Chapter 229 The novel reflects reality
Thomas opened "The Big Short" with anticipation. He wanted to see as soon as possible what kind of novel Amazon's No. 1 best-selling author would bring. work.
Soon, Thomas discovered that "The Big Short" actually contained a lot of financial knowledge. Fortunately, these financial knowledge are explained in the book. After reading the explanation, Thomas, a layman, can understand it.
“A large number of large subprime real estate loans defaulted. Wall Street investment banks did not strengthen supervision and find ways to remedy the situation. Instead, they planned to take this opportunity to make a fortune? Such a plot is indeed very Wall Street!”
When Thomas saw this plot, he didn't take it seriously. It was a fantasy novel anyway. It was all the author's own imagination and could not be taken seriously.
The plot that follows shows the collusion between rating agencies and investment banks, deliberately raising the credit ratings of credit default swap products, and the shameless behavior of investment banks after the subprime mortgage crisis broke out.
“Although this is a plot imagined by the author himself, if you think about it carefully, it is quite satirical to social reality. The giants on Wall Street have always eaten people without spitting out their bones.
This way If his work is published, the investment banks on Wall Street and the financial rating agencies will definitely be unhappy! Maybe the author will be sued!" Thomas thought to himself.
After spending a whole afternoon, Thomas finally finished reading "The Big Short". This time, he could only read it like a gulp, without carefully savoring its connotations.
But Thomas at least remembered the plot content.
"From a literary point of view, this work is still very good. The plot is very compact and the plot has ups and downs. It has all the things that a novel should have. It is an excellent work.
It just ends in the end. The ending turns out to be the subprime mortgage crisis that broke out in the United States, and the entire financial system is facing collapse. Many people will definitely not like this setting.
However, this work is still worth publishing. Zhang Wei is, after all. The number one bestseller on Amazon is "The Thirst Game". This alone can attract many readers to buy it."
Just because of his reputation as a best-selling author, Thomas will not. Zhang Wei's publication is rejected, but if it is published, the work still needs to be refined to a certain extent.
"Wait until tomorrow morning and show this "The Big Short" to other editors and let's discuss it together!" Thomas thought to himself.
The next second, Thomas suddenly realized a problem. He opened the computer webpage and searched on Google for various financial products introduced in "The Big Short".
“MBS, Mortgage Backed Bonds, really exist, and they have appeared in the 1970s!”
“CDO, Guaranteed Stationary Obligations, this thing also exists, it was in the 1980s The emergence of financial products. ”
“CDS, credit default swaps, there are also such things. It turns out that the environmental compensation caused by Mobil’s Valdez cruise ship was this way. ”
“These financial products are definitely out of reach of ordinary people. It seems that our best-selling author also has a very professional financial knowledge base!
No, I remember when I first met Zhang Wei, he introduced himself as being in the biology department of Princeton University. Biology has nothing to do with economics! As expected of a top student at Princeton University, he knows a lot. ”
After pondering for a moment, Thomas found a number in the contacts on his mobile phone.
This is the phone number of a fund manager, who often promotes various funds to Thomas on weekdays. If Thomas has spare money on hand, he will occasionally buy some.
Thomas called the fund manager. After a few words, Thomas asked directly about the mortgage-backed bonds. < br>
“Mr. Thomas, are you talking about MBS? how? Are you interested in investing in this area? If you are interested, I have several recommendations for similar products here. ” said the fund manager.
"The product you are talking about is the direct purchase of mortgage-backed bonds, or is it a comprehensive product?" Thomas asked.
"Of course it is a comprehensive product. Banks will package various mortgage-backed bonds, as well as other financial products such as ordinary bonds, debts, insurance policies, etc. together to form a commodity and then sell it to the market. Generally These products all have fixed returns,” the fund manager said.
“Are you talking about a guaranteed debt obligation?” Trust asked.
"Yes, CDO for short, Mr. Thomas, it seems that you have done your homework and understand CDO."
"So what are the risks of this kind of CDO?" Thomas continued to ask.
"Any financial product has risks, and CDO is no exception. However, rating companies will rate financial products. The higher the rating, the smaller the risk. If you are interested in this product, I can recommend several A 2A-level product. The risk of this level of product is very small, and the return is also very impressive!"
When the fund manager mentioned the rating, Thomas immediately thought of the credit in the novel "The Big Short". Rating companies colluded with investment banks to deliberately raise the ratings of financial products.
"I'm overly concerned. It's a novel, so don't take it seriously!" Thomas comforted himself, and then asked: "There is something called CDS, do you have it there?"
< br>"You're talking about credit default swaps, right?"
"Yes, that's it. I would like to ask, do you have any recommendations for credit default swaps related to real estate?"< br>
"Mr. Thomas, your information is really good. Real estate credit default swap is a new product that has just appeared recently. However, this product is purchased by funds and investment institutions. General investors can buy it." Can't afford it.
