But is this really the case? Wall street, which pursues "wolf nature", actually has a premonition of the bubble that is about to burst.
"Under the background of the economic stimulus in the United States for more than ten years, if there is too much money in the market, there will be a crisis, but it is just a matter of’ bombing’ on real estate or’ bombing’ in other places," said Dong Jun, who experienced the thrilling subprime mortgage crisis.
Precursor of crisis: there is CDO square on CDO.
In 2007, 30-year-old Dong Jun was working as a portfolio manager on Wall Street, working for Bank Hapoalim, one of the largest banks in the Middle East. Born in Yunnan, he went to the United States for postgraduate study after graduating from university. After graduating in 2003, he first worked in a German bank, NORD/LB. Two years later, he joined the Workers’ Bank of Israel as a trader, and together with another American investment manager, he managed a $4 billion plate, with more than 20 mainstream brokers, including Lehman Brothers, which closed down in the crisis.
Dong Jun, who worked on Wall Street.
From graduation in 2003 to leaving Wall Street in 2009, he was engaged in MBS (mortgage-backed bonds) trading, and MBS and the more complex asset securitization portfolio CDO (collateralized debt obligation) were the fuse of the subprime mortgage crisis. And this period of his work cycle just witnessed this financial product from the wind and fire to become the target of public criticism.
Here, we need to explain what MBS and CDO are respectively-
MBS(Mortgage-Backed Security (MBS) came into being in the United States in 1960s, and its inventor was Lewis Ranieri, the founder of Franklin Bank. MBS pools different mortgage loans to form a "pool", and then issues securities with its expected principal interest.
CDO (collateralized debt obligation) is a debt bond mortgage product. All mortgages are packaged together, repackaged and put on the market in the form of products. It can be understood that MBS is a mortgage portfolio, while CDO is a bond portfolio. CDO is a more complex product based on MBS, which is packaged and then packaged.
On this basis, the more complex structure is called CDO, and some financial derivatives such as swaps and financial futures are packaged into CDO. Dong Jun said that the most confusing derivative is CDS.
CDS(Credit Default Swap (CDS) is the most common credit derivative product in foreign bond markets. In the credit default swap transaction, the buyer of default swap will pay a certain fee to the seller of default swap on a regular basis, and once the bond subject cannot pay, the buyer of default swap will have the right to deliver the bond to the seller of default swap at face value, thus effectively avoiding the credit risk.
"CDS is actually an insurance. For example, I bought a MBS from you, and I am worried about the risk of MBS. I will buy an insurance from another person and pay this third party a certain amount of insurance money every month. The contract states that if your MBS defaults, the third party will pay," Dong Jun explained.
From the above analysis, we can see that CDS itself does not generate risks, but it will transfer credit risks. In the movie "Big Short", it is the credit derivative CDS that shorts the real estate market. This kind of derivative has less investment and high leverage. However, the real financial world is more complicated, and this kind of CDS that can be traded by anyone outside the market will also be packaged into CDOs to hedge risks.
"At that time, the market was very crazy. After the CDO was repackaged, it was called’ CDO Square’, which means CDO Square. A CDO may be packaged in several layers, and investors could not see exactly what was at the bottom, and there was no model to simulate it. Everyone finally became a pure digital transaction," Dong Jun recalled.
Crisis foreshadowing: junk debt parasitic on ARM
Pure digital games themselves will not trigger the economic crisis. What is terrible is that mortgages, as the underlying assets of these CDOs, are "junk debts".
"In the economic stimulus of the United States in the previous decade or so, the Greenspan era kept cutting interest rates and increasing leverage, which made the money on the market particularly easy to borrow. Many people borrowed money to buy houses. These people who bought houses did not have enough credit, but financial institutions felt that you had a house as collateral anyway, so they dared to lend them money, because many people could borrow money to buy a house, the price of the house was also raised, the leverage was increasing, and the liquidity in the market was particularly sufficient. Financial institutions all over the world are constantly buying these creditor’s rights on Wall Street and supplying them with blood. The economic stimulus in the United States for more than a decade has made this market have too much money, and when it is too much, it will be worthless, "Dong Jun said.
In extreme cases, as shown in the movie "Big Bear", country strippers can borrow money to buy several villas and apartments at the same time, with almost zero down payment. Banks simply don’t care whether ordinary wages can afford these houses. Anyway, they can change hands to package these debts into MBS and CDO, and there are many people who want to pay the bill.
But like the dancer mentioned above, isn’t she worried that she can’t afford the house?
"At that time, mortgages were set very aggressively, especially ARM(Adjustable Rate Mortgage)," Dong Jun mentioned.
Different from the fixed-cost mortgage, ARM’s interest rate can be adjusted. Originally, this setting was only to adapt to the bank’s interest rate environment, but when the lender was eager to earn the difference between the loan and the sale to financial institutions, it was made into a radical product—for example, no interest was paid in the first 12 months, and the cost was pushed to 12 months later. At this time, lenders will take the "American Dream" as the theme, and take three assumptions as the guarantee of repayment of principal and interest to persuade people to buy as many houses as possible and buy as big houses as possible.
These three assumptions are: income will rise in the future, interest rates will not rise in the future, and the real estate market will continue to prosper in the future.
As a result, everyone saw it.
Then why did the subprime mortgage crisis break out in 2007?
Dong Jun said that around 2007, the general interest-free period of loans ended in 12 months, and the United States began to raise interest rates after experiencing inflation. "The loans that expired in the 12-month interest-free period originally only paid 500 dollars. At that point, the monthly payment suddenly became 1,000 dollars, which was completely impossible to pay back, so it was’ bombed’ and many loans were concentrated at that time. The default rate of an ABS underlying asset jumped from a few percent to more than ten percent, which is very scary. "
But this alone is not enough to create a subprime mortgage crisis. After all, the subprime mortgage of the blue-collar class only accounts for about 5% of all loans in the United States.
