Up to now, Barron's entire layout for the subprime mortgage crisis includes three parts: North America, Europe and Asia.
In North America, the subprime mortgage bond market, which is the source of the subprime mortgage crisis, and the related real estate and financial industries are directly targeted by the Wall Street fund he acquired, the Black Swan Fund.
Since the second half of last year, the Black Swan Fund has successively received $4.1 billion in funds from IC Capital and Blue Valley Capital. Through the early long investments in subprime mortgage companies and related debt products, it has successfully increased the value of these funds to more than $5 billion.
After that, they began to short related products.
The most profitable part here is shorting subprime mortgage debt CDO and purchasing subprime mortgage swap default products CDS.
For example, shorting CDO means that the Black Swan Fund directly signed a bet agreement with the issuers of the bonds, that is, the big investment banks on Wall Street, "borrowed" CDO bonds from them and sold them, and then waited until these bonds fell to the price of waste paper and bought them back...
At that time, the real estate market was still hot and housing prices were still rising. This kind of short-selling behavior seemed to be completely "seeking death", so those institutions were very happy to have someone give them money for free.
Now Black Swan Fund has signed CDO betting agreements with a long list of "giants" including Merrill Lynch, Citigroup, Lehman Brothers, UBS, Deutsche Bank, Goldman Sachs, etc., with different amounts of funds involved, ranging from nearly 10 billion to 1 billion US dollars. Because these investment banks are in a competitive relationship, and will keep their customer information and investment trends confidential, so in fact they just think that there is a "dizzy" fund company that is betting against them and giving them money...
They never thought that this fund company was not "dizzy", but directly crazy, and bet with almost all investment banks involved in CDO business in the market.
It must be said that among them, although Goldman Sachs is known for its greed, it is also the most cautious one. The betting agreement they signed with Black Swan Fund is the one involving the least funds, only 1 billion US dollars.
As for the credit swap product CDS of subprime loans, not only was the price very low at that time, but also because of its form, it can exert great leverage, so the scale of funds involved in the CDS held by Black Swan Fund is even larger.
Speaking of subprime loan CDS products, in fact, they are a kind of insurance product, which generally pays premiums every six months with fixed terms.
For example, the Black Swan Fund can purchase a 10-year credit default swap product for subprime mortgages worth $100 million at a price of $500,000 per year.
So, the total premium that the Black Swan Fund should pay is $5 million for 10 years - if these subprime mortgages are repaid on time and no default occurs within 10 years, then their $5 million is equivalent to paying the premium, and the insurance company earns it for nothing.
But if a subprime mortgage default occurs during these 10 years, then the Black Swan Fund will receive $100 million in compensation from the insurance company.
Therefore, you can simply think of this as a bet. One party believes that these loans will not cause defaults, and you take out 10 years of 5 million funds to participate in the bet. If the other party succeeds, you pay him $5 million, and if the other party fails, you get $100 million.
Of course, these figures are just examples. In reality, premiums and compensation are priced according to the credit rating of those subprime loans. The premiums of CDS bonds corresponding to 3A-rated CDO bonds are definitely very different from those of 3B-rated bonds. This is
because 3A-rated CDO debt is "considered" to be high-quality debt, and the possibility of the other party defaulting is extremely low, so the corresponding premium is low. But in fact, many of these 3A-rated CDO debts are just packaged to look low-risk - Wall Street has many ways to package them, making it difficult to tell the difference.
The Black Swan Fund has hired some people to conduct in-depth research on these related debts, so as to find out the types with the highest probability of default among the 3A-rated CDS debts that can make higher profits, in order to increase the final return.
And you should know that these premiums are paid in installments. If a 10-year CDS bond defaults in the first year, you only need to pay one year's premium to get the final compensation. According to the previous example, a total of $5 million in premiums should be paid for a $100 million mortgage for ten years, but if the subprime mortgage crisis breaks out within a year, then they actually only pay a one-year premium of $500,000.
This is equivalent to adding an additional leverage on top of the original leverage. As long as the time of the subprime mortgage crisis does not change, this is a ten-fold leverage with no additional risk at all!
The most interesting thing is that, also because of Wall Street's greed, in order to increase the supply of the CDS debt market, they do not simply correspond one CDO product for a mortgage to one CDS product, but often one CDO product corresponds to three or even more CDS products.
Simply put, if a house with a loan of $1 million cannot be recovered, the insurance company normally pays the $1 million.
But they have invested three insurances on the mortgage loan of this house, so that if the loan cannot be recovered, then these insurance companies will have to pay a total of $3 million!
Now you know why the US government wanted to help the market when the subprime mortgage crisis occurred. According to their way of playing, if the government does not come forward, the entire financial system, including banks, insurance, and stocks, will all be finished.
It has to be said that Wall Street is indeed a gathering place for the smartest people in the United States. They use various carefully designed financial products to make profits and play with financial derivatives.
But at the same time, because they are too smart, those complicated financial products quietly gather a lot of capital investment, and also accumulate huge risks, tying the global financial industry to this big ship heading for the iceberg.
In addition to investing in CDO and CDS, Black Swan Fund also made layouts in the stock market - there is no way, they certainly cannot invest all of this amount of funds in CDO and CDS, because when the subprime mortgage crisis came, the funds that those investment banks and insurance companies can actually pay are limited, that is, the amount of funds they are involved in now, there must be a considerable part of the compensation funds, which need to be negotiated with the other party.
In this case, even if you make more money in these places...
I am afraid that you can only get back this part of the funds, so there is no need to waste the principal investment.
So they invested all the remaining funds in shorting the stocks of related companies and banks.
Once the subprime mortgage crisis broke out, it was normal for the stocks of companies that issued subprime loans and many related banks to plummet by 90%, and many even went bankrupt directly.
Therefore, shorting these stocks will also bring huge profits to Black Swan Fund.
In fact, the Black Swan Fund only accounts for a part of the short selling in the US stock market.
The main force of short selling in the stock market is still being carried out by the New York branch of DS Group. They invested a total of US$5 billion in this short selling!