Credit default insurance is perhaps the biggest problem?

Louis was stunned for a moment when he heard Zhou Ming's words, but then he laughed: "My dearest Mr. Zhou Ming, you really dare to say that in the entire subprime loan field, credit default insurance is obviously the best layer of shackles, but I didn't expect it to become a problem when I came to you, your words have opened my eyes, could it be that this order is not formulated by you?"

In the face of such ridicule, Lin Muqing immediately stood up and said: "I don't think there is a problem with Zhou Ming's words at all, this insurance sounds very good, but in the final analysis, it is nothing more than a risk transfer, but the transfer is just from one person to another, and the risk itself will not change in any way, if there is a breach of contract, won't it be the same for whoever pays?"

"It seems that you really don't have any concepts, and I need to popularize the most basic financial knowledge for you. ”

Louis deliberately sighed and said: "Although the final subprime loans are ultimately issued to those ordinary people, most of these credit default insurances are actually issued to intermediate banks or lending institutions, in other words, these institutions that handle subprime loans, they buy insurance for all the subprime loans they want to do." ”

"The original intention of this insurance is also very simple, because most of these lending institutions are small companies, so the assets they have are not high, only a few millions, and few reach hundreds of millions. It is for this reason that although they can get the best loans from the bank through formal channels, they cannot get a very high amount of loans due to the fact that their own collateral assets are too small, but there are so many people outside who need loans and cannot meet the conditions of the bank waiting for loans, so there is credit default insurance at this time. ”

Louis continued: "For example, I plan to give out a subordinated loan of 300 million, but I don't have so much money myself, and I don't have enough qualifications to go to the bank for a preferential loan, so I will find an insurance company and ask him to guarantee the default of my loan, and I can pay him 5 million a year for a total of 50 million for ten consecutive years." ”

"If I don't default on my investment, then the insurance company will take the premium for nothing, but on the contrary, if I default, then the insurance company will compensate me. ”

Louis spread out his hands: "Actually, I don't lose money in this matter, because my 300 million is used for lending, let's compare it with mortgage lending, I calculate that my subprime loans are 8 percentage points on average, so I can earn about 140 million in ten years, then I take out 50 million from the middle for insurance, and I can still make a net profit of 90 million." Even if there is a default, it doesn't matter, anyway, if the insurance company helps me pay for it, I make a risk-free amount of money. ”

Louis said: "Of course, the insurance company is not stupid, he will not immediately accept the insurance contract, he will first conduct a risk assessment, we assume that the risk of default is one percent, then I only need to accept 100 insurance contracts, I can get 5 billion insurance money, even if there is a default, I pay 300 million and make a net profit of 4.7 billion." Even if there is an accident and 3 companies default at the same time, I can still make 4 billion, why not do this kind of business that is sure to make money without losing money?"

Louis paused deliberately when he said this, he looked at Zhou Ming and Lin Muqing left and right and asked: "Do you understand my explanation?" This credit default insurance sounds like a kind of risk transfer, but in fact it is a kind of risk sharing, which improves everyone's ability to resist risks. ”

Zhou Ming and Lin Muqing didn't speak, and Louis was not surprised by this, he just said: "I know there are many loopholes in you, but we can't do it here, because this is a very mature financial market, no matter any loopholes, someone will help him plug them, so please don't look at us with your backward concepts in the future, okay?"

Lin Muqing didn't know what to say at this time, she could only look at Zhou Ming helplessly.

Zhou Ming shook his head and said to Louie: "There is no problem with your explanation, but I still insist on my own idea, the financial market is just a place for capital exchange, and it will not produce any value-added." In addition, in the capital market, income and risk exist at the same time, there is no business that makes sure that there is no loss, and now such a high market profit but no risk, such a way is definitely problematic, but the problem has not been discovered. ”

Louis smiled very happily: "Is this the case? It seems that Mr. Zhou Ming is really firm and stubborn, then I think I will be very much looking forward to you finding out the problem of this miracle." ”

With that, Louie left the living room, leaving only a string of contemptuous laughter.

This laughter made Lin Muqing sound very uncomfortable, but she didn't know how to refute it at all, and in the end she could only say to Zhou Ming: "Why don't we change the way?"

Faced with Lin Muqing's sudden question, Zhou Ming asked with some surprise: "Sister Muqing, don't you believe me either?"

Lin Muqing immediately explained: "Zhou Ming, I didn't mean that, I know that you are very confident in your judgment, and I also believe in your judgment, because I myself also think that the subprime loan sounds like something problematic, but now we still haven't found it, right?"

Zhou Ming smiled and said to Lin Muqing: "Sister Muqing, I think you misunderstood, I'm not reckless, I really think there is a big problem with subprime loans." ”

"Really?" Lin Muqing still seemed to be a little disbelieving.

"Of course it's true, maybe I'll be a little reckless in front of Louie, but Sister Mu Qing, you're not an outsider, what kind of strength am I doing in front of you!" Zhou Ming said.

