A guy named John Paulson, in a sub-prime crisis in ’08, he’s stunned by the fire and made a run for over $20 billion.
Speaking of which, you’ll all be thinking about the big picture:
In reality, it’s bigger than the four above, John Paulson, who jumped out of business when the crisis broke out, and the fund he had in his name, which in 2007-2008 made more than $20 billion, which was so bad that Hollywood wouldn’t dare put his story on the screen to get the Cyclops to his liver.
People will be confused:
1) How did they find out about empty opportunities?
2) What tools are they using to empty American House City?
3) Is the empty process so smooth? Is there no obstacle?
4) How can ordinary people protect their own wealth when they do not have access to empty channels?
01
Many people find the sub-prime crisis complex and difficult to understand: financial derivatives alone, what MBS, CDO, CDS … are bald.
In accordance with the constant law of difficulty — the kernel is often simple, on the face of complexity. It sounds like a professional, doesn’t it? But when it breaks open, it turns out that, uh, those people simply don’t want to talk, and they’re incoherent.
The financier didn’t mean to make a fool out of you, so you would give him the money, or how would he make a commission?
Unlike me, I do knowledge-sharing, I don’t pretend to need, I don’t have the will to make commission, I don’t share it when it’s too complicated, so my principle is — how simple.
Finance is really simple — all financial issues are credit at the core.
The role of credit is to be used as a liability.
The debt corresponds to a risk of 1; a gain of 2; and a cash flow cycle.
All financial products, whatever they are, can’t escape these elements.
Let’s take a look at MBS, CDO, CDS, see what these so-called financial derivatives are and why they can be empty.
MBS – Mortgage Bond.
Home mortgages are mortgages and bonds are loans.
Pack it together, it’s a bunch of loans.
So this MBS, to put it simply, is a bunch of mortgage contracts packed together, tradable bonds.
Don’t underestimate the packing, it’s a great invention that changed the bond industry’s position on Wall Street.
Prior to the 1980s, Wall Street was not a place to make a lot of money because of strong regulation, and the bond sector was colder. It was not until Lewis, the father of the mortgage bond, invented a profit model for contracting the mortgage into MBS bonds, that the bond departments of the major investment banks began to flourish.
For example, Goose City Bank released 10 billion mortgages at 6 per cent interest rates. It’s all taken to pay the mortgage, and none of it was collected in 20 or 30 years. Soon, the bank’s money will be gone. How do we make money back there?
And Lewis, from the Solomon Brothers Investment Bank (now Citibank), came up with a way to wrap these mortgage contracts together and sell them to his family at a rate of 5 per cent and make one per cent.
One percent looks small, but if he moves fast enough, it’s good enough.
One turn once a year, 1% profit; one turn a month, 12% profit. This isn’t part of the profit.
As a result, the Goose City Bank had not only made profits, but had returned the money, and most importantly, he had transferred the risk to his family.
Theoretically, the MBS model can create an infinity cycle of lending: lending, tacking, tacking, selling, tacking, tacking, tacking…
In general, banks may be concerned about the ability of borrowers to repay, but now that the risk has shifted, they will no longer mind lending to a messenger who has a low capacity to repay, and only want to release the loan more quickly.
When high-quality borrowers run out, banks look at people with poor qualifications — loans called subprime loans.
What the hell is a CDO?
It’s not really complicated, it’s a package of bonds that are packed over and over again.
MBS contains mortgage bonds, CDOs may have mortgages, other types of loans, including consumer loans, and even CDOs.
But no matter how much it is packed, it is still debt in essence.
It is debt, and there is a risk of default, and once the risk of default is exposed, no one is willing to buy the bonds and the price falls. It’s like a big corporate debt, and now it’s a fracture.
That is, when the subprime default rate rises, MBS and CDOs are thunderstorms, and this is the chance to do nothing!
So the question is:
When will the default rate on subprime loans rise?
2) What tools can be made empty MBS and CDO?
The first big, Michael Burry, to help us understand these two questions:
Michael Burry is the only character in The Big Blanche who plays under the real name of the prototype, the famous Dark Knight-Batman-Christian Bell.
