Chapter 722 Toxic Assets: Synthetic CDO

……

Stephen Bryan has worked Wall Street for half his life, and he has a lot of experience and knowledge. But he had never seen American real estate expand wildly in this way. He believes that he is not the only one who can see the risks, but everyone is reluctant to make low-hanging profits, and they all believe that they can cash out before the crisis, and in the end it turns out that no one is God, and those who want others to be pick-ups eventually become pick-up heroes.

Although Guo Shouyun agrees with Stephen Bryan's caution, he doesn't want to leave the court 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. The interest rate is around 6~8%.

Don't think that's low, since 9/11, when the Fed lowered the federal funds rate below 1%, interest on conventional loans hasn't exceeded 2%. It is incomparable with Huaxia's deposit interest and loan interest of nearly 8%. Therefore, a CDO that seems to have stable and high returns has become the best choice for investment institutions.

The huge number of buyers is also one of the main reasons for the outbreak of the subprime mortgage crisis.

The nearly 100 billion CDO held by Phoenix Bank can bring in more than $5 billion in operating income every year. That's not a small amount of money. If you sell it, you won't have it.

Of course, in Guo Shouyun's view, the returns of gold, futures, and stocks are higher than those of CDO. 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, and it is more suitable for real estate CDOs than corporate bonds with moderate interest rates and high risks. As for national and local government bonds, the interest rate is too low.

"Stephen, the prudence in dealing with high-stakes issues is indeed appreciated. However, I do not think that mid-2005 is the right time. Looking at Stephen Bryan's disapproving look, Guo Shouyun smiled faintly, "Stephen, do you know what a synthetic CDO is?"

"Synthetic CDO?"

The new term unsurprisingly sparked Stephen's curiosity.

"That's right!"

Guo Shouyun nodded. It was still November 2004, and it was still more than half a year before Lehman Brothers invented the synthetic CDO, a highly toxic asset.

"Real estate mortgage-based CDOs are classified as senior, intermediate, and subordinate. Originally, the price of this subordinated CDO was very low, but with the boom in the U.S. real estate derivatives market, these subordinated CDO bonds have also become popular. And in order to allow these low-priced secondary CDOs to sell the price of the priority. Real estate mortgage lenders and commercial banks have once again divided these subprime loans into priority, intermediate and subordinated loans according to different risk levels. ”

"But divided into different levels of CDOs, the essence is still subprime loans, rating agencies still do not give high ratings, banks and real estate mortgage lenders do not get the benefits they want. So, Bear Stearns came up with a solution for everyone: find a commercial insurance agency like AIG to insure these bonds. ”

"After investigation, AIG and other commercial insurance institutions found that the real estate market in the United States is hot, and there is basically no possibility of non-repayment. Looking at the past hundred years of real estate development in the United States, even in the real estate downturn, there has never been a collapse of the entire market. As a result, commercial insurers, including AIG, offer different levels of guarantees for senior, intermediate, and secondary CDOs. ”

"With these guarantees, the risk of these bonds is undoubtedly greatly reduced. When commercial banks and real estate mortgage lenders found Moody's, Standard & Poor's, and Fitch, they were rated A, B, and C. ”

"Ratings A and B are quickly bought by investment institutions such as mutual funds and large pension funds because of their relatively low risk. However, the market demand for C-level CDOs is very low because of the high risk. This is also the general situation of the real estate industry in the United States right now. ”

Stephen Bryan nodded, looking forward to Guo Shouyun's next words.

"Financial institutions don't want to have any losses in their hands, especially when the U.S. real estate market is so hot, and they should squeeze every cent of profits out of it. But if the C-rated subprime mortgage does not change the risk, few people will invest, so what should I do?" Guo Shouyun's eyes flashed with a gleam, "At this time, the synthetic CDO will appear. ”

Guo Shouyun took his coffee, then took the sugar jar that was placed aside into his hand, took out a sugar cube and gestured to Stephen Brian.

"I'm assuming that the sugar cube is an A-rated subprime mortgage insured by an insurance agency, and this cup of coffee is a C-rated subprime mortgage. ”

After the words fell, Guo Shouyun threw the sugar cube into the coffee cup, and then began to stir well with a spoon. Noticing his movements, Stephen Bryan's eyes lit up, and a flash of realization flashed through his mind.