Because a credit default swap can range from tens of millions of dollars to hundreds of millions of dollars. If ordinary investors want to buy it, they can only buy funds that invest in this product. !”
The fund manager then said: “Mr. Thomas, I suggest you not to touch this product. The real estate market in the United States is very good now, and housing prices have been rising. If you buy a house today, after a while You can still make money by selling it!
Therefore, there is no chance of a credit default in the real estate market in a short period of time. Buying this kind of credit default swap product is equivalent to giving money to the investment bank!”
< br>The fund manager’s words shocked Thomas again. Isn’t this exactly what was mentioned in the novel?
In the novel "The Big Short", one of the protagonists approached an investment bank and asked to buy a credit default swap product, and the investment bank believed that this was to give him money.
As a result, the subprime mortgage crisis broke out. The protagonist made billions, and the investment banks shamelessly shorted themselves in order to recoup their losses!
“Didn’t you say this is a fantasy novel? How come the content of the novel is reflected in reality!”
Unknowingly, cold sweat broke out on Thomas’s forehead. He had a premonition, Things in the novel are happening now, and the subprime mortgage crisis is really coming!
“I’m thinking too much, I must be thinking too much! This is just a fantasy novel, it can’t be true!”
Subconsciously, Thomas took out the manuscript of "The Big Short" and read it again, especially the content about defaults in the subprime loan market. He read it many times in a row.
Finally, Thomas couldn't help but dial Zhang Wei's number.
"Mr. Zhang, there is one thing I want to ask you about. Will what you wrote in the novel really happen in the future?" Thomas asked in a sincere tone.
"My novel was written in 2008, which is only two years ago. Won't you know whether the things in it will happen or not?" Zhang Wei said cheerfully.
"Mr. Zhang, it's like this. I also know a few friends in the financial circle. I asked them specifically. According to their descriptions, many of the things you introduced in the novel exist in reality. .”
"This is normal. Art creation comes from reality! Many excellent works of art are processed based on reality."
"That is to say, the content in the novel is your artistic processing. ? Then I'll be relieved!" Thomas let out a sigh of relief.
"Of course it is artistic processing! This is a novel, not documentary literature. What's more, the background of my story is two years in the future. I am not a wizard, how can I predict what will happen in the future!" Zhang Wei continued.
"What you said makes sense. I'm too worried. It's probably because I've been under too much mental pressure recently. My mind is a little dazed and my mood is too tense." Thomas said.
Zhang Wei asked: "What? Mr. Thomas? Have you bought a house recently?" "The mortgage on the house I live in has not been paid off yet! How can I still have money to buy another house?"
"That's good. If you live by yourself, you have to continue to live no matter whether it goes up or down. You can't lose or make money. But if you want to buy it for investment, I suggest you sell it quickly! "Zhang Wei said with a smile.
"Take action quickly?" Thomas was stunned.
According to your opinion, what is written in your novel is still true!
……
The most famous book about the 2008 subprime mortgage crisis is of course "The Big Short". This book was published in 2010. The original author is the American super-best-selling author Michael Lewis.
Michael Lewis himself graduated from Princeton University and the London School of Economics. He once worked as a bond trader on Wall Street and later became a writer for the New York Times. He once wrote a book "Lying Poker", It is known as a classic masterpiece describing Wall Street in the 1980s.
The work "The Big Short" is a novel based on a number of Wall Street fund managers and professional short sellers, based on their real-life operations during the subprime mortgage crisis.
The main content of the novel is the story of a few unknown people who saw the coming subprime mortgage crisis in the United States early and made huge profits by betting on the collapse of the U.S. financial system.
The money-making tool they use is credit default swaps, or CDS for short.
When talking about the subprime mortgage crisis in the United States in 2008, we have to start at the end of the twentieth century. At that time, the United States still had very strict supervision of the banking industry, and the division of labor between commercial banks, investment banks, trust funds, insurance companies, and various financial institutions was fairly clear.
But at the end of Clinton's second term, he signed a bill that loosened the scope of financial institutions' operations, which laid the foundation for the subprime mortgage crisis.
In 2000, after the Internet bubble, a large amount of money had nowhere to go, so it poured into the real estate industry, and housing prices in the United States began to rise.
The boom in the real estate market has also led to the rapid development of the subprime mortgage market.
Americans all use credit cards, and banks have a credit score. Under normal circumstances, loans are issued to those with high credit scores, but subprime loans are specifically issued to those with low credit scores. , but the interest rate is higher.
Due to the deregulation of financial institutions, between 2000 and 2007, a large number of financial institutions issued subprime loans to people with low credit scores.
People with low credit scores have a greater chance of not being able to repay their loans, and they are also more likely to have bad debts.
If house prices keep rising, then the house is a high-quality asset. Even if the loan cannot be repaid, you can make a profit by selling the house. Even if you go bankrupt and the bank takes the house and sells it, you won't lose money if you resell it.
