I strongly support to read the original text, the original address: http://i.mtime.com/dresslessleep/blog/7938159/
In addition, I also recommend "Big But Not Falling", "Guardian Steal", "Social Network", "Benefit Storm"
The script of "Big Short" is derived from the book The Big Short of the same name by the famous American financial journalist Michael Lewis. If it is literally translated, it should be "a large-scale short-selling operation." This is undoubtedly the most exciting moment in the hedge fund industry. Michael Lewis has a long-standing reputation in the industry, so I bought this book as soon as it was published. After reading it, I feel that this is the best book to interpret the financial crisis at a micro/detail level. If you are interested, you don't need to buy a book to read it, just go to the movie after reading this article! ^.<
In December 2008, I received a text message on my mobile phone. It must have been forwarded a million times:
A year ago, Royal Bank of Scotland bought ABN AMRO for US$100 billion. Today, the same amount of money can be used to acquire Citigroup (22.5 billion), Morgan Stanley (10.5 billion), Goldman Sachs (21 billion), Merrill Lynch (12.3 billion), Deutsche Bank (13 billion) and Barclays After the bank (12.7 billion), there are 8 billion dollars left... With this change you can buy General Motors, Ford, Chrysler and Honda F1 teams.
At the beginning of his book "Ten Years of Reincarnation", the chief economist of the World Bank and Malaysian Andrew Shen wrote such a memorable passage for all people in the financial world.
However, the impact of the subprime mortgage crisis goes far beyond that.
Just as the "Great Depression" led to the collapse of the gold standard, the regression of the first globalization, and the rise of fascism, the major global impact of the subprime mortgage crisis has just begun.
Europe is facing a European debt crisis. Iceland has gone bankrupt. The unemployment rate in Spain and Greece is 25%, and the unemployment rate among young people is as high as 50%. Greece also faces a very large risk of exiting the euro zone, and even the final collapse of the euro zone is not impossible.
The Middle East and North Africa are struggling. Due to the continued economic downturn, anti-government movements erupted in Tunisia, Egypt, Libya, Yemen, Syria and other countries, namely the "Arab Spring", which directly forced many leaders to step down and the country's political situation fell into violent turmoil.
Russia’s economy collapsed, and it was desperately trying to use force to push the price of oil up...
Brazil and Argentina were struggling to extricate themselves in the quagmire of severe inflation and capital flight/currency devaluation.
Japan is pursuing an unprecedented expansionary economic policy. Abe has even revised the "Peace Constitution", and Japanese militarism is showing signs of revival.
China has accumulated unprecedented real estate bubbles and local government debt problems, and the crisis seems inevitable.
India has had an inflation rate of more than 10% for 7 consecutive years, and its economic development model has encountered serious challenges.
……
Many movies suggest that the financial industry is an industry that does not create any wealth, as if it is a parasite to the entire society. This is very wrong and outrageous.
In this article, let us start talking about the role of the financial industry in society...
The contribution of the financial industry to society is enormous. Just as I wrote in "Don’t Misunderstand Socialism", it is precisely because of the operation of finance, the existence of the stock market, that Western countries have been able to learn from Marx’s writing in the 19th century. The original capitalist system was transformed into the semi-capitalist and semi-socialist system of today. We might as well take Jobs as an example. If the current economic system of the United States continues the traditions of the 19th century, then Jobs is likely to be the richest man in the history of this planet. The reason is simple. Apple has been named the world's most profitable company for many consecutive years. At its peak, it reached a net profit of 50 billion US dollars a year. Although it dropped a lot last year, it still had 39 billion US dollars. However, we found that Jobs only left a fortune of $8.6 billion when he died. Why is this happening? The reason is that Jobs is not a capitalist at all. Apple does not belong to him, but belongs to all shareholders-the most ordinary American people (in fact, anyone can buy Apple shares and receive cash dividends, not limited to the United States. citizen). I wrote a lot about how the West completed this great historical transformation in "Don’t Misunderstand Socialism", so I won’t repeat it here, but we must be clear about the basis of this transformation, that is, the operation of the financial industry. . If there is no financial industry, then we are probably still in the capitalist society described by Marx in the 19th century.
Here is a problem. In this case, why did Jobs make Apple go public after he founded it? Why not take it as his own as John Rockefeller did, and then take Rockefeller and replace him as the richest man in human history?
The reason is that he can't do it. If he doesn't do this (to go public), then the company of the person who does this will develop rapidly, leaving him and Apple far behind. The best of these people is undoubtedly Mr. Bill Gates.
In 1983, a very smart young man invented a product that could change human life. He was only 28-year-old Bill Gates and his just-designed Windows operating system.
If there is no financial industry, then Mr. Gates will only be able to sell it to a small group of customers (not enough marketing team and financial resources to advertise), and then expand the business bit by bit, just by earning Of cash to recruit more employees.
However, in 1986, Microsoft completed its listing on the NASDAQ stock market and raised a large sum of money. This money helped Microsoft grow from a small regional company to a multinational company. In this way, in just a few years, users all over the world have used Windows, an excellent operating system. The result is obvious-people's living standards have improved, and Mr. Gates has received the wealth he deserves.
If there is no financial operation involved, this process may be delayed by 10 or even 20 years.
For those who bought Microsoft stock in the past, they were "turning current income into future income, but the future income will be more." Since its listing, Microsoft's stock price has risen more than a thousand times. Most people who bought stocks are now millionaires.
For Mr. Gates and Microsoft, it is "turning future income into current income, thus changing the future!" With more funds invested in research and development, Microsoft products can be quickly updated. This process has even changed the way of life of most human beings.
