Wall Street Financial Truth

Chapter 23 How do rich people make money (6)
This royal member is a well-known philanthropist. She has several charitable funds in Africa, specializing in helping some African countries build schools and hospitals, and continuously expand her philanthropy.It's funny to say, but the purpose and need of her trip is how to make good use of legal means to avoid paying high government taxes through SWAP.

We all know that the enactment of many laws in the United States and Canada comes from the Common-Law of the United Kingdom. The United States and Canada have inherited their high tax rates, and the high tax system of the United Kingdom is even more inevitable. system.For the rich, voluntarily taking money from one pocket to do charity is out of a sense of superior satisfaction.They will not be willing to enact laws like the government to forcibly "grab" money from the other pocket of the rich (and perhaps also spend it on the poor).Therefore, the rich always try their best to bypass the government and evade taxes under the nose of the government. It is like playing a game of cat and mouse. If tax evasion is successful, the psychological comfort can also reach the ultimate excitement.

When our company received the task, accountants, lawyers and analysts all mobilized with great fanfare to help her design, calculate, analyze and research, and finally formulated a SWAP contract with a ten-year plan.In this SWAP deal, she will legally "dodge" $10 million in taxes over 5000 years (I heard the money ended up in a charitable fund), and our company will pocket $1000 million from the deal.

Perhaps the rich have their reasons for evading taxes: "The richer we are, the more we donate to the poor; the bigger the charity, the more we give back to the society." They achieved their inner balance under this guise.But the irony is that behind this charity often creates greater greed and competition for the society.The rich will compare who donates more schools, who builds more advanced hospital equipment, and who contributes more to society.Greed and competition fuel lies and deceit!Givers use tax-evaded "dividends" to put their names on hospitals and schools, setting them high above the poor.While the recipients benefit from the charity, their aversion to the usurper is greatly weakened. Charity is carried out in such a cycle of oppression, and the "peaceful" society continues in this way.

It can be said that SWAP trading is a game designed by Wall Street for the rich.Otherwise, how many poor people can afford to open an account with at least 100 million US dollars?High reward, high risk, no?In such a game, the poor are the worst offenders.

13. "Poisoned milk powder" in the financial world

American International Group (AIG), the world's largest insurance company, has been ranked among the top ten in the world for many years.However, such a powerful group company cannot withstand the attack of CDS (credit default swap, a kind of derivative securities SWAP).Had it not been for the hundreds of billions of dollars in emergency aid from the U.S. government, even Goldman Sachs would have been dragged down by it, and Buffett would have lost billions of dollars.

In the turbulent year of 2008, the three letters of AIG made headlines in financial news almost every day.For most Chinese people, they may not know what AIG means, but as long as it mentions AIA, it should be a household name. AIG, which originated in Shanghai, is an international multinational insurance and financial service organization group based in the United States. AIA is only a subsidiary of it.

AIG once ranked tenth in the world's top 500 companies, and it is also the leader in the insurance industry, with 11.6 employees worldwide.Since April 2004, 4, AIG has been a constituent stock of the Dow Jones Industrial Average. However, on September 8, 2008, due to the impact of the financial tsunami, AIG's rating was downgraded, causing banks to seek debts from AIG. , resulting in tight liquidity, was removed from the Dow Jones Index on September 9, 16.It can be said to be too big to fail (too big to fail). In desperation, the US Federal Reserve announced that it would provide AIG with an emergency loan of 2008 billion U.S. dollars to avoid a vicious chain reaction caused by the collapse of AIG due to capital turnover problems.This is the largest transaction in the history of the United States in the acquisition of a private company by the government. The amount is so large that it is second only to the acquisitions proposed to Fannie Mae and Freddie Mac a week before the incident.

How can such a huge century-old store collapse?In the past, AIG's main business was life and property insurance.It is one of the most "dull" and "safe" (that is to say, unprofitable) businesses in the world of finance.However, since the 20s, they have expanded their business to bond insurance: if the bond matures and the bond issuer cannot repay the money, AIG will make full compensation, and while bearing the risk, it can also charge a certain premium .Originally, this was a very good business, because whether it is corporate bonds or government bonds, they are very safe, and there are very few precedents of non-repayment at maturity.

But this time in 2008 was different.

The instigators of this financial turmoil were the five major investment banks on Wall Street. They packaged and sold a huge amount of subprime mortgages mixed with ordinary bonds, just like poisoned milk powder mixed with melamine.Of course, they are well aware of the risks of the bonds sold in packages, so they want to find a way to protect their own interests.Therefore, these "extremely smart" financial experts invented the "CDS" emerging market, and sold those "toxic bonds" through this emerging market to AIG for guarantee, so AIG got "stones" like eating poisoned milk powder , had to seek "healing".

