The Son of Finance of the Great Age

  Chapter 205 Orange County Bankruptcy

  A week later, when all the funds were in place, Zhongshi transferred some of these funds to commercial banks with extensive business in South America, and used these funds as collateral to borrow Mexican pesos and Brazilian reals from relevant banks.

   On January 1, 1994, Mexico joined the North American Free Trade Area consisting of the United States, Canada and Mexico. The purpose of this free trade area is to remove mutual trade barriers, increase investment opportunities, establish an effective mechanism for implementing agreements and resolving trade disputes, and promote mutual cooperation.

   To put it simply, the member states give each other substantial preferences in terms of import and export tariffs, so as to promote the better circulation of mutual products in the mutual market. Due to Mexico's weak competitiveness in industry, agricultural products, etc., the trade agreement stipulates that some industries have a buffer period of 10 to 15 years, and other industries have a longer transition period.

For example, the tariffs on chicken exported from Mexico to the United States have dropped significantly, and the price will naturally be more favorable. However, if Mexico imports a large amount of corn and dairy products from the United States, it will seriously impact the domestic market and the entire production system. Therefore, these industries have A relative buffer period.

  The problem is that a corresponding buffer period can be stipulated for specific real industries, but there is no corresponding buffer period for capital that cannot wait to enter the Mexican market. Due to the huge difference in salaries and benefits between the United States and Mexico, the American manufacturing and banking industries can't wait to use the local cheap labor to achieve their goals of reducing costs and increasing capital gains. At this time, the dollar is exchanged for Mexico. The exchange rate issue of the peso was brought to the table.

  Under such circumstances, the Mexican government announced the implementation of a strict and flexible fixed exchange rate system pegged to the US dollar to attract foreign capital, especially US dollar capital. However, this fixed exchange rate is not static. The Central Bank of Mexico constantly adjusts it according to market changes, and the adjustment range is within the range established by both parties. At the beginning of 1994, 1 US dollar was exchanged for 3.106 pesos. With the continuous expansion of the bilateral trade volume, by March, 1 US dollar was exchanged for 3.28 pesos.

Under such constant small adjustments, on December 1, 1994, the immediate exchange rate was 1 USD to 3.436 pesos, that is, 1 Mexican peso to 0.29104 USD. The quoted price in the market was 0.29082 USD for buying and 029104 USD for selling. . If the distance from the market is too large, the Central Bank of Mexico will intervene to keep the exchange rate at a normal level.

Zhongshi has gathered a total of 9 billion US dollars this time, of which 5 billion US dollars are three-month loans from three commercial banks, and the loan interest rate is 5%. In addition, there are 4 billion US dollars of its own funds, of which 2 billion The U.S. dollar is the capital of Tianyu Fund, and the other 2 billion is the funds in the accounts of Skyline Financial Company and Skyline Holding Company.

  Among these funds, 100 million U.S. dollars has been converted into equivalent Brazilian reals, which have been transferred to Andrew in South America, and the money will be invested in the Brazilian stock market. In addition, there are about 400 million US dollars of funds, which are gradually being invested in the short Mexican peso in the IMM and the short Mexican peso futures and options contracts in the OTC market. The remaining US$8.5 billion was gradually borrowed in corresponding three-month Mexican pesos through 15 American and European banks with branches in Mexico. While these processes were slowly going on, something big happened on the American side.

"Mr. Zhong, something big happened. Orange County (Orange County) in Los Angeles declared bankruptcy!" On December 6, when Zhong Shi was checking the preparations of various aspects within Tianyu Fund, Maxim suddenly slammed Pushing open the door, he said excitedly.

  Orange County is a county located in California on the west coast of the United States, and it is also a fairly wealthy county. The name of this county comes from oranges, the main local crop. In fact, there are several other names like Orange County in the United States, but the Orange County in California is the most famous because the public funds of this county lost in the investment derivatives market. It was miserable, and eventually the entire Orange County was declared bankrupt.

Seeing that history is still proceeding according to the original process, Zhong Shi secretly heaved a sigh of relief from his heart. After pretending to be shocked, he pretended to ask again: "What Orange County went bankrupt? Mark, are you right?" Be clear!"

Maxim hurried to Zhong Shi's desk, took a big gulp from the paper cup on the table, and then panted and said, "Mr. Zhong, it's like this. The news from the US is that Orange County government funds have suffered huge losses in investing in bond derivatives, and the amount disclosed so far is a loss of at least US$1 billion. It is said that holders of public funds have begun to demand redemption of their shares in November, but the funds have not Sufficient funds were able to be raised in a timely manner. And it is said that the brokers have also started to ask the funds to call for deposits, so the local government announced to seek bankruptcy protection, so that the government has enough time to deal with this incident.”