Of course, the contribution of the financial industry goes far beyond that. It also has another extremely important function-asset management, which involves another financial field outside the stock market-the insurance industry. What do you think is the realization of universal medical care in the West? Could it be that the government directly uses cash to pay for each citizen's medical expenses? of course not. The fact is that the government purchases medical insurance for every citizen, and how to use the government’s money to pay for citizens’ medical expenses is the insurance company’s business. Through financial operations, insurance companies can finally solve big problems (universal medical care) at a very low cost (premium). What about pensions? Same thing too. The balance of pension funds in the United States accounts for 65% of the world's total, exceeding US$18 trillion! And China’s pension balance is only 3 trillion yuan... I wrote about the reasons why Americans don’t save money in the article "Ji Debun Yu Yu Bao" (the savings rate was once as low as-1% in 2005) , Because they only need to spend an average of 20% of their monthly income to buy insurance. What else do they save? Therefore, Mr. Chen Zhiwu wrote in the book "Which one I forgot": The reason why Chinese people are hardworking and not rich is that the financial industry is too backward. I believe what he meant is that we neither have an efficient stock market that can legally and reasonably distribute the wealth of capitalists to ordinary people; nor do they have a reliable insurance system to allow ordinary people to worry-free in the process of life.
Next, let's talk about the subprime mortgage crisis!
Suppose it is 2001, and you want to buy a house worth $1 million in the United States. Not many people can afford to buy a house with cash, so you decide to use a loan. How much will an American bank or similar credit institution lend you? —— 1 million, or even 1.05 million, even the money for insurance is also loaned to you.
(The reason why you don’t need a penny down payment is not because many people think that the U.S. financial industry is irresponsible, but because the U.S. is a credit society. In the U.S., consumption is basically taken first and then paid. Even though Americans don’t have a hukou In this book, everyone has a thing called "credit score", so no matter whether it is a bank or a business, you will not be afraid that you will not repay the money after you borrowed it or you will run out of debt after you take something. Because of credit If the points are high, you will find that everything you buy will be much cheaper (it will be about 5% ~ 20% cheaper than others), and if the credit points are low, you will not only buy things more expensive, but also you will not want to borrow money anywhere in the future NS).
The money that these banks or credit companies lend to you is called a housing mortgage (Housing Mortgage). If it is in China, then the matter will end here. But American banks are very smart. They don't want to wait 20 years to recover these funds, so they sold these loans to other financial institutions in the form of MBS (Mortgage Backed Security) mortgage securities.
What does that mean? For example, suppose I am Bank A. I borrowed US$10 million to buy a house for some customers. So I now have mortgage assets of US$15 million (with interest), but these assets will be divided into 20 years. I don’t want to wait that long, so I sell it to you in the form of MBS, another financial institution B, which may cost 11 million US dollars (the price is determined by the prevailing market interest rate). For you, you used today's 11 million US dollars in exchange for 20 years of 15 million US dollars in cash flow, so you are satisfied! For me, I made a net profit of $1 million as soon as I changed hands, which is of course satisfactory.
When I, Bank A, sell the MBS to you, you will have the ownership of the cash flow (the principal and interest paid by the lender each month) behind these MBS, but I will still help you collect money from the person who borrowed money to buy the house , And then transfer the received money to you. In this process, I am the Servicer and you are the Owner.
This magical process is called securitiesization!
Such a process is essentially different from the traditional Chinese model, that is, the risk of default by the lender has been transferred.
In the traditional model, if the person who borrowed to buy a house defaulted, the bank would suffer a lot of losses. Under this securitization model, if the former defaults, the person who suffers losses will no longer be Bank A, because it has sold the ownership of these loans (in the form of MBS) to another financial institution B. Therefore, the person who suffers a loss becomes B who bought these MBS.
So who is this so-called other financial institution B?
In the real estate mortgage securities market, nearly half of MBS are sold to the famous Fannie Mae & Freddie Mac-Fannie Mae & Freddie Mac. On the eve of the subprime mortgage crisis in 2007, the total amount of MBS issued by them was as high as 4.4 trillion US dollars.
However, they are only intermediaries. After Freddie Mac and Fannie Mae bought these MBS, they did not intend to hold them to maturity (20 years later), but would resell them to the world-the government ( Sovereign wealth funds), banks, hedge funds, insurance companies, pension funds, individual investors, etc.
In this case, a complete chain of capital flow is formed-from the homeowner who buys a house with a loan to investors all over the world.
This is equivalent to the fact that investors all over the world are "funding" the American people to buy houses. Therefore, since 2001, housing prices in the United States have risen at a rate never seen before in history, and the bubble was born.
Since Freddie Mac and Fannie Mae are semi-nationalized enterprises, they are subject to strict supervision. They can only buy the best quality, or the real estate mortgage securities MBS with the lowest default rate, from banks.
So how do they tell which MBS is high-quality and which are inferior?
This is about the role of the three most powerful companies in the global financial industry-the three major rating companies. Rating companies are responsible for rating most securities (including MBS) traded on the market. The basis of the rating is the original data of the borrowers behind these MBSs. For example, I, Bank A, want to issue a 20-year MBS worth 10 million U.S. dollars, so how do I price it? 8 million, or 9 million? At this time, I have to find a rating company. They will be based on the borrower's information provided by me, such as their credit scores (I mentioned this one of the most important things about living in the United States, remember?); the ratio of personal/family assets to liabilities; And the ratio of the amount of the loan to be repaid each year to the annual income (generally not more than 40% in the best class).
Based on this information, the rating company will give the MBS a rating, such as AAA, which means that the rating company believes that the default rate of this security is very, very low, and the risk of investing in this bond is very low. Or C-level, also called "junk-level", such as the current Greek national debt, the risk of defaulting on investment in this type of bond is very high. Buying 10 million US dollars of AAA-level MBS may cost 9 million, while purchasing the same amount of C-level MBS may only require 6 million. Of course, the higher the rating, the more expensive it will be sold.
MBS purchased and sold by Freddie Mac and Fannie Mae (they are like distributors of MBS) must have a rating of B+ or higher, which means they must be "Prime Loan" (Prime Loan). If this is the whole story, then there will be no "subprime mortgage" crisis.
As MBS distributors in the market, there are not only Freddie Mac and Fannie Mae, but also famous Wall Street investment banks.