Zhou Ming is telling the truth, he has the memory of later generations, he knows very well that this kind of subprime loan will definitely have problems, but this time he is not an unpredictable prophet, but he has to do it himself to burst this bubble, Zhou Ming in front of Louis, he did not show so confidence.

But Lin Muqing didn't know this, for her, she was relieved when she heard Zhou Ming say this, because Zhou Ming in her impression was not without self-esteem, but his self-esteem was based on self-confidence and reason, and in front of his own people, he was originally going to discuss countermeasures, so there was no need to force that boring shelf, and he didn't act too strong in front of himself.

Zhou Ming thought carefully for a while before he said: "Sister Mu Qing, no matter how low the risk assessment is, he is built on the subprime loan market, and now that the US economy is growing rapidly, the risk of this kind of loan is very low, but what if one day the subprime loan market goes wrong?

"And the most important point!" Zhou Ming said, "People are profit-seeking, I don't believe that such a profitable business will not lose money will no one come in to speculate and create a bubble, as long as there is a bubble, then the market itself will be fragile." ”

"If Zhou Ming said so, I would think of one thing, that is, the CDS market. Lin Muqing said suddenly.

"CDS market, Sister Mu Qing, are you referring to the credit default insurance market?" asked Zhou Ming.

Lin Muqing nodded and said: "That's right, just now I checked the information materials of Bray Insurance Company, which is an insurance company directly controlled by the Addams family, and I found a very interesting information, he once spent four billion dollars on a hundred CDS contracts. ”

These words made Zhou Ming's eyes light up suddenly, and he said happily: "Sure enough, I know that there will definitely be great hidden dangers in such a big market!"

Lin Muqing is also very happy, but her happiness is more to help Zhou Ming, of course, as a financial investor, she also understands what it means to have a hundred CDS contracts of four billion dollars, that is, speculation. Because according to Louie's previous algorithm, if every CDS contract is worth $50 million, then 100 contracts are $5 billion.

Four billion and five billion, so it seems that Bray is making money, but you must know that these five billion are delivered in ten years, not to mention whether there will be accidents in these ten years, just the possible inflation, it is unacceptable.

Then it is not difficult to imagine that there must be an insurance company that has taken a hundred CDS contracts, and the insurance company alone is worried that there will really be an accident, after all, this can also be regarded as a futures contract, so the best way for him to avoid risks is to sell all these contracts directly.

Perhaps the price set by this insurance company at the beginning was 20 to 2.5 billion US dollars, although it is half of the 5 billion yuan, but it will take ten years to gradually get it, and it still has to bear the risk, how can it compare with being able to get 2.5 billion US dollars immediately now, without any risk?

Then the company that bought the 100 CDS contracts, he didn't want to wait 10 years to get the money, or he didn't want to take the risk, so he would continue to sell the 100 contracts again, selling 2,728 million. Or no one can come up with so much money at one time, he can also sell these CDS contracts one by one like stocks, and finally under the speculation of the market, it gradually soared to a high price of 4 billion yuan in 100 contracts.

"At the high price of four billion dollars and 100 contracts, I don't think there is much profit margin, as long as one contract is broken, I think someone should go bankrupt, because he has already taken out four billion to buy contracts, can he get more money? Zhou Ming said.

"So will Bray put all these contracts up for sale as well? Lin Muqing guessed.

Zhou Ming shook his head and said: "In fact, it doesn't matter whether Bray will sell in the end, the important thing is that he has already bought it, which can already prove that the CDS contract or the bubble in the subprime loan market has been speculated, and everyone is not buying the earnings after ten years, but the next buyer they are looking for now, and this kind of drumming and passing flowers, as long as it stops, it will be a landslide and tsunami-like turmoil." ”

"But how can we get him to stop?" asked Lin Muqing.

Zhou Ming thought for a moment and then asked, "Sister Mu Qing, if you are an investor, under what circumstances will you no longer buy these CDS contracts?"

Lin Muqing frowned and replied tentatively: "The risk is too big, or the profit margin is too small?"

"So at what point will the risk of these CDS contracts become larger, or the profit margin will become smaller?" Zhou Ming asked again.

"Of course, there are times when there is a default......"

Lin Muqing's answer only said one sentence and then didn't say any more, because she already understood Zhou Ming's thoughts: "Zhou Ming, do you mean to create a breach of contract?"

Zhou Ming nodded first and then shook his head and said: "Default is definitely going to be created, because the emergence of default is the first condition to burst this bubble, but before that, we must first determine whether the current subprime loan has really swelled to a sufficiently drastic extent." ”

"But this requires more detailed market information. Lin Muqing said with some embarrassment.

Zhou Ming said very casually: "Sister Mu Qing, you are too ignorant of Mr. Louie's existence, he is the patriarch of the Lowell family!"

Lin Muqing smiled: "I really forgot about this stubble. ”

At the same time, in another room, Louis sneezed hard, and his body shivered involuntarily, and he had a very bad premonition in his heart.