In reality, he looks like this:
Originally a doctor of medicine, he had accumulated investment experience from amateur time, was discovered by Wall Street masters, became a career investor and took over the Seine Fund.
How did he find out that the U.S. real estate market was dying?
He first looked at a large amount of data, and found that in the period 2000-2005, housing prices in the United States had increased fivefold, but people’s incomes had not risen much — suggesting that there was a bubble in the market.
He then paid attention to the subprime, the “flammable material” that detonated the debt bomb.
As mentioned earlier, when a good-quality borrower is consumed, the bank cheats on a sub-borrower to buy a house, and banks generally use “modifiable interest rates” to bypass them, i.e., the interest rate for the first two years of the loan is low, which is then slowly added.
With interest rates added, sub-borrowers experienced a sharp increase in repayment pressure and an increased risk of default.
Can these people not see the pits of interest rates?
Of course, they can see it, but the bank told them that the house price will always rise and that if the interest rate increases, they can fully recommence the “mortgage” with the value added of the property, so they don’t have to worry about not being able to pay the mortgage.
This means that it is not enough to see an increase in interest rates triggers the debt risk, and if the house price continues to rise, the bubble can continue.
The question is, will the house price keep rising?
If you ask the Americans that question before 2007, they will answer: “Of course they will!” I’m sorry.
Because:
1) The United States building city has been rising for decades;
2) Experts, such as Greenspan, have repeatedly stated that there has never been a significant return in housing prices in the history of the United States.
The question is, did the American house price ever fall?
No, it’s just that most people are unable to escape the limitations of their own experience, so that they are not able to learn from experience and lessons from longer historical cycles, and it’s only customary to believe that the past has been rising, and now it is, and that the future will surely rise.
In fact, the U.S. House collapsed in the Great Depression of 1933, and Michael Burry studied that history and summarized the signs that two buildings were about to collapse:
1) Increased complexity;
2) The rate of non-compliance has increased.
Complexity refers to the dazzling CDOs that, at the time, even professional investors, had no idea what bonds they contained.
The default rate is the conclusion of Michael Burry, who has studied a lot of subprime data and information on the qualifications of subprime borrowers: He believed that those who bought their homes during the peak of the bubble (2005-2006) would default on a large scale after the increase in interest rates in 2007.
Now the signal’s right, Michael, convinced that the U.S. House drugs, MBS and CDOs will fall to nothing.
The question is, how do you make it empty?
02
What would you do if you thought the house price was going down?
A: Sell the house quickly;
B: Run to the Hong Kong stock as an empty housing stock;
C: Buying funds that buy stock and bonds from housing companies.
All of this is traditional.
For example, if you start looking at space last year, you borrow 100 million shares from the coupons and sell them on July 6, 2020 at a price of $27.
On December 15, 2021, it was bought at a price of 1.5 yuan/equity and returned to the coupons.
In a year and a half, it’ll be a profit.
Ps: Logic is a logic, but it’s not as simple as it is, so don’t look at it as a obscurantism, so let’s encourage work.
Stock could be empty, but not so easy for mortgage bonds.
First of all, it is not clear what the empty objects are or what they contain.
Second, investors who look up usually buy the CDO for the next full issue and refuse to lend it out and not give you a chance.
Can’t we just be empty?
Mustn’t be. Did the crocodiles see their prey, not a bite, or a crocodile?
So, the CDs are out!
The CDS is an insurance that specifically protects bond assets.
For example, if you accidentally bought a permanent corporate debt, and because you were worried that the owner would not be able to pay on time, you bought the corresponding CDS, pay the premiums every year, and when the constant thunderstorms, the insurance company will pay your losses under the contract.
Theoretically, you should hold assets before you buy insurance for them.
But Wall Street’s smart guys, tough guys, have developed the CDS into a gaming tool — even if you don’t have it yet, you can buy it if you think it’s gonna come out. Once it falls to nobody, the insurance company will pay you at its book value.
By way of example, Shanghai has a bill price of 100 million, and Wang has decided to make it empty. He didn’t have to buy the mansion and buy it insurance, but he bought the CDS to gamble on the house.