Investment banks (Citi, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns, Morgan Stanley, JP Morgan Chase, etc...) have found that since 2001, housing prices in the United States have been in a steady upward period. So they speculated that even if they find someone with bad credit to lend, there will not be a big risk, because even if they encounter a default, they only need to take back the house and sell it (Mortgage Loan Securities MBS, as the name implies The house is mortgaged).
So they began to unite banks and credit institutions to issue more "subprime debt," that is, they began to provide loans to people with poor credit.
What about banks and credit institutions that issue loans? As explained earlier, due to the process of securitization, they can transfer the risk of these MBS defaults to the investment banks that have purchased these MBS, so why not do it? The more the better!
Therefore, the sub-prime loan or sub-prime MBS in the "subprime mortgage" crisis was born.
Let us see the whole process more clearly in the form of an icon:
Okay, now we can talk about the movie.
In this entire securitization chain, which link is the most critical? Undoubtedly, it is the credibility of people who borrow to buy a house. The most critical thing is whether they can repay the mortgage to the bank as scheduled, and then the bank will pass it on to investors around the world.
And when we understand the entire securitization process, we will think that whether it is a bank or a credit company, there is an incentive to lend to people with very poor credit ratings, and ultimately these people with very poor credit ratings It is very likely to default. If the facts are as we think, then the collapse of the entire securitization chain in the future will not be impossible.
Bell (Dr. Burry in the film), Commander High (Vennett in the film), and Mark in the film (starring Steve Carell) also think so.
The film focuses on how Bell and Mark investigate.
Bell is in front of the computer to read the original information of the borrowers behind MBS. Because he is a hedge fund manager and he is a buyer, he has the right to request the seller (investment bank) to provide these information. It is conceivable that reading these materials is very tedious. Bell carefully read dozens of such materials, and roughly browsed hundreds of them (each with hundreds or even thousands of people's information). In the book, Michael Lewis wrote: Dr. Burry believes that he is the only person on this planet who reads these documents besides the lawyer who drafted them.
(This explains a question asked by a friend in the comment: Wouldn’t these financial institutions or investors look at the original information of the borrower? Obviously, the information is there, but no one wants to It takes time to look at them, because there are rating agencies... The role of rating agencies will be discussed later)
In the process of reading these materials, Bell was surprised to find that in most of the materials he has read, 50% of the borrowers are There is no information! In other words, less than 50% of the people provided income certificates, property certificates, credit scores and other information, while the remaining more than 50% have no information at all! what does this mean? It means that these people are not completely ineligible for loans, it means that the bank did not ask them to provide any information when lending!
So how did Mark investigate? Mark's approach is to visit the front line directly to see how banks and credit companies issue loans. There are two scenes in the movie: First, when Mark asks the tenant XXX (the owner of the house) of a house if he is at home, the tenant tells him that it is the name of a dog, the name of the owner's dog! In other words, the bank loaned a dog! I don’t know if this is a real thing... But in April 2007, when the New Century Loan Company went bankrupt and the first domino of the subprime mortgage crisis fell, people’s description of the New Century Loan Company was indeed "it Even lending money to a dog." I wonder if the director got inspiration from this. The second scenario is when Mark asked the agent of the bank responsible for lending to the borrower "has ever refused anyone's request for a loan to buy a house", and the answer was: "NO" ~
(A few more words, it's really amazing All of the investors do this kind of thing, and they go to the front line to find first-hand information. If you just look at the financial statements that everyone reads every day, how can you listen to the news that everyone listens to every day? Is it faster than the market’s reaction? After buying MasterCard stocks, Buffett went to the supermarket counter to count how many people used MasterCard credit cards. One stop was a day; after buying stocks in oil companies, he went to the train station to count oil. Tanker.)
Remember before that although the original information of the borrower is there, investors will not look at it? Where is the reason? Because the rating companies will read them, they will rate these MBSs after reading them. Investors only need to judge the risks of these securities based on the ratings. Since John Moody founded Moody Ratings in 1902, this model has worked well for nearly a century. Who would have thought that something would go wrong this time? (One of Moody’s major shareholders is classmate Warren Buffett, and Moody’s business model is hailed by Buffett as the most successful in history.)
So what’s wrong with a reliable rating company?
The answer given in the movie is this: When Mark and his team took the MBS information they collected, which contained a lot of information about the borrower, to question Standard & Poor's (one of the three major rating companies), why did they give this? When MBS rated AAA (the highest level), Standard & Poor's said this: If we don't give these MBS ratings AAA, these companies will go to Moody (S&P's competitor).
I'm afraid this can only be regarded as an exaggeration of film art... Not to mention the reason why the people of Standard & Poor's speak the "truth"... If this is the truth, wouldn't all the bonds in the world be destroyed? Is it rated AAA?
So what might the fact be? Michael Lewis gave some explanations in the book "The Big Short":
On the one hand, the bond traders of Wall Street Investment Bank are some people with 7-figure annual income, and they coax the guys with 5-figure annual income ( Employees of rating companies) are more than enough. In fact, the best employees of rating companies have all switched jobs to investment banks to help their new owners deal with their old ones.
For example, the FICO score is used to measure the credit value of personal borrowings. The highest score is 850 points and the lowest score is 300 points. The median in the United States is 723 points. The method used by Moody and Standard & Poor's is to use the average FICO score of all borrowers in an MBS. For example, the average FICO score required by the AAA rating is about 615 points. Investment banks look for half of the borrowers with 550 points and half of the borrowers with 680 points, and then (purposefully) put them in an MBS, so this MBS It can be rated AAA. In fact, a borrower with a score of 550 is highly likely to withdraw. Typically, there are policies and there are countermeasures...