"After such a mix, the whole asset pool is very different. C-rated subprime loans, which were originally risky and could not be sold, are now greatly reduced by the addition of lower-risk A-rated bonds. Except for the investment banks that designed this financial model, no one knows the specific situation in this asset pool, and insurance institutions, including investment institutions and investors, only see the overall rate of return and risk of this asset pool. Therefore, the C-rated subprime mortgage that could not be sold was sold so smoothly at the price of B, or even A-rated bonds. This... It's a synthetic CDO. But we all know that CDOs based on subprime loans are garbage, and synthetic CDOs are garbage in garbage, and ice ~ poison in drugs ~ products. When the whole market collapses, synthetic CDOs will be the first to collapse, and then the whole market!"

Guo Shouyun brushed the coffee cup with his right hand, and with a 'bang', the coffee cup was poured instantly, and a piece of coffee inside was also sprinkled.

Although he was spilling coffee, Stephen Bryan really had in mind the entire U.S. real estate market, as well as the U.S. financial institutions as the crisis spread, and the world.

In an instant, even Stephen Bryan, who had experienced half a life of ups and downs on Wall Street, felt shocked and jumped.

He knows the urine of his Wall Street peers very well, and if they know about synthetic CDOs, he will definitely design it himself and bring it to market. Wall Street can do anything for the sake of profit. As for the risks, it's the shareholders and the 300 million Americans who pay for them anyway. They will leave with their own generous bonuses and pensions.

Stan O'Neal buried Merrill Lynch, but received a $160 million pension. AIG's management, represented by Edward Liddy, was compensated $165 million, but buried the world's largest insurance group.

Against the backdrop of the subprime mortgage crisis, the management of financial groups such as Merrill Lynch, AIG, Lehman Brothers, and Citigroup that had suffered heavy losses or collapsed were able to retire with large sums of money, which directly led to the subsequent 'Occupy Wall Street' movement.

Of course, after a while, now Stephen Bryan's heart is full of shock because of Guo Shouyun's words.

"If that happens, the subprime mortgage crisis will be bigger than we expected, no, bigger than the economic crises that have occurred in the last few decades!"

"Only God knows this kind of thing. After a pause, Guo Shouyun wiped the coffee spilled on the table with a drawing paper, "Stephen, the real estate industry is the backbone of the American economy, and this is a trillion-dollar market. And as a global financial center, the profits of U.S. real estate derivative bonds will attract the attention of almost all investment institutions around the world, and now all this is just a dessert before dinner, and the real climax has not yet begun, so there is no need to rush out. ”

Stephen Bryan nodded, and he spoke, having calmed down, "It's just that this will make us take more risks!"

"If you want to make 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!"

In response, Stephen Bryan stared at Guo Shouyun and said in a deep voice: "Can I know who came up with the idea of synthesizing a CDO?"

"I promised to keep it a secret, so I'm sorry, Stephen!"

He's not a fool, how can this kind of pot be deducted from himself.

Looking at Guo Shouyun's apologetic expression, Stephen Bryan suspected that this kind of bond that he had never heard of was written by the other party. And with his own understanding of the other party, he is fully capable of this ability. But since the other party has denied it, as a business partner, he can't really chase after it. This can damage the intimate relationship between the two parties, and it will be harmful to everyone.

"Stephen, the idea of a synthetic CDO is not difficult, it is easy to conceive. I'm sure that even without our conversation today, someone on Wall Street, which brings together the world's best financial talent, would have thought of the same idea. Guo Shouyun glanced at him and said.

Stephen Bryan pondered for a moment, then nodded slowly.

"Bruce, as a friend, how big do you think this crisis is, can it compare to the Great Depression?"

The so-called Great Depression is the economic crisis of 1929, which began to spread from the United States to the world, directly led to Japan's invasion of China, the rise of the world, and changed the political and economic situation of the world.

"Stephen, I'm not God. I don't have an answer to this kind of future thing at all, and I can't have an answer. … Also, it's not like you. ”

Stephen Bryan also knew that he was a little uncalm, and after taking a deep breath, he smiled bitterly: "As we accumulate more and more data in our hands, the sense of crisis caused by U.S. 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. ”

………………………………………………………………