Chapter 753 Financial Leverage

"Sell all of Merrill Lynch's assets in the real estate sector. In addition, in addition to retaining the shares of Bloomberg and Verizon, the remaining private equity investments will also be liquidated. Guo Shouyun thought for a moment and said.

"Berkshire Hathaway's stock has always been a good place to grow. In addition, Huaxia Telecom and Modu Petrochemical have an annual return of more than 15%, and it would be a pity if they were sold now. And isn't the boss always optimistic about the future of Huaxia Enterprises?!" said Michael Moretz.

"Optimistic is optimistic. But you know my attitude towards the rapid development of 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 know about it in the outside world. But it's no secret at the top of Phoenix Bank and Hanhua Holdings. But Michael Moretz thinks he's a little too alarmist.

"Boss, the cyclical nature of the real estate industry is really something to be wary of. But now U.S. real estate is just entering a boom. According to the pattern of the past, it will be at least three to four years before entering the downward range. Wouldn't it be too early to start preparing, and it would also make us miss out on a lot of opportunities to make big profits!"

"There are many ways to get income, and it doesn't have to be real estate and derivatives. In addition, it is doubtful that 20 years have passed since the last real estate cycle, and it is doubtful how much reference value there is now. In addition, more than 99% of financial institutions in the United States have now entered the field of real estate and derivatives, and the scale and growth rate are far greater than in the past. In 2005 alone, the scale of real estate derivative bonds, including CDOs and CDS, increased by nearly 76 billion US dollars, and if by the end of the year, this scale will increase by at least 5000~700 billion US dollars. The scale is too horrific for Merrill Lynch to take the risk. Guo Shouyun said firmly.

“… When I can't see the road ahead, I'd rather be safe!"

Michael Moretz pondered for a moment and nodded.

"If you close the majority of your private equity investment, what will you do with the repatriated funds?"

"Gold spot! On the premise of ensuring that it is safe enough, triple the gold spot. It's also a hedge against future risk!"

In the subprime mortgage crisis, although toxic assets were concentrated in the field of real estate and derivative financial products, as the largest financial crisis that broke out in the United States since 1929, it harmed the entire market. At that time, whether it is government bonds, corporate bonds, or stocks, there will be varying degrees of decline.

And as an investment bank, you can't close all the financial products that are falling left and right, and this is also unrealistic. Therefore, the best way is to hedge against hedging products such as gold. Of course, CDS is also a good option. But with the lessons of the American International Bank, whether or not you can get a claim is a question of whether you can get the claim at that time. Therefore, when you think about it, gold is the safest. The market is large enough, the upside is ideal, and the payment is fast.

“… But the chances aren't too good right now. The repatriated funds are temporarily placed in the company's account and reinvested when the gold market node comes. ”

In view of his current plans with Citigroup and Goldman Sachs, it is better to keep more liquidity in his own hands at this time.

Michael Moretz nodded. The practice of 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.

"At present, in the asset portfolio held by Merrill Lynch, should all the real estate derivatives be sold?"

Bank of Merrill Lynch manages $1.3 trillion in wealth, a large portion of which is derivatives in the real estate sector. And that's only part of it. In order to increase revenue, Merrill Lynch also uses its own cash flow as a 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 CDS.

Of course, this is also what the five major investment banks on Wall Street, and even all the banks with investment banking business, including Citigroup and Chase, will do. Commonly known as 'arbitrage'.

The principle is also very simple.

This is because banks take deposits from the public and lend out at the same time, making profits by earning interest rate differentials. But there is no quantifiable relationship between deposits and withdrawals from the public, sometimes more, sometimes less. In order to avoid a run that threatens the bank's survival, it is important for the bank to keep enough cash. But keeping enough cash flow would reduce the bank's revenue, and it would require more reserves to be made to the Fed.

Therefore, in order to maximize their own interests, interbank lending and overnight lending markets have emerged in the financial market.

Overnight lending is well understood, i.e. borrowing today and paying back tomorrow. Interest rates fluctuate with the Fed's federal funds rate.