On the other hand, Michael Lewis wrote in the book that when a fund manager asked why the rating company would rate the MBS, which was obviously unreliable, AAA, the answer was all : "housing prices in the country fell at the same time is not possible, the data show that over the past 60 years, has never been the case in the United States nationwide housing prices fell at the same time."
in other words, rating the company, the result of these MBS are all mortgage securities. Even if you encounter a default, you just need to take back the house and sell it again (analyzed earlier). Unless housing prices fall, investment talent will really suffer. However, since each MBS is mortgaged by houses distributed all over the country (a normal practice of diversifying risks), unless house prices across the country start to fall at the same time, there will be no risk for such MBS. of. Since the Great Depression, there has never been a simultaneous decline in house prices across the country in the United States.
This reason is much more reliable.
However, what the rating companies did not expect was that the US real estate market experienced a bubble after 80 years of steady development. When the bubble burst, it was the day when the nation’s house prices fell at the same time...
Let’s go back to 2001 again. year.
The United States experienced two major events in 2001. First, the Internet bubble, which began to burst in March 2010, began to collapse in 2001. Second, the United States suffered the 9-11 terrorist attack. After the attack, the liquidity of the financial market began to shrink sharply, and a recession was about to come.
In response to the crisis, Alan Greenspan, then chairman of the Federal Reserve, began to lower interest rates, as shown in the figure, from 6.5% in 2001 to 1% in 2003.
is very interesting that Paul Krugman, the Nobel laureate at the time, wrote an article in The New York Times titled "The United States Should Replace the Internet Bubble with a Real Estate Bubble to Boost the Economy" ... Last year, when the "New York Times" and its archenemy "The Wall Street Journal" (the former was leftist and the latter was right) were once again noisy, the economic columnist of the "Wall Street Journal" actually found this article...
In fact, the United States did replace the Internet bubble with a real estate bubble, and the bursting of the real estate bubble led to this once-in-a-century financial crisis.
Almost all economic crises in human history were caused by bubbles. Simply put, it all started with excess liquidity (more and more money), followed by speculative fever, and finally formed a bubble, and then collapsed.
The real estate bubble in the United States began when the Federal Reserve Chairman Greenspan cut interest rates in 2001, which created excess liquidity.
Therefore, after the subprime mortgage crisis broke out, many, many people blamed this 16-year Fed chairman. (Perhaps because of deep dissatisfaction with China's monetary policy... I dreamt last night that a friend told me that the Governor of the People’s Bank of China Zhou Xiaochuan had been dismissed...)
However, the former Fed Chairman Ben Bernanke In a speech at Yale University, he defended Greenspan. He believed that there is no necessary connection between asset bubbles and the central bank's monetary policy.
Bernanke’s reasoning is:
from 2001 to 2007, the UK’s monetary policy was much tighter than that of the US. The US reduced it from 6.5% to 1%, and stayed at 1% for a year until 2004. In the middle of the year, the UK dropped from 5.75% in 2001 to the lowest 3.5% in 2003, much higher than the 1% in the United States, and stayed at 3.5% for only three months, just in 2004 It rose rapidly to 4.5% in the middle of the year, while interest rates in the United States were only 1% at this time. Subsequently, both countries began to raise interest rates. Before the subprime mortgage crisis broke out in 2007, the interest rates in both countries were about 5%.
It can be seen that the monetary policy in the United Kingdom is not loose, while the housing prices in the United Kingdom have risen by more than 100% between 2001 and 2007. On the other hand, in the United States, with such a loose currency, house prices have risen by only 72% in the same period.
A more convincing comparison comes from Germany and Spain.
The two countries share the same central bank-the European Central Bank, so the two countries are implementing exactly the same monetary policy. However, from 2001 to 2007, house prices in Spain have risen by 145%, while in Germany house prices have risen by only 1%. . I wrote in "China Economy 2015" about how Germany used government policies to suppress housing prices, and how Spain used policies to raise housing prices.
The 1% interest rate reduces the cost of real estate speculators; but for companies, the cost of investing in research and development of new products has also been reduced. Regardless of whether there is more money or less money in a society, there is a problem of the flow of funds, because it is impossible for funds to cover every industry evenly.
In my opinion, how to channel funds to areas that are more beneficial to society requires the government's outstanding vision and ability.
(For example, Singapore imposes a 100% capital gains tax on the profits from real estate speculation, which means that if you buy a house for 100,000 a year ago and sell 200,000 a year later, then you will pay the government 100,000 Tax! And you have to pay for one year of real estate tax. In other words, if you buy a house for real estate speculation, then your income will definitely be negative! Doesn't this solve the housing price problem... What's difficult? It will not cause any negative impact on society, on the contrary, it conveys a kind of fair value to the people)
Many people in the world now advocate small government and let the market develop freely. In fact, the countries where people live the happiest in the world, Norway, Sweden, Denmark, France, Finland, etc., are all big government countries. The United States, the developed country with the smallest government in the world, is precisely the country where the gap between the rich and the poor is the largest (the Gini coefficient is only a little lower than that of China), and the people’s lives are the hardest. The problem lies here, how to guide the flow of funds is an extremely profound economic proposition, which requires the government's foresight! Is it going to the poor—Norway, Sweden, etc.; or is it going to real estate—China, Spain; is it going to high-tech—the United States, Japan; or is it going to finance—the United Kingdom, Iceland, and Ireland. If the government doesn’t care about anything, then Thomas Piketty has given a sufficiently detailed explanation in his epoch-making masterpiece "On Capital in the 21st Century": the gap between rich and poor will widen, and wealth will go to income without hesitation. The highest 1% of the population is concentrated.
It can be seen that I advocate big government. This sentence may cause misunderstanding in China. However, the problem of China's economic development is not because the government manages too much, but because the government manages it in the wrong way. I will write articles to analyze these issues in the future.
Back to the subject. After talking about excess liquidity (more money), let's talk about speculative fever and bubbles.
One afternoon two years ago, my friend and I took a walk along the coastline of Zhuhai for an hour (we used to do this at the time). All the way along the way were residential areas under construction, each with 20 or 30 floors. So high. I'm very curious, who will live in these houses when they are completed?
So I talked to my friend about the "feedback loop" theory of hedge fund manager George Soros.