Assuming that the CDS premium is 1 per cent of the house price, he’ll only have to pay $1 million a year and bet with a $100 million mansion — 100 million if the house price crashes, the insurance company pays him 100 million; if he doesn’t crash, he’ll have to pay the premium.
The benefits of CDS are too obvious in relation to traditional empty ways.
The traditional way in which stock is empty, once stock prices rise, there is a huge loss to the empty, as the price of the stock is higher, the cost of repurchases is higher, and there is no loss.
The most typical example is the “GME Blast Wall Street” in early 2021. The empty GME coupons reached 140 per cent of the total stock, were caught in the house, were pulled and not sold for a while, could not buy back the stock, and were beaten to bankruptcy.
The cost of buying a CDS is not just low, but the loss is manageable if it is not low.
OK, now we have empty logic and tools.
03
In 2003, just after Michael predicted that the real estate industry in the United States was about to go out, for the next two years, he kept buying CDS.
However, housing prices in the United States have risen the most in the past two years:
It’s really, too fast in the face, like a tornado.
The way in which this investment is made is a good bet, but if it is chosen at the wrong time, it is easy to leave.
Is that as late as possible?
No, because when we get back, the signs of a collapse in the market become more apparent, and the number of people looking away increases the price of the CDS, and the cost of doing it becomes higher.
So Timing was crucial: early, spent money, died before dawn; late, the price was fired, no way to talk.
Ordinary people come across a long sun and change three ways, but the two years of the United States House have not changed Michael’s view. By the fall of 2005, he had found a widespread “Synthetic Second House Loan” — both mortgage and down payment.
In his view, the risk of non-compliance was high for those who needed to borrow even a down payment, and for house prices, even if they were transversal. At the end of the year, he e-mailed the client that the United States House was the biggest credit bubble in history and that if he turned a blind eye to it, the opportunity to get rich would slip away.
But the client didn’t buy it and thought he was crazy.
Michel: Anyone can see a bubble in the city.
Shareholders: There’s no bubble in the market. Your idea is bubble.
Micheal: Since 2000, the number of mortgages has increased fivefold, but per capita income has not risen, and the price of housing has risen even higher, which is a clear bubble.
Shareholders: Are you a fucking dick better than Greenspan?
Micheal: In fact, yes, I am better than him!
Shareholders: You manage $550 million, you buy 1.3 billion CDS, you pay 8-9kw a year, and in less than six years, you lose your money.
Micheal: By the second quarter of 2007, when interest rates rise, there will have been a massive loss of supply, which will be profitable.
Shareholders: You idiot, give me my money!
It’s very frustrating for Michael to have clients withdrawing money, even if it took him a long time to clear up the logic of the city, but it’s too hard for everyone to have their own logic and position and to have someone else’s point of view.
Despite the fact that the CDS is an excellent and empty tool, capital prefers to do more. The process of spending money on the CDS, which is empty, amounts to an immediate loss, and of paying more and more premiums over time, is very painful.
Deutsche Bank has a front office called Lippmann, which is a prototype of the little bitch Jared in The Big Open:
His team had an analyst named Seo Eugene, a math genius from China.
Xu Eugène found that as long as house prices stopped rising, the default rate would rise — housing prices were the only factor that affected the mortgage default rate, not interest rates, employment rates and economic growth rates, according to other economists.
Indeed, in the spring of 2006, house prices stopped rising and the default rate on subprime loans began to rise rapidly.
Remember Michael Burry’s discovery of two signs that the city would collapse?
1) Increased complexity;
2) The rate of non-compliance has increased.
So, in 2006, it was the best window of time for the U.S. building, and Paulson’s fund was the one that bought the CDS, and he expected the house price to drop by 40 percent. But unlike Michael, Paulson didn’t tell the client that he knew the client wouldn’t believe that, after all, American house prices had risen for decades.
But Paulson was very determined to do nothing, not just MBS and CDO, and he thought, since mortgage bonds would fall into shit, wouldn’t those financial institutions that took this shit end?
For example, New Century Finance, Two Houses, Belsden, and the Washington Solidarity Bank why not use the opportunity to empty their shares?
Once these financial institutions are finished, there will be a chain of events throughout the financial system, and will the larger