real estate. And that's only part of it. In order to increase revenue, Merrill Lynch also uses its own cash flow as the basis to hold hundreds of billions of dollars in financial products through high leverage. At least one-third of them are real estate CDOs and CDSs.
Of course, this is also what the five major investment banks on Wall Street, and even all banks with investment banking business, including Citi and Chase, will do. Commonly known as 'arbitrage'.
The principle is also very simple.
Because banks take deposits from the public and make loans at the same time, they make profits by earning interest rate differentials. But the difference between public deposits and withdrawals cannot be quantified, sometimes more, sometimes less. To avoid a run that threatens the bank's survival, the bank must keep enough cash. But leaving enough cash flow would reduce the bank's revenue and would require paying more reserves to the Fed.
Therefore, in order to maximize their own interests, inter-bank lending and overnight lending markets have emerged in the financial market.
Overnight borrowing is easy to understand, that is, borrowing today and repaying tomorrow. Interest rates move up and down with the Federal Reserve's federal funds rate.
The largest institution that absorbs the bank's overnight lending funds is the investment bank. Investment banks have rich high-risk, high-return investment channels and experience, a sound risk management system, deep connections and a flexible and complete information network. Make sure they can engage in arbitrage trades.
If the interest rate for overnight lending is 1%, the return on real estate ABS is 7%, and the investment bank can still get 300-400 basis points of revenue after deducting the insurance paid when hedging risks.
When the investment bank uses the funds raised, plus its own funds, the purchased financial products as collateral, and receives more overnight borrowing funds to purchase financial products with higher returns, which forms leverage. In this cycle, the scale of leveraged financial products becomes even larger.
Just like now, Merrill Lynch's leverage ratio is 19 times, and Goldman Sachs, Dharma, Lehman Brothers and Bear Stearns are basically around 20 times.
By the time of the second major crisis, the leverage ratios of the five major investment banks were basically around 30 times.
What is the concept of 30 times? If the five largest investment banks have a principal of $10 billion, then they hold a position of as much as $300 billion. Obviously, the Big Five's own funds are obviously more than $10 billion. It can be seen that the scale of funds they leverage will be staggering.
But this massive asset built on overnight lending is like a castle on the beach. If there is a lot of money in the market during good times, maintenance is easy. In the event of an economic crisis, the cost of borrowing money will be higher, and it may even be difficult to borrow money.
During the subprime mortgage crisis, the shrinking of the overnight lending market was a major cause of the crisis.
Of course, the root cause is the decline in real estate and derivative bond prices.
Financial institutions such as Lehman, Bear Stearns, Merrill Lynch, etc. held too many positions in real estate derivative bonds. Once the real estate market fell, the prices of financial products built on these real estates also fell. Transactions that used to be arbitrage, now not only fail to make money, but lose money instead. If the investment bank's own funds are not enough to compensate, it means that it has a liquidity crisis.
So, Lehman went bankrupt. Bear Stearns and Merrill were acquired.
A bank that lends out overnight loans and can't get its own funds back now means it has suffered a loss. If the scale of the loss exceeds its own funds, it will also have a liquidity crisis. If the bank fails because of this. It means that there is a crisis in the entire financial system, which is called a systemic crisis!
The subprime mortgage crisis is a crisis in investment banks, banks, credit institutions and insurance companies in the United States. The representatives of investment banks are the Big Five, the representatives of banks are Wachovia, the representatives of credit institutions are Freddie Mac and Fannie Mae, and the representatives of insurance are the world's largest insurance institution, American International Group.
The collapse or bankruptcy of these giant-level financial institutions directly induced the crisis of the entire US financial system. Because the trigger is the subprime mortgage of real estate, it is also called the 'subprime mortgage crisis'.
The scale of the subprime mortgage crisis was staggering. Guo Shouyun, who had personally experienced it, felt his scalp go numb just thinking about it. He didn't want Merrill to get involved in it like the previous life.
"Sell the real estate derivative bonds, as well as investments related to different properties. This process can be relaxed until the end of next year."
Considering the high yield of subordinated bonds, Guo Shouyun did not act immediately. It is enough to leave this pit a year early.
“…The money returned is invested in preferred stocks and corporate bonds of U.S. blue-chip companies, but steer clear of financial stocks.”
After Michael Moretz nodded, "What about the lever, does it need to be adjusted?"
"No need, just follow the trend of the whole market to increase and decrease."
Arbitrage trading is one of the main sources of profits for investment banks. Although high leverage is very risky, it cannot be done directly. If it doesn't invest in the hottest real estate financial products, at most it will get some complaints. But if the income of Phoenix Merrill is reduced by one piece, I am afraid that the shareholders who he wants to draw over to merge the platform for Phoenix Merrill will not agree.
"...Although leverage does not need to be adjusted, risk exposure, especially risk exposure of real estate investment, must not exist. There is no room for negotiation on this point." Guo Shouyun said directly.
"What about futures investments in gold and oil?"
Guo Shouyun smiled, "Michael, I am very confident in the future of the gold and oil markets. But if you want to do short-term trading, you must hedge. If it is long-term, you can open as much exposure as you like."
The future of gold and oil has at least six years of upside. So long-term trading will not cause too much loss. Of course, in the early stage of the subprime mortgage crisis, there will be a brief drop in oil prices due to the economic collapse. When the United States turns on the money printing press and uses the 'petrodollars' to pass on its losses to the world, oil prices will rise to the sky again.
So in the long run, oil prices are still rising. As for how to get through the short window period of the subprime mortgage crisis. It's not too late to say. The oil futures trading scale is enough for Guo Shouyun to sell his position to close it.
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