Soros University studied economics, but he was very skeptical about the conclusion that market prices would eventually reach equilibrium in economics. He believes that it is difficult for prices to reach equilibrium in a market, but will swing back and forth between the left and right ends of the equilibrium price line like a pendulum.
What does that mean?
Take the current A-share startup version for example~ (The time of writing this passage was April 2015, when the A-shares reached 5,000 points... Now the bubble has burst?)
The price-earnings ratio of the GEM has reached a terrifying 100 times! Far beyond the equilibrium point. But why is it still rising?
the reason is simple. Because it has been rising in the past!
When the stock price rises, it will attract many people to bring capital into the market. When more people come in, prices will continue to rise, which in turn will attract more people into the market. Higher prices will attract more people into the market. So the price is higher~~~
This forms a "feedback loop".
It is of course irrational. One day, more and more people in the market will realize that it is a big bubble (usually professionals, for example, Li Ka-shing has withdrawn from the Chinese real estate market), and this will bring about a collapse.
There will still be a "feedback loop" when it crashes.
The more people sell, the lower the price. The lower the price, the more people will sell it.
In the end, the price will not stay at the equilibrium point, but will fall below the equilibrium point.
At this time, the "Buffetts" who advocated value investment began to enter the market to buy bottoms.
Start a new cycle.
So I told my friend at the time: Without looking at any data, I can be sure that the Chinese real estate market will accumulate a big bubble, and there must be a crash.
Because this is the law of the market.
The United States has also accumulated a real estate bubble (of course, in addition to government policy support, there is also the financial industry to fuel the flames). So how did it crash?
We know that bubbles often come from excess liquidity-low interest rate policies (although there is no inevitable causal relationship between the two, the latter is indeed a necessary condition for the former). The collapse of bubbles often comes from the tightening of liquidity-high interest rate policy.
We know that it was the Federal Reserve that raised interest rates several times from May 1999 to May 2000-from 4% to 6.5%, which directly led to the collapse of the Internet bubble in 2000. Going forward, in 1990, in order to control inflation, the Bank of Japan raised interest rates from 1% to 3%, which directly led to the collapse of the "Heisei Bubble" and its "lost decade" after another. For another example, in the first half of 2007, China's central bank raised interest rates 12 consecutive times in response to inflation, and both the stock market and the property market collapsed in the second half of 2007. The fuse of the subprime mortgage crisis is no exception. In mid-2004, Greenspan, then chairman of the Federal Reserve, began to raise interest rates in response to inflation, as shown in the figure, from 1% to 5%. Real estate prices in the United States also began to fall in 2006. It was the fall in real estate prices that triggered the subprime mortgage crisis.
When the growth rate of the money supply cannot keep up with the growth rate of the bubble, the bubble will burst.
Anyone who invests, whether it’s stocks or real estate, must remember this sentence, don’t know how the market crashes when the time comes. In fact, it is not difficult to withdraw funds before the market crashes.
Continue back to the United States.
In the U.S. home purchase policy, there is one called "Foreclosure". In other words, the homeowner who bought the house with the loan can give up the ownership of the house at any time, return the house to the bank, and stop repaying the loan (of course, the amount already repaid will not be returned).
In the past, I mistakenly believed that when house prices fell, many people would take the initiative to execute the foreclosure and return the house to the bank, because when they found that the market value of the house was already lower than the loan amount they had to repay, why didn’t they use it? Foreclosure and then buy a set at a lower price? So I think this is the main reason for the collapse of American real estate.
However, it is not. After I came to the United States, I discovered how important credit points are to Americans... That is to say, you can certainly use the right of foreclosure to return the house, but this is called a "strategic default." Behavior will make your credit score drop significantly. In the words of my American investment bank friend, Foreclosure equals death, "Exercising foreclosure equals death."
If it were not for the fall in housing prices that led to an increase in the borrower’s default rate, then what was it?
"Big Short" once again provides us with the answer: in 1996, 65% of loans were fixed interest rates, and in 2005, 75% of loans became floating interest rates.
For example...
I borrowed 1 million US dollars to buy a house, and the interest rate is 1%. For a period of 20 years, I have to pay 1.22 million in total, which is 5,000 US dollars per month. ). If it is a fixed-rate loan, then I only pay $5,000 a month for 20 years.
However, for the bank, the bank knows that the interest rate cannot stay as low as 1% for a long time, and the interest rate will definitely rise in the future. Therefore, if I only let you pay 1% interest in 20 years, the bank will not lose money. NS. Therefore, the bank will not sign a fixed-rate loan contract with you when making a loan, but will sign a variable-rate loan contract with you. This rate may be the Federal Reserve's federal funds rate + 1%. Assuming that the current federal funds rate is 0%, then the interest rate for your loan is 1%, and you still pay $5,000 every month. But when the Fed started raising interest rates in 2004! If the federal funds rate becomes 1%, then the interest rate for your loan will become 2%! At this time, instead of paying back 5000 every month, you have become back 6200! Not to mention that Greenspan raised interest rates from 1% to 5% all the way! Guess how much you have to pay at the 6% interest rate level? $13,363 per month! It's almost three times as much as $5,000 per month.
At this point, we can find that when interest rates continue to rise, not to mention those borrowers of subprime loans, even borrowers of high-quality loans may be surprised to find that they cannot repay the loan. As a result, a large number of people were forced to exercise "foreclosure" in 2006 and return their houses to the bank.
When the interest rate is 1%, a loan of 1 million to buy a house requires only 1.22 million repayment within 20 years; and when the interest rate is 6%, a loan of 1 million to buy a house requires a repayment of 3.22 million within 20 years. Therefore, on the one hand, this will directly lead to a sharp drop in the number of home buyers. On the other hand, a large number of people (especially those who owned five houses like the stripper in the movie) began to be forced to return their houses to the bank. After the bank got the house, it had to sell the house immediately at a low price.
