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Chapter 437 Prepared $2 Million

In Professor Qin's eyes, Gao Yang looked very young, not yet 30 years old.

That is to say, in his early 20s, he started investing in A-shares starting from 2.8 yuan. In 7 years, he made a sudden profit of 25 times.

In the same period, A shares had a small bull market of less than two years and a long bear market of five years.

This kind of investment ability can be described as horror.

Thinking of this, Professor Qin asked: "Gao Yang, how much money do you plan to use to short US subprime loans?"

Gao Yang looked at Wu Ruohan, and Wu Ruohan replied: "Professor Qin, we are planning to have more than 2 million US dollars."

Professor Qin asked curiously, "Are you planning to transfer more than 2 million US dollars from China?"

Wu Ruohan smiled and said, "No, Professor Qin, these funds are already in the United States, and all of them are invested in American stocks."

Professor Qin asked again: "Can you tell me about the specific sources of these funds?"

Wu Ruohan replied: "These funds are mainly divided into three.

One is that from 2004 to 2005, we registered an asset management company in Hong Kong Island, and registered a VIE company in Cayman, and injected 300 million US dollars in the form of private equity funds. I entrusted my elder brother and sister-in-law to start investing in US stocks.

During the same period, my elder brother and sister-in-law also successively invested 100 million US dollars.

The US$400 million has now reached US$8500 million in US stocks.

The second fund is Gao Yang and his friend. At the end of 2004, they invested 3000 million US dollars in a company in Silicon Valley, and then opened an account in the name of this company, and raised 2500 million US dollars to invest in U.S. stocks. At present, this fund has nearly quintupled , There are more than 5 million US dollars.

The third fund is 8000 million US dollars, which is the fund of 51 Group.

51 Group first set up a VIE company in Cayman, and then registered an asset management company in Hong Kong Island. The 8000 million US dollars, in late September this year, invested in US stocks through the Cayman VIE company, and now has more than 9 million US dollars. up.

This fund is planned as a backup. "

Professor Qin nodded:

"The source of funds is not a problem. Let me first tell you about the subprime mortgage and its financial derivatives market in the United States.

The first is MBS, residential mortgage-backed securities. The concept of MBS was born very early, dating back to the middle of the 19th century. It became popular in the 1970s and directly changed the banking industry in the United States.

MBS is divided into RMBS for residential mortgages and CMBS for commercial mortgages. The design of the concept of MBS is to package mortgage loans into securitized products and share the risks of investors.

There are two types of MBS issuers, one is a state-owned enterprise guaranteed by the government, and the other is a private enterprise.

There is a concept called Sub-prime MBS, that is, sub-prime mortgages. Most issuers of sub-prime mortgages are private companies.

Then, rating agencies carry out risk ratings for these MBS, from B, BB to AAA, mainly these are 6 risk ratings.

The MBS that has been derated is called Unrated MBS, and it is a junk asset that almost no one pays attention to.

MBS was originally an asset securitization product with low investment risk and relatively high yield.

Many of the early MBS products were rated AAA, and the investment risk was very low. They were basically fixed income products.

Its annualized rate of return is stable at 8% to 9%, and has been warmly welcomed by institutional investors such as American pension funds.

Then, an insurance product CDS, namely credit default swap, was also set up, which was issued by large insurance companies to hedge the investment risk of MBS.

In 2000, I published a paper on financial risk management in the North American "Fixed Income" magazine. Based on CDS market price data and using Gaussian connection function for quantitative analysis, I can prove that in MBS, borrowers with different qualifications in different regions, their Default risk correlation is low.

This is also the basic basis for the original design of MBS, that is, real estate mortgage loans that are deliberately defaulted are rare. My thesis only conducted a quantitative analysis to prove the investment value of MBS.

Then, my thesis was used by Wall Street to quantify the investment risk of CDOs, quickly price CDO products, and allow investment banks to successfully sell CDOs to investors.

The meaning of CDO is a secured debt obligation, in which an important mortgage bond securitization product CMO is designed, that is, mortgage-backed debt securities.

CMO is a type of credit-guaranteed securities, which can be the issuer's own credit guarantee, and there are also many third-party guarantees, such as large insurance institutions such as AIG, Ambac, and MBIA, or large investment banks such as Morgan, Bear Stearns, and Deutsche Bank.

Such a series of financial designs can allow banks to quickly withdraw real estate mortgage loans and then release new mortgage loans.

At this point, it is a very good innovation in financial derivatives, which can attract investors, boost the vitality of the real estate market, and stabilize its development, smooth its cyclical fluctuations, and also drive economic development.

Sadly, the financial capital represented by Wall Street is too greedy, frantically chasing profits, and even resorting to unscrupulous means.

They keep packaging CDOs, CDOs within CDOs, layer upon layer, making the design of CDOs more and more complicated, which is difficult for many professionals to understand.

Ordinary investors do not have the ability to distinguish, and mainly look at credit ratings, and the proportion of AAA ratings in the asset portfolio.

In the past two years, I have been tracking and understanding the MBS market and the CDO derivatives market through my friends on Wall Street.

Originally, I did not have a more precise situation, but your survey data today made me realize that the scale of financial derivatives transactions surrounding US housing mortgage loans can already be dozens of times the size of housing mortgage loans, or even more .

Wall Street obviously stuffed a large number of high-risk subprime mortgages into complex CDO products, and then packaged them into a large number of AA grades or even AAA grades and sold them to investors.

Judging from the current situation of US real estate mortgage loans that you track and investigate, the scale of subprime mortgage loans is already very large, the default rate has been rising, and the market risk is huge.

A large number of private institutions issued subprime mortgages, chasing capital profits, completely ignoring risks.

Subprime mortgages originally had floating interest rates, because after the 911/[-] incident, in order to stimulate the economy, the loan interest rates in the United States continued to fall.

Sub-prime mortgage issuers have also introduced the 'Teaser Rate', a preferential mortgage rate, and even free interest rates for the first one or two years, to attract home buyers to enter the market with loans.

This has pushed up housing prices all the way, and more people have been entering the market.

It’s just that, once the Teaser Rate’s preferential period expires, many home buyers’ monthly mortgage repayments may double or even more.

Judging from your survey data, the true subprime default rate is close to the warning line of 8%. It is almost certain that the subprime mortgage bubble in the United States is not far from the day when it will burst.

Likely to reproduce the Jugra cycle..."

Professor Qin was greatly moved, but Gao Yang roughly understood part of the content, which seemed to be similar to the evolution of the subprime mortgage crisis revealed in the movie "The Big Short" in his memory.

However, what Gao Yang is concerned about is that there is any way to go short of the US subprime mortgages in a stable, precise and ruthless manner, so as to obtain huge profits in a short period of time.

Gao Yangdao: "Thank you very much, Professor Qin, for popularizing the professional and complicated market background and knowledge for us. After listening to your analysis, the US subprime mortgage bubble is likely to be close to bursting. I wonder what investment tools and investment channels we can have?"

Unexpectedly, Professor Qin just shook his head and smiled: "If you want to short US subprime mortgages and make a huge profit in a short period of time, it will be very difficult."

Wu Ruohan was suddenly surprised: "Professor Qin, if we are sure that the subprime mortgage bubble in the United States is likely to burst and there is a clear opportunity to short, why is it so difficult?"

(End of this chapter)