Investment banks are the largest institutions that absorb overnight lending funds from banks. The investment bank has rich channels and experience in high-risk and high-return investment, a sound risk management system, deep contacts and a flexible and complete information network. Guarantee that they will be able to engage in arbitrage trading.

If the interest rate of overnight lending is 1% and the return of real estate ABS is 7%, the investment bank can still get 300~400 basis points of revenue after removing the insurance paid when hedging risks.

When the investment bank uses the money it has financed, plus its own funds, and purchases financial products as collateral, it receives more overnight borrowing funds to purchase financial products with higher returns, which forms leverage. In this way, the scale of leveraged financial products is even larger.

Just like now, Merrill Lynch has a leverage ratio of 19 times, while Goldman Sachs, Damour, Lehman Brothers and Bear Stearns are basically around 20 times.

By the time of the next major crisis, the leverage ratio of the five major investment banks was basically around 30 times.

What is the concept of 30 times? If the principal of the big five investment banks is $10 billion, then they hold a position of up to $300 billion. Obviously, the Big Five's own funds are clearly more than $10 billion. As a result, the scale of the funds they are leveraging will be staggering.

But this huge asset, built on overnight lending, is like a castle on the beach. If in a boom period, when there is a lot of money in the market, it is easy to maintain. In the event of an economic crisis, the cost of borrowing money will be even higher, or even difficult to borrow.

During the subprime mortgage crisis, the contraction of the overnight call market was a major trigger for the crisis.

Of course, the root cause is the decline in the price of real estate and derivative bonds.

Financial institutions such as Lehman, Bear Stearns, and Merrill Lynch hold too many positions in real estate derivative bonds, and once the real estate market falls, the price of financial products built on these real estate will also fall. Trades that used to be arbitrage can now not only not make money, but lose money. If the investment bank does not have enough money to lose, it means that it has a liquidity crisis.

So, Lehman went out of business. Bear Stearns and Merrill Lynch were bought.

If a bank that lends overnight does not get its money back, it is losing money, and if the size 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, and this 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 investment banks are represented by the Big Five, the banks are represented by Midland Bank, the credit institutions are represented by Freddie Mac and Fannie Mae, and the insurance companies are represented by the world's largest insurance institution, American International Group.

The collapse or bankruptcy of these giant-level financial institutions directly triggered a crisis in the entire financial system of the United States. Because the trigger is the subprime loan of real estate, it is also called the 'subprime mortgage crisis'.

The scale of the subprime mortgage crisis is staggering, and Guo Shouyun, who has personally experienced it, has a numb scalp just thinking about it, and he doesn't want Merrill Lynch to get involved in it again like he did in his previous life.

"Sell all the real estate derivative bonds, as well as the 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 do it immediately. It is enough to leave this big pit a year early.

“… The repatriated funds are invested in preferred stocks and corporate bonds of U.S. blue-chip companies, but avoid financial stocks. ”

Michael Moretz nodded, "What about the levers, do they need to be adjusted?"

"No, 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, and although high leverage is very risky, it cannot be directly one-size-fits-all. Moreover, he is not alone in the future shareholder of Phoenix Merrill Lynch. If it doesn't invest in the hottest real estate financial products, it will face some complaints at most. But if Phoenix Merrill Lynch's income is reduced by a piece, I'm afraid that the shareholders he wants to win over and stand up for the Phoenix Merrill Lynch merger will not agree.

“… Although leverage does not need to be adjusted, risk exposure, especially in real estate investments, must not exist. This is non-negotiable. 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 have to do hedging. If it's long-term, open up as much as you want. ”

The future of gold and oil is at least six years on the rise. So there won't be much loss in long-term trading. Of course, the subprime mortgage crisis will lead to a temporary decline in oil prices due to the collapse of the economy. When the United States starts the money printing press and uses the 'petrodollar' to pass on its losses to the world, oil prices will once again rise to the sky.

So in the long run, oil prices are still rising. As for how to survive the short window period of the subprime mortgage crisis. It's never too late to talk about that. The scale of oil futures trading is enough for Guo Shouyun to sell his position and close it.

…………………………………………………………………………