(In another book describing the financial crisis, it is even mentioned that a British couple bought 99 houses. Once interest rates start to rise, such a person will be 100% defaulted/cut off the contract.)
In the above two factors Under the interaction, the real estate industry in the United States ushered in the first overall decline after the Great Depression.
A large number of MBS began to default, and all investors in the world who bought these MBS-governments, banks, pension funds, hedge funds, etc., suffered serious losses. In this way, the subprime mortgage crisis spread from the United States to the world. When the whole world is in crisis, a country like China, which does not have much overlap with MBS but relies heavily on exports, is of course not immune.
As shown in the movie:
In April 2007, the New Century Mortgage Company went bankrupt; a
few months later, two hedge funds under Bear Stearns, one of the five largest investment banks, were closed due to heavy losses;
followed by the stock market. The collapse...
The climax of the entire movie was also in September 2008, when one of the five major investment banks, the 150-year-old Lehman Brothers bankruptcy ushered in...
Millions of Americans (because they couldn't repay their loans) began to be driven by banks. Out of their house... (The documentary recorded that when the police went to California residents to try to force them out of the house, a helpless old man sat helplessly on the sofa and shot in front of them. Suicide shots)
Millions of Americans lost their jobs...
The scene that touched me the most in the movie was when the real estate market finally began to collapse, when the two hedge fund managers who followed Brad Pitt short-selling MBS happily (they are about to make a lot of money), Brad Pete said to them seriously:
You know what you just did?
You bet against the American economy.
If you win, people lose homes, people lose jobs.
Don't you dance about it.
Do you know what you just did? ?
You are betting on the American economy.
If you win, people will lose their houses and people will lose their jobs.
Don't dance for it in front of me.
Post this picture again:
There is another question here.
In this transmission chain, on the surface, banks and credit companies are risk-free, because they sold MBS to investment banks, Freddie Mac and Fannie Mae, right? Even if the borrower defaults, the latter suffers losses. However, investment banks, Freddie Mac, and Fannie Mae are also risk-free, because they all sold MBS to investors around the world. Even if the borrower defaults, it should be the global investors who will suffer.
Then why do we see that in the subprime mortgage crisis, banks, credit institutions, investment banks, Freddie Mac and Fannie Mae are facing bankruptcy first?
The reason is that these MBS assets have an inventory period. Banks and credit institutions are definitely looking for buyers while lending, just as companies are producing and selling products. At any time, they will definitely accumulate a lot of loans/MBS inventory. The same is true for investment banks. They will buy MBS while diversifying their risks (as mentioned in the previous article, putting together MBSs from different regions or with different credit ratings), while looking for buyers. Similarly, they have accumulated a lot of MBS inventory in their hands.
When the market starts to deteriorate, the MBS in their hands will fall sharply, or even to the point that they cannot be sold at all, but the money for buying these MBS has already been paid out, and if they cannot be sold, it will bring them a great deal. loss.
But a little inventory loss in hand can bankrupt Lehman Brothers, one of the world's five largest investment banks that have existed for 150 years?
can.
The reason is that its leverage ratio is too high.
What is leverage?
Leverage ratio (Financial Leverage) = total assets/core capital.
Core capital is the bank’s own capital. Suppose I have 5 yuan and then borrow 95 yuan to invest in stocks. At this time, my total assets are 100 yuan, core capital It is 5 yuan. The leverage ratio is 100/5 = 20 times.
At this time, suppose I lose 6% in stocks-my total assets lose 6%, my total assets are left at 94 yuan, and my core/own capital is only 5 yuan, but my debt is 95 yuan. It will directly cause my total assets to be insufficient to repay the debt-94 <95, so I am bankrupt!
In other words, when my leverage is 20 times, as long as my assets shrink by more than 5%, I will go bankrupt. It can be seen that the higher the leverage ratio, the greater the bank's risk.
So how high was the leverage ratio of the five largest US investment banks in 2007?
At the end of 2007, their total assets reached 4.3 trillion US dollars, while their own capital was only 200.3 billion US dollars, that is to say, their leverage ratio reached 21.3 times!
With such a high leverage ratio, how can it be possible to withstand the simultaneous decline in real estate prices across the United States, and the mortgage default rate soaring to more than 20% in 2007?
In contrast, European banks are more dangerous: the
prestigious Credit Suisse (Credit Suisse) leveraged 33 times in 2007; ING reached 49 times; Deutsche Bank (Deutsche Bank) Up to 53 times; Barclay (Barclay) in the United Kingdom is as high as 61 times.
(This is also one of the most important reasons why Europe must save Greece, because the leverage ratio of the European banking industry is too high to withstand the consequences of Greece's default)
Should the government not supervise it and let their leverage ratio soar?
In fact, before 2004, the banking industry in the United States had regulations, which stipulated that the leverage ratio of banks should not exceed 15 times. However, this regulation was cancelled by the US Securities Regulatory Commission in 2004. What an incredible incident.
Speaking of the SEC, the US Securities Regulatory Commission (a government agency responsible for overseeing the US financial industry) in the subprime mortgage crisis, the movie "Big Short" also mentioned some of the reasons. One of the scenes is that the younger sister of a certain character in the film originally took a job at the SEC, but told the character that she wanted to work for Goldman Sachs (the top five investment banks). The reason is simple. Goldman Sachs' salary is several times that of the SEC... Then When the little beauty saw a handsome guy by the pool, she bounced past and said as she walked: He works at Goldman Sachs...
Indeed, many books and documentaries mention this problem, whether it is Whether it is a rating agency or the US Securities Regulatory Commission, their employees’ salaries are only a fraction or even a tenth of that of investment bank employees. Americans also love money, especially Wall Street... So the most talented people must have gone to investment banks. It’s really difficult for you to let a group of sub-talented or untalented people supervise the world’s most talented group of people whose annual salary generally reaches seven figures (US dollars)...
To understand the movie, there are two terms necessary. Find out... It's CDS and CDO.
When Bell told his boss that he would short MBS, his boss said to him: "How do you short? No tools!"