What is terrible is the gambling financial derivatives.
Between 2000 and 2007, the United States relaxed financial innovation, and the market liquidity was too abundant. When the money could not be invested in MBS, it went to invest in derivatives and gamble on creditor’s rights. For example, CDS, A and B can sign a contract, and so can B and C. The risk of the same loan is magnified more than ten times. Even if only 5% of the people with poor credit default, the value fluctuation of CDO and CDS will soon be amplified with the butterfly effect, and the US financial market will begin to collapse.
"The culture of Wall Street in the United States is a wolf culture, which is not good for risk control. Why are there so many problems? At that time, many people who worked thought that the loss was the company’s, and the gain was their own. It was entirely a sales culture, which encouraged everyone to take more risks and try to design more products, "Dong Jun commented.
On July 31, 2007, due to the subprime mortgage market crisis, two funds of Bear Stearns, the fifth largest investment bank in the United States, closed down, resulting in a total loss of more than $1.5 billion for investors. WarrenSpector, the company’s co-president and co-chief operating officer in charge of this business, resigned the same day. This point in time is called "Bear Stearns moment", and the death knell of the financial crisis rings.
When the crisis is going on: CDO is transferring at zero yuan.
"I have always realized that something is going to go wrong. The real obvious feeling is one or two months before Bells is logged out. The most obvious feeling is that the business can’t move," Dong Jun told The Paper.
Dong Jun said that at that time, it was found that when the creditor’s rights in his hand were sold, others would lower the price a lot, the transaction cost was high, and the market liquidity began to dry up. For example, when a product was bought in 100 yuan, it was only sold in 60 yuan, and "some CDOs were even transferred at zero yuan in the market".
In this case, the total plate of $4 billion managed by Dong Jun can’t be moved at all. Selling it will definitely reflect a very high loss in the account, and buying it is not a good time. Previously, it was normal to buy and sell 20-30 million dollars every day.
The crisis is more serious for sellers, market makers have no transactions at all, and many investment banks and brokers have been fired.
"Being fired in the United States is a terrible thing, including people who work abroad in the United States. Generally, they have a lot of debts, especially mortgage and car loans. This is the living habit in the United States. As soon as they graduate from college, they start to provide your house and then buy a car. In fact, the whole Wall Street was pretty bleak at that stage, "Dong Jun said. At that time, all the China people he knew on Wall Street had basically returned to China, and some of them were laid off or took the initiative to choose. It is normal to be laid off, because the company is unwilling to bear the extra cost of helping foreigners apply for work visas and green cards.
However, he also mentioned that in fact, the elite of Wall Street had long thought clearly about the crisis caused by the early excess liquidity, and they also thought thoroughly during the crisis, so they felt that the next whole event happened naturally.
In March, 2008, the Federal Reserve decided to rescue Bear Stearns-providing funds for JPMorgan Chase to buy Bear Stearns at a total price of about $236 million.
On September 15th, 2008, Lehman Brothers, which had survived the Great Depression in 1929, suffered huge losses and filed for bankruptcy protection.
For the Fed’s "favoritism", the Wall Street insider feels that there is some truth. First, it can’t be saved. Secondly, saving Lehman Brothers will send a wrong signal to the market. In addition, there are more important institutions to save-such as AIG (American International Group) must concentrate on fire rescue. "After the arm is broken, let everyone see the seriousness of this matter and convince the decision-makers to save more core companies."
Crisis follow-up: Another round of "subprime mortgage crisis" occurred in China.
During the crisis, the Israeli Workers’ Bank sold $4 billion of assets managed by Dong Jun to PIMCO (Pacific Investment Management Company), the largest fixed income fund in the United States, and its head was the legendary investor bill gross, who was known as the "king of bonds". Dong Jun wanted to resign and go back to Asia at this time. Originally, JPMorgan Chase invited him to go back and still be in charge of MBS business. The position he gave was very good, but this road was rejected because of the subprime mortgage crisis. In this sense, the subprime mortgage crisis also changed his life direction.
After the financial crisis broke out in an all-round way, he chose to go back to China to start a business and founded a guarantee company called Hengxin Yuehua. However, this company did not go well and met the China version of "subprime mortgage crisis".
He described the guarantee products of his startup company as similar to CDS. Compared with the strict requirements of the United States for buying and selling insurance, China had flexible supervision at that time, and many banks in China could not control the risks, so guarantee companies came into being.
However, it was unlucky. During the global financial crisis, the China government put forward the "4 trillion" plan, and the market liquidity was excessive. Banks kept taking out money. Some enterprises with insufficient qualifications borrowed money and found companies with insufficient qualifications to provide guarantees. The guarantee companies with insufficient qualifications magnified the leverage by ten times or more. By 2010 and 2011, the "small subprime mortgage crisis" also occurred, and the guarantee industry was almost wiped out, and Hengxin Yuehua also followed.
"I experienced two subprime mortgage crises in my career," said Dong Jun, calling that entrepreneurial experience "an interesting opportunity when I was unfamiliar with the China market".
In 2013, Dong Jun founded a financial technology company, Building Block. In 2016, it was split into Building Block Puzzle Group and Pinti Group. In the C round of 2015, he received $84 million in financing from Xiaomi Technology and other companies.
If the subprime mortgage crisis in 2007 taught him anything, he said: "Financial services are not a game of speed. Companies willing to do it here have opportunities. The biggest enemy is yourself, not the market, not competitors. Dumping is not because of competition, but because of yourself. If we look at it more broadly, basically no big financial institutions have fallen out because of competition. "