technological heresy

Chapter 31 Bonds of Madness
When Shen Luozhi transferred Ning Qing's files to Xu Yuan, Ning Qing was chatting with Zhou Jingxue about the mathematical models and papers he prepared for the national competition in the dormitory temporarily arranged for him by the school.

Yes, Ning Qing finally decided to do the national competition subject with the principle of keeping the same and responding to all changes. He spent a lot of time surfing the Internet these two days, and finally confirmed that the development of the securities market in the west of the world is indeed at a relatively early stage. stage, so he intends to develop a new path for the financial industry in the west of the world in this competition.

Covered Debt Obligations CDOs and a more advanced securitization game - Credit Default Swaps CDS!

For the innovative requirements of the World Mathematical Contest in Modeling, this type of game is absolutely qualified.Of course, because it is a mathematical modeling competition paper, he needs to use mathematical models to simulate the benefits and risks of these two extremely innovative capital methods as much as possible through mathematical models.

On Earth, these games were designed by some of the smartest people on Wall Street.Ning Qing happened to be very clear about these gameplays, and also more aware of the possible consequences of these gameplays.In fact, when this kind of gameplay is popularized, assets of hundreds of millions or billions can easily leverage the market leverage of hundreds of billions or even trillions, tens, and trillions.

Most importantly, all capital bonds will completely hide the underlying logic of all controllable inquiries in each package of credit granting and rating.To put it bluntly, it is to use the greedy nature of capital to lighten the economic development process of this world.

If the capital game is played too conservatively, even if there is an economic crisis, there will be pettiness. Ning Qing wants to let the capital forces of this world start to act as soon as possible.Only when everyone's leverage is large enough can they be worthy of the value created by the world's population of nearly [-] billion.

But at this time, Zhou Jingxue obviously didn't understand what Ning Qing wanted to do. Even though he could speak for himself in the bilingual No. [-] Mathematical Modeling Competition, he still didn't break away from the teacher's category after all.He doesn't know anything about finance, so he is still trying to persuade Ning Qing to give up the idea of ​​hitting the finale of the upcoming national competition.After all, in his opinion, what kind of financial model innovation can a high school student understand?
"Ning Qing, I told you before that all those who chose the last question in the competition did not get high scores without exception. Why do you think the things you are tinkering with now can be judged by the experts of the judging committee?" focus on?"

Ning Qing's eyes were still fixed on the screen, and he explained in a leisurely manner: "Because this is really innovation. Mr. Zhou, I don't know if you have noticed that most of the topics in this year's modeling competition are related to economic development. Relevant. Whether it is discounts in shopping malls or airport taxi rankings, they all belong to the category of microeconomics, so I believe that many of the judges for this mathematical modeling must be experts in the study of economic laws.

Since the topic bias in this regional competition is already obvious, we ideally judge that the national competition is not bad.Based on this, I judge that the rules of the national competition are probably similar, and there will be many questions related to economic strength.It's nothing more than a change of skin, such as circulation production in the industrial field, optimal logistics model, and so on.So I chose the last question after careful consideration. As long as there are economists in the final review panel, I will definitely give me a high score for this proposition. I have this confidence. "

Zhou Jingxue looked at Ning Qing who was full of confidence, frowned and said, "Okay, since you are so confident, then explain to me first, where is your innovation? You must at least convince me before you can convince those Expert?"

Ning Qing finally looked away from the computer screen, looked at Zhou Jingxue and said, "Mr. Zhou, do you understand asset securitization? Like mortgage-backed securities? Do you understand these concepts?"

Looking at each other, Zhou Jingxue felt a little embarrassed.

"It's okay if you don't know. Let me explain to you as simply as possible. Let's take housing loans as an example. For many banks, they don't really like the product of housing loans. First, because they target many individuals, they need to spend more Second, the repayment period of this money is very long, which is often a long-term loan of 20 or 30 years, which will encroach on the liquidity of bank funds for a long time.

At this time, in order to give banks the motivation to make housing loans for ordinary people, the financial industry has developed a product that allows banks to package many housing loan contracts and sell them to other investment banks and financial institutions with the principal and interest of these loans as the target. mechanism.In this process, banks can not only earn handling fees and interest rate differences, but also quickly withdraw funds while reducing their own risks.

Because these loans have been packaged and sold.So even if there is a supply cut, the investment banks and institutions that bought these bonds will be the first to be unlucky.These are mortgage-backed securities.Of course, in addition to housing loans that can be packaged, in theory, various other loan contracts, such as car loans, business loans, etc., and asset-backed loans can be packaged and sold, that is, ABS. In fact, this is the most popular bond market in Western countries. trading varieties. "

Zhou Jingxue nodded, because Ning Qing's words were easy to understand, and he quickly understood this financial service model.

"The next step is the innovation I want to propose. Simply speaking, it is to securitize the bonds again, which is the CDO! In simple terms, banks use a series of operations such as packaging, grading, and credit granting of these bonds as bonds. The securities are sold to investors, which is equivalent to the transfer of risk to the next owner.

But for the players who enter the market, funds are also limited. If they want to buy more securities and earn more money, they also need liquidity, and when they encounter suitable opportunities, they also have short-term capital needs.So why can't we do it again and merge, layer and divide the MBS and ABS bonds I just mentioned to form bonds with bonds as the underlying bonds for secondary sales?

That is to say, these bonds are sold again to more investors to recover liquidity.Attract more people to join this capital game, so as to revitalize the accumulated funds and make the economy more prosperous. "

It sounds very simple, but Zhou Jingxue quickly discovered the loophole: "Ning Qing, it sounds reasonable, but the bank makes a fortune, the investment bank makes another fortune, and then sells it. It's not that the return is extremely low, but the risk is too high. But is it infinitely enlarged? Who would buy your so-called innovative financial products?"

Ning Qing laughed, of course he knew that not only would people buy this product, but many people would buy it...

But there was no basis for the words, so Ning Qing changed his rhetoric when he opened his mouth: "So this paper has another innovation, called CDS, which literally means credit default swap. The simple explanation is a bond default gambling agreement."

(End of this chapter)