Bell smiled and replied: "I want them (investment bank) to create one for me "
This tool is CDS, Credit Default Swap!
Let's talk about what short selling is first. Short selling is to make money by betting on falling asset prices. The general approach is to ask someone to borrow some assets, for example, ask someone to borrow stocks worth $1 million, and then immediately sell these stocks at the current market price of $1 million. After a period of time, when the stock price drops, let's say it drops to 500,000 U.S. dollars, you can buy these stocks back for 500,000 U.S. dollars and return them to the people who borrowed your stocks that year, and you can make a net profit of 500,000 U.S. dollars.
Hedge funds may be the most stimulating industry in the world, and short selling is the most stimulating behavior in the hedge fund industry! The reason is simple. When the market price is already falling, everyone will rush to sell, and no one will lend you assets. Only when the market price is rising, you can borrow assets. Therefore, short selling is to use one person to fight the entire market! For example, George Soros' short-selling of the British pound in 1992 was against the Central Bank of England, which has existed for 400 years...
If you win in the end, it means that you have defeated the market, and you are one of the few in the market that sees the future. People. Therefore, Patton Biggs wrote in his famous book "Hedge Fund History": All hedge fund managers regard a successful short selling as the greatest achievement in their life, and many people have paid a huge loss for this. . After all, it is not so easy to beat the market...
How did Bell use CDS to short MBS?
CDS was not invented by Bell, but was invented by Morgan Bank in 1993. Once invented, it immediately changed the entire financial industry. Together with securitization, it can be ranked as one of the greatest inventions in financial history.
CDS is an insurance contract. Suppose I want to sell you an MBS, but what if you are afraid that it will default? You can spend a sum of money to buy a CDS contract from a third party (or me). In this way, if the MBS defaults, the third party can compensate you to ensure that you will not suffer any loss (except for the money to buy the CDS contract, which is exactly the same as the concept of insurance and premiums).
Bell thought that when MBS began to default on a large scale, the price of CDS insured for it would surely rise sharply, just as the premiums of housing insurance and medical insurance would rise sharply before the hurricane hit. If you hoard a large number of CDS contracts at this time, when the subprime mortgage crisis breaks out, when the MBS default rate rises sharply, the contract price of this kind of CDS insurance for MBS will surely rise to the sky! At that time Bell will be able to make a fortune.
Episode ~
In 2001, when Goldman Sachs sent Greece into the Eurozone through financial fraud, Goldman Sachs had long anticipated that Greece would have a debt crisis, so in the same year it purchased a 20-year, 1 billion euros worth of CDS contract with Greek government bonds as insurance. When the Greek debt crisis broke out in 2009, the prices of these CDS contracts soared 40 times!
So why has no one applied the CDS contract to MBS before (buying insurance for MBS)? It is because no one in the market thinks that MBS will cause problems. Buying insurance for MBS is as absurd as buying pregnancy insurance for men. Therefore, no one in the market sells such CDS.
Until the appearance of Bell (Dr. Burry in the film).
We saw that when Bell found in the film that Goldman Sachs wanted to buy a CDS contract for MBS, the people at Goldman Sachs described it as "If you want to give us money for nothing, we certainly have no objection..." After walking out of the Goldman Sachs office, we also saw the Goldman Sachs employees in the lens all laughing forward and backward... Because in their opinion, Bell is almost as if they just bought their own pregnancy insurance from them.
(Bell did not randomly buy insurance for MBS. Instead, he carefully read a lot of information about the borrower behind MBS, and finally selected 6 MBS that he thought was most likely to default, and purchased CDS worth 60 million US dollars. Each MBS contract is insured for 10 million U.S. dollars)
Goldman Sachs passed on what they thought was funny.
(In fact, Goldman Sachs is also very powerful, but it was not as early as Bell discovered it. Two employees of Goldman Sachs discovered this in early 2007, so they also began to buy CDS contracts on a large scale. Because of Goldman Sachs' wealth, the final The two employees made more than 4 billion U.S. dollars in profits for Goldman Sachs. The interesting thing is that the stingy Goldman Sachs only gave everyone a bonus of 10 million U.S. dollars. The final result was that the two resigned angrily and set up their own company together)
Commander High (Vennett in the film) heard about this, and after confirming it through his own investigation, he also began to buy a CDS contract. And told Mark (in the movie) about this. Later, two young people found Bell’s documents on a coffee table in a bank lobby (I forgot the details), but because their company was too small to be eligible to purchase a CDS contract, they found Pete (in the film) Ben) to help them buy.
Another problem is that in the movie, we will find that before the crisis broke out, everyone involved in this short sale was very nervous and faced great pressure. The reason is that they use all the assets they can use to buy CDS, and the purchase of CDS costs money, just like insurance premiums, they have to pay every month. Therefore, before the outbreak of the crisis, the total assets of their funds will continue to decline, and the decline in assets will cause investors to withdraw their capital, so they must withstand a lot of pressure from their bosses and investors in doing so. This point of the film is mainly expressed through Bell.
A very exciting design of the film is that Bell will keep writing down the percentage of change in the net worth of his fund on a board at the door of his office. At first it was – 9%, then – 11%, then – 19.3%, and finally, when the dust settled, Bell walked out of his office and wrote +489% on that board... That is to say, If you invested $100 in Bell's company in 2005, it will become $489 by 2008.
Another scene that impressed me was that because he couldn't stand the investor's subsequent withdrawal requests, Bell sent an email to all investors prohibiting the latter from withdrawing funds from him. This is equivalent to a bank suddenly announcing that all depositors will stop withdrawing money from tomorrow... Of course, the subject of the first reply email he got was:
"I'm suing! I want to sue you!"
(Bell, I love you... "Batman" didn't make me fall in love with you, this movie made me fall in love with you... Who made you act so cool A hedge fund manager! Attention! This is not a pure idiot, but a compliment to acting... Fans who like Bell must not miss this movie!)
Let’s talk about CDO, Collateralized debt obligation.
This scene mainly takes place in the dialogue between Mark and a CDO manager in the film. CDO is a company that puts a lot of MBS together to form an asset pool, which is then managed by a CDO manager and makes money by buying and selling MBS (the price of MBS fluctuates with the market environment). Here, each MBS is like a stock, and CDO is like a stock fund, and the CEO manager is the company's fund manager. The CDO Square that appears in the movie, "CDO Square" is like a fund of funds. It does not directly select stocks for investors to buy and sell, but makes money by selecting different stock funds for investors. CDO Square is the company that selects CDOs for investors... CDO has not had that great impact on the subprime mortgage crisis and the financial system. The real problem lies in the basis of all these assets-the default of the borrower.
At the end of the movie, let me talk about the misunderstandings of many people about the subprime mortgage crisis.
As long as it is a work that criticizes the financial industry, it will definitely emphasize that the government has spent more than 800 billion US dollars in taxpayers' money to rescue these financial institutions.
But in fact, the money is used to buy preferred stocks of these financial institutions.
We can think of preferred stock as a kind of bond, with 8%~12% interest every year.
After the worst year of the subprime mortgage crisis has passed, the rescued financial institutions have all repaid the government's aid to them that year, that is, redeemed their preferred shares.
In this process, the government not only did not lose money, but made a lot of money for taxpayers.
So stop talking about the taxpayer's money...
There is another misunderstanding.
Some people say that one reason for the outbreak of the subprime mortgage crisis is because of incentive problems. That is, when the market is in a good shape, the CEOs of these financial institutions make a lot of money, and if the company goes bankrupt, they will not be affected, so this is inspiring them to do more risky things.
In fact, this is not the case. Under the American corporate governance system, CEOs will buy a large amount of stocks in their own companies. This is easy to understand. If even the CEO of the company does not buy the stock of his own company, who would dare to buy it? For example, when Jimmy Dimon took over JPMorgan Chase in 2005, he used half of his wealth to buy shares of JPMorgan Chase.
Therefore, when Bear Stearns was sold to JPMorgan Chase for $2 per share (as high as $170 a year ago), when Lehman Brothers went bankrupt, the stock price became worthless, and it was these companies that suffered the most. CEOs - they all lost billions of dollars. If we sort by the ratio of loss to personal assets, then they are likely to be the ones who lost the most in this crisis.
Therefore, we cannot attribute the so-called "incentive mechanism" to the cause of the subprime mortgage crisis. This is illogical.
PS
Bell played so well! However, due to too few scenes, it is estimated that it is difficult to get the best actor...
Pete's playing time does not exceed 10 minutes. When I saw that Pete is a producer at the end of the film, I instantly understood... I
posted it just after watching the movie. We commented that this is this year’s Oscar’s Best Picture~ To add, I only watched three movies that might be selected for the best picture competition this year-"The Martian", "Jobs" and this one, so I mean, it It is the best-looking of these three...
Merry Christmas ^.<
// * Appendix~~
For financial professionals, or friends who are particularly interested in the financial industry... We can also take a look at the process of securitiesization. How to achieve it in actual operation. It involves two well-known terms-"SPV special purpose vehicle" and "off-balance sheet financing".
Still suppose I am Bank A, and I have 2 billion Receivables accounts receivable on my balance sheet (the people who borrowed money to buy a house owe me), if I don’t want to wait 20 years but want to cash them out now, I It will choose, for example, to sell it to you, Financial Institution B, at a price of 1.6 billion. But in fact, you don't want to buy my loan, because such a huge asset has very poor liquidity. If you need it, it is difficult for you to resell it to others. So I thought of a way, I turned these loans into a MBS, and then sold it to you. The liquidity of this kind of thing in the market is very high, if you want, you can resell it again at any time. For example, it’s like I have a company now, I want to sell it to you, but you don’t want to buy it because the liquidity is too poor, so I turn my company’s assets into equity, and then sell your equity, you must be willing , Because you can resell these shares at any time.
So what is this MBS? It is just an agreement. The content of this agreement is that you now give me US$160 million in cash, and I will repay you US$200 million in cash in installments over the next 20 years (10 copies are signed). And if someone defaults, I can take back his house and sell it, and then give you the cash from the sale as compensation.
After we sign such an agreement, I, Bank A, will find that my balance sheet has an additional $1.6 billion in cash in the asset item, but suddenly the debt item has an additional $2 billion in Payables accounts payable, so it will let me. The balance sheet becomes ugly, and if such things are done too much, it will violate regulations such as financial leverage restrictions.
So I thought of a good way!
I first set up an independent company (note that it is not a subsidiary, but a company completely independent of me), and then I sell the loan to it! Then it turns them into MBS and sells it to you (you go and sign the agreement that should have been signed with me)!
Such a process has both advantages and disadvantages for me.
The downside is that it costs me money to set up such a company. The advantage is that I realized the legendary "off-balance sheet financing"! At this time, my balance sheet no longer has more than 1.6 billion assets and 2 billion more debts, but has become 400 million less assets (from 2 billion to 1.6 billion), but they have changed from 20 years of application. The receivables turned into 1.6 billion in cash (and I might only spend 1.5 billion to get the 1.6 billion)! I can use the 1.6 billion to do the same thing soon!
(Another advantage is that the interest of my MBS will be lower than the interest of my bond financing, because this SPV is Bankrupt Remote's bankruptcy risk isolation...)
For you, Financial Institution B has both advantages and disadvantages.
The advantages and disadvantages are that this SPV is "bankruptcy risk isolation", which means that in the past 20 years, since the ownership has been transferred from me to the SPV, if the loan defaults, it can only be borne by it. But it doesn't have much capital! It is just an SPV, so I am afraid that you can only bear it... But the advantage is that if bank A, I, goes bankrupt, then it, SPV, and your right to claim the cash flow of these loans will not be affected in any way. . Because for me, it is also bankruptcy risk isolation. * //
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