Looking back at history, when the issuer of the bond is unable to repay (usually a certain company or a certain government), it will not default on a large scale, and the insurance company is fully capable of paying compensation.But this time, when the Wall Street investment bank changed the content of the game, the price of subprime loans followed the housing price, while the cycle of real estate was relatively long. In a period of continuous decline in real estate for several years, the default rate of subprime mortgages was getting higher and higher. Although the bonds mixed with subprime mortgages did not default, but like poisoned milk powder, this kind of toxic bonds has no interest in the market and has become priceless.Even worse is the way in which debt is calculated based on accounting instant market value, and all debts of investment banks must be based on the ultra-low price of the market, which makes their assets shrink significantly.

According to the New York Times report, the culprit that brought down AIG turned out to be AIGFP (AIG Financial Products), a subsidiary of the group in London, with only 377 employees. Founded in 1987, AIGFP provides insurance to holders of CDOs (Collateralized Debt Obligations) — that is, investment banks — that the securities will not default for a period of time.Relying on the golden brand of AIG, the performance of AIGFP has grown by leaps and bounds, from an annual profit of only US$7.37 million to US$2005 billion in 32.6.At that time, AIGFP had become the golden hen of AIG, and President Cassano was therefore regarded as a popular candidate for the successor of AIG president.The salaries of Cassano and his men have also risen accordingly, with an average annual salary of more than 100 million US dollars per person.Over the past seven years, $7 billion has been paid to employees.

However, the financial turmoil caused by subprime mortgages caused huge losses in CDS products. Since AIGFP is an investment bank rather than an insurance company, the parent company AIG is responsible for the losses, which caused AIG to suffer a loss of US$3.52 million.The financial report at the end of 2008 showed that the subsidiary had lost $250 billion, and AIG's stock plummeted, and it was finally taken over by the US government.And Goldman Sachs, who managed to escape the financial tsunami, is the largest business partner of AIGFP. After all, AIG was killed by Goldman Sachs.

If AIG is not guaranteed, Goldman Sachs may suffer a loss of 200 billion US dollars.And in 2008, Warren Buffett, the stock god, extended a "helping hand" to Goldman Sachs—purchasing Goldman Sachs' preferred shares for US$50 billion, and exchanging another US$50 billion for the warrants of Goldman Sachs common shares, which will also be in vain.

Originally, the original intention of derivatives was to be used as insurance for anti-flight hedging, but with the continuous increase of leverage, it has evolved into a tool for gambling.However, the US Congress's legislation on derivatives was bombed without a trace by the "heavy financial nuclear weapons" of Wall Street interest groups.

Undoubtedly, as long as the greed of human nature is not restrained, the financial turmoil in 2008 will repeat itself again and again.

14. You watch the movie, I bet on the box office

On March 2010, 3, there was a piece of financial news that attracted attention: 'Beginning next month, movie lovers will be able to make that bet through a futures contract issued by New York broker Cantor Fitzgerald.' The meaning of this news is: from Beginning in April, movie lovers can bet on the success or failure of the movie box office through futures contracts, with Cantor Fitzgerald, a well-known Wall Street broker, acting as a broker.

This news uses a very interesting word that is heard the most in casinos - bet (bet, bet), which is extremely vivid in pointing out the commonality between futures contracts and casinos.

This kind of futures, once officially approved by the US Commodity Futures Trading Commission, can be opened on the Cantor trading market and traded around the clock. At that time, anyone can "invest" (more precisely, "speculate").It is expected that the public will flock to this product.According to the "New York Times" report, several other Wall Street firms are also planning this business, and Cantor is just one step ahead.

Futures (futures) is a contract signed by buyers and sellers in the futures market.This kind of contract buys (Long) and sells (Short) certain goods at a fixed time, quantity, and price, including various bonds, foreign exchange and specific physical objects.

For example, if a farmer harvests 100 tons of corn every year, he should be able to sell it for 1000 yuan per ton under normal circumstances.He was afraid that the price of corn would drop due to the bumper harvest that year, so he sold a 1000-ton corn futures contract at a price of 100 yuan per ton.If corn really fell that year, of course his corn could not be sold at a good price, but he made money in corn futures, just to make up for the loss.What this farmer does is Hedge.The buyer who signs a futures contract with him, if the price of corn exceeds 1000 yuan/ton, he will make a profit, and if the price falls below 1000 yuan, he will lose money, just like betting on "size" in a casino, it is a kind of "adventurous speculation" , a loss for one means a win for the other.

(End of this chapter)