It must be explained that in the United States, if a bankruptcy protection is applied for, the creditor has no right to continue to recover the debt, and must wait until the corresponding department has inventoried and auctioned all the assets of the bankruptcy applicant before repaying according to the corresponding procedures and order . In this process, if the legal procedures are followed, those creditors who are lower in the order are very likely to get nothing.

For example, if a listed company goes bankrupt, the funds obtained from the auction of their assets will be given to employees, guilds, banks, etc. in accordance with the legal order, and finally it may be the turn of investors to buy their stocks, which often does not reach this stage At the time, all the funds had been distributed, and in the end these shareholders had nothing to gain.

   Now that Orange County has declared bankruptcy, it is precisely because of this consideration that the Orange County government and their public funds now need time to deal with debt matters.

   "What did they invest in, and how did they lose so much?" Zhong Shi was not interested in bankruptcy protection. What attracted him most about the whole thing was how this government fund lost so much. Logically speaking, the strategies of general public funds are very safe, because the nature of funds determines their investment style, and the aggressive risk-taking style is definitely not in their interests.

Although Zhong Shi had heard about the bankruptcy of Orange County before reincarnated as a human being, he did not pay too much attention to the news at that time. Firstly, the broker of this public fund was Merrill Lynch, and their Morgan Stanley At that time, the entire Morgan Stanley looked at this matter with a mentality of watching a joke. In addition, he was still a low-level employee in the fixed income department at that time, and his area of ​​responsibility was somewhat different from that of the more traditional bond trading department, so it was normal for him not to know the inside story.

"I heard that it is a thing called a reverse interest rate bond, and this public fund has also used high leverage. It is said that it has more than doubled, and it holds a total bond position of nearly 20 billion US dollars." Maxim finally recovered from extreme excitement. After regaining his composure in the state of being in a state, and taking another sip of water, he said unhurriedly.

"Reverse interest rate bonds?" Zhong Shi suddenly felt that the name was familiar, as if he had seen it somewhere before. He frowned and thought for a while, and finally realized that he had also come into contact with a contract whose target was interest rate return bonds. It was Merrill Lynch's broker who came to sell it, but he didn't buy it at the time. "Someone sold this kind of bond to our fund before."

  Maxim froze immediately, opened his mouth wide and couldn't speak for a long time. Seeing his appearance, Zhong Shi couldn't understand what he was thinking, he couldn't help but smiled, and patted his chest proudly: "Of course I didn't buy it, otherwise we would have gone bankrupt by now !"

  Maxim, who told Zhong Shi that he had broken his mind, just laughed. He scratched his head in embarrassment to cover up his embarrassment, and then asked, "Mr. Zhong, how do you think things will develop?"

"It's hard to say!" Zhong Shi's face immediately became serious, "If I'm not wrong, this public fund has fallen into someone else's trap. I believe they have other conditions attached to the reverse-rate bond contract. It was this string attached that led to the bankruptcy of the Orange County government, otherwise a mere $1 billion loss would not have caused a wealthy county government to declare bankruptcy protection."

The fact is exactly the same. After experiencing huge losses, the manager of this public fund discovered that in the contract signed with the broker, there was an automatic extension for two years, and during this year, the The public fund has lost more than US$2.2 billion in funds. If it is extended, the risk of future losses is very likely to cause the public fund to lose all its money.

Maxim discussed with Zhong Shi for a while, and then he bid farewell to leave. He also had to analyze the impact of this incident on the US financial system and the impact on the business of some brokers, which meant a lot of money. short selling opportunities.

After Maxim left, Zhong Shi thought about it carefully, and finally came to a conclusion that made him feel very scared, that is, investment must use its own funds to the maximum extent, and try to avoid high leverage, especially In the case where the broker strongly advocates lending, the leverage ratio should not exceed a certain coefficient, preferably 2. Because of this, even if it is a loss, it will eventually be able to repay the broker's debts.

For a public fund like Orange County, if it weren’t for the trap in the contract, coupled with the fact that the brokerage company no longer provides liquidity and requires additional margins, this public fund would not be in a situation of extreme lack of liquidity . If there is no lack of liquidity, then this fund may make a comeback, instead of being chased by investors to redeem it like it is now, and the brokerage company also took the opportunity to make things worse and use the conditions far below the valuation to acquire the current fund. portfolio.

   At any time, maintaining sufficient cash flow is king!

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  (end of this chapter)