But once house prices fall and the house becomes a negative equity; or interest rates rise and the lender cannot repay the loan, the entire subprime loan market will collapse.
One more thing to mention here is that most Americans’ loans to buy houses are not fixed interest rates, but floating interest rates, especially subprime loans, which are inherently risky. In order to avoid interest rate risks as much as possible, banks are more It is necessary to use floating profits.
Therefore, the Fed's interest rate hike will have a great impact on the U.S. real estate market. Will the interest rate for home purchases increase? The key is that rents will increase, exacerbating people's housing costs.
The increase in housing costs is the increase in the cost of living, which will directly translate into inflation. Therefore, once the Federal Reserve raises interest rates, U.S. inflation will skyrocket.
Getting back to the subject, after commercial banks issue loans, in order to recover their principal as soon as possible, they will convert these loans into bonds and then sell them.
In this way, the bank quickly withdraws funds and transfers the risk to others. At the same time, it has more capital to issue loans and earn more on compound interest.
This kind of bond is a mortgage-backed bond, which is called MBS, and investment banks are the big buyers of MBS.
When investment banks buy MBS, they will not wait to collect interest, but will split it up, package it into new financial products, and then sell it to other investors to make a profit. Then use the withdrawn funds to do the same operation again.
The financial product issued by an investment bank is a guaranteed debt obligation, which is called a CDO.
So the essence of a CDO is actually the interest income on loans issued by banks, which is nothing more than the product of dividing and aggregating many loans. If the loan can be recovered, investors will make money by buying CDO. If the loan cannot be recovered, investors will lose money by buying CDO.
However, ordinary investors cannot determine the risk of a CDO and do not know whether they should buy it. At this time, it is the credit rating agency's turn to come into play.
Rating agencies such as Standard & Poor's and Moody's will give each CDO a rating. The higher the rating, the smaller the risk, and vice versa.
But there is another trick here, that is, rating agencies actually rely on investment banks to make a living. Investment banks will pay you to do ratings. Since investment banks are the sponsors, they cannot be offended, so when rating, they will deliberately rate them higher, even several notches higher.
For example, 2B-level products will be given a 2A rating, and B-level products will be given an A rating. It is also for this reason that a large number of so-called 2A-grade and A-grade financial products on the market are actually B-grade or even C-grade. These were all exposed during the subprime mortgage crisis.
But investors don’t know. They think that the 2A rating is very high and it is a financial product with extremely low risk, and they continue to buy in large quantities. In fact, what they buy are junk financial products.
The large number of bad debts generated in the subprime mortgage crisis were mainly these CDO products.
The protagonists in "The Big Short" saw this. They realized that the subprime loan market was about to collapse, so they took a gamble with investment banks.
They signed a credit default swap, or CDS, with an investment bank.
This thing is like an insurance, which means that within a certain period of time, I will pay you an insurance premium. If the bonds I hold fall or default, then you will pay me a sum of money. , and if the bonds I bought do not fall, then you will earn an insurance premium in vain.
Investment banks believe that house prices are unlikely to fall in the short term, and real estate-related bonds are unlikely to fall or default. Isn’t this giving me money in vain? So I was happy to sign this CDS agreement.
In actual operation, I don't need to actually hold such a bond to sign a CDS agreement, as long as the investment bank can pay the compensation at the time.
Investment banks don’t care whether you own the bond or not, as long as they can earn premiums.
To put it bluntly, this is gambling within the scope of the law.
This is equivalent to buying car damage insurance. The bank will sell you the insurance regardless of whether you have a car or not, as long as you are willing to pay the premium.
As a result, the next day, cars all over the world exploded into ashes at the same time. At this time, even if you don't have a car, as long as you have an insurance contract, the bank will have to compensate you.
As a result, when the subprime mortgage crisis broke out, these CDS agreements could naturally make a lot of money.
The story of "The Big Short" is about such an operation.
Historically, in the second half of 2005, some smart guys realized the collapse of the real estate market and signed CDS agreements with investment banks such as JPMorgan Chase, Goldman Sachs, Citigroup, Deutsche, and UBS.
So when Zhang Wei took out "The Big Short", the first batch of big shorts had actually completed their layout.
Zhang Wei has no intention of using this to make money. Firstly, the amount of the CDS agreement is relatively large, with the minimum starting from tens of millions of dollars. Zhang Wei cannot afford such a lot of money.
Secondly, it is because there are still two years and three months before the moment of Bells and so on, and the investment return cycle is too long. These two years are the golden period of China's rapid economic development. If you have spare money, you will definitely Investing domestically is no less profitable than paying lip service during the subprime mortgage crisis.
So Zhang Wei will not get involved in the subprime mortgage crisis, and he should just earn writing fees honestly!
(End of this chapter)