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Chapter 438 What a Crazy Young Man

Facing Wu Ruohan's question, Professor Qin explained: "Ruohan, I understand that you all came here for a short sale to earn huge profits.

Just shorting subprime mortgage derivatives is completely different from shorting the stock market.

The point is, how do you find your opponent's hand.

You go to Wall Street to find large institutions such as investment banks, and to find counterparties through over-the-counter transactions.

Among them, two issues are involved.

In the eyes of Wall Street investment banks, even if you buy all of your $2 million into MBS put options, the scale of the transaction is actually not too large.

If the subprime mortgage bubble bursts, your income will not be too high, because the AAA-level MBS with the highest leverage is about 15 times leverage.

If you start to find an investment bank a year ago and buy MBS put options, after another year or half a year, if the bubble bursts, you will probably have a return of about 4 times. Of course, you need to talk to the investment bank about the specifics. The expected return can be calculated based on the specific asset package price. "

Gao Yang asked again: "Professor Qin, is there any way to sell short with high leverage?"

Professor Qin nodded and said: "Yes, it is to directly short the CDS backed by the MBS guarantee, that is, credit default swap. MBS involves risk ratings. The higher the rating, the higher the leverage.

If the subprime mortgage bubble suddenly bursts, the first to collapse will be high-risk MBS such as B-grade and BB-grade MBS. For shorting CDS backed by BB-grade MBS, the leverage is about 20 times. For CDS backed by BBB-grade MBS, the short-selling leverage is about About 30 times.

The advantage of shorting CDS is that if you think you are right, you can bet heavily on it, or even go all in.

Among them, another problem is involved. For this kind of high-risk trading variety, your capital amount has not yet reached the threshold requirement.

To short CDS directly, you first need to sign an ISDA agreement with the investment bank.

The ISDA agreement is a high-end transaction that excludes amateurs and professionals, and is mainly institutional investors or large and medium-sized hedge funds.

As far as I know, to sign an ISDA agreement with a large Wall Street investment bank, the fund size is usually required to start at 10 billion US dollars, or even higher. "

Professor Qin's answer made Gao Yang instantly recall the scene in "The Big Short", where two young geniuses foolishly went to a Wall Street investment bank to sign such an ISDA agreement, and they didn't even understand the threshold of capital.

It seems that what is described in the movie is still true.

Gao Yang tentatively said: "Professor Qin, with your reputation, you must have rich contacts on Wall Street, can you please help us sign the ISDA agreement?
We will pay you a reasonable reward, and if it succeeds, we will share it with you..."

Professor Qin waved his hands and smiled: "Gao Yang, I don't need any share."

Gao Yang said: "Professor Qin, you or the School of Economics of Jiaotong University, 51 Group can donate to set up scholarships and grants. If there are research projects that need funds, we can also directly sponsor them."

Professor Qin glanced at Gao Yang: "I can help you sign ISDA agreements with Wall Street investment banks, but Wall Street is very complicated, with various interests intertwined, very complicated, and even dirty.

Even if you see the right direction, you may still face huge risks in specific transactions, and you may even lose all your money..."

Speaking of this, Professor Qin picked up the document that Wu Ruohan brought, turned to a few pages, and gestured:

"You see, the ABX index, which reflects the risk of the subprime mortgage market, has clearly shown an inflection point in September this year, but the prices of related MBS-related securities during the same period have not loosened and are still at a high level.

At the same time, the default and foreclosure rate of real estate mortgage loans has obviously been rising all the way, and has passed the warning line, and rating agencies still have not lowered the risk ratings of these MBS.

This shows what?
Wall Street investment banks, rating agencies, and various stakeholders are colluding and conspiring to defraud ordinary investors who don't know the truth.

The risks in the subprime mortgage market have become so obvious that Wall Street is still frantically selling MBS-related derivative-backed securities to investors, such as those complexly designed CDOs.

While they are trying to earn the last gold coin, they may have already started shorting, transferring risk, or hedging risk and locking in risk exposure.

The circulating funds in this market are too large, and Wall Street elites also have the ability to control the market trend for a certain period of time, such as making the price of the secondary market rise instead of falling.

Right now, if anyone has bet heavily against subprime mortgages, they're probably in a state of jaw-dropping horror.

If the position is too heavy and there is no funds to cover it, they may even have to close the position and face huge losses..."

Gao Yang smiled slightly: "Professor Qin, I believe that no matter how powerful Wall Street is, it may manipulate the market for a while, but it is impossible to truly influence the market trend.

The bubbles piled up by greed and madness will definitely burst, and those institutions whose interests are tied together will definitely be rushed away in advance.

We are not afraid of temporary trading risks. We want to seize such a once-in-a-decade opportunity to make a big bet. If we fail, we will bear the risk at our own risk and have nothing to do with Professor Qin. "

Professor Qin was silent for a while, then smiled and said, "Gao Yang, since you are so determined, I can help you sign the ISDA agreement.

After that, at the end of January next year, in Las Vegas, the annual securitization forum in the United States will be held, and a large number of MBS managers, as well as CDO and CDS traders will participate.

At that time, you can go there to find opponents. "

Gao Yang said: "Professor Qin, can we invite you to go with us when the time comes?"

Professor Qin thought about it: "Okay, let's go there about a week in advance."

Gao Yang asked again: "Professor Qin, if we short the CDS backed by AAA-level MBS, how much leverage will we have?"

Professor Qin looked stunned: "Gao Yang, no one is crazy enough to short the securities backed by AAA-rated MBS, even if the subprime mortgage bubble really bursts, the possibility of AAA-rated MBS collapse is not very high.

Wall Street uses CDOs to package MBS-related derivative securities. It always needs a banner publicity product, AAA-level MBS, and the possibility of being stuffed into a large number of subprime mortgage assets is very small.

High leverage also means high risk. A small fluctuation may make you liquidate instantly.

Even if there are systemic risks in the entire market, the Federal Reserve will definitely step in to rescue the market before the collapse of the AAA-rated MBS.

So, if you want to short the securities backed by AAA-rated MBS, the probability of success is too small. "

Gao Yang nodded: "Thank you Professor Qin for your guidance, what about the CDS supported by AA-level MBS?"

After hearing this, Professor Qin's eyes lit up after thinking for a while: "Shorting AA assets is indeed a good choice, with a leverage of about 200 times, but this is only a theoretical gain.

If you short the CDS backed by AA-level assets and successfully obtain a leveraged return of 200 times, it is only wealth on paper. In such a situation, your opponents may have gone bankrupt.

Not only will you not be able to obtain huge profits with high leverage, on the contrary, the empty orders you bet on will become a piece of waste paper at this time, and you are doomed to lose everything. "

Gao Yang continued: "Professor Qin, if we short the AA-backed CDS, instead of pursuing the 200 times limit leverage return, and exit early, is there any possibility of such a transaction being successful?"

Professor Qin thought about it: "There is a possibility of success, but such a transaction is like walking a tightrope. At that time, your opponent needs to reach a settlement with you and buy your empty order, or you can resell it to other institutions. .

The problem is that if shorting AA grades can be successful, it means that the entire market has already experienced systemic risks, and the market situation is changing rapidly, and no one can grasp the speed of this emotional collapse.

At that time, the trading window period left for you may be very limited. Even if you resell the short order at [-] to [-] times the profit, it will be a transaction worth billions or even tens of billions of dollars, and few institutions can take it. "

Gao Yang said: "Professor Qin, when we choose to short AA grades, we should place more bets, diversify our investments as much as possible, and withdraw in time when the expected return is achieved. Is there a high probability of success in this transaction?"

Professor Qin said: "It is possible to succeed. However, if you short BB or BBB grades, although the leverage is not high, there is a great chance that you can secure your pockets before systemic risks appear in the market. , such a choice is more secure."

Gao Yang said: "Professor Qin, I think that if someone is already shorting, then BB and BBB assets may already be popular varieties for transactions. We may not be able to short at an ideal price, and it may even be difficult to find a counterparty. .

On the contrary, when the market trend is not yet clear, it may be very rare for people to short AA grades. We have the opportunity to short short positions at a relatively cheap position, and it should be easy to find opponents.

A Jugra cycle, if it really happens, the opportunity is rare, and only high risk can have high returns..."

Hearing Gao Yang's thoughts, Professor Qin was also secretly shocked.

Crazy young man...

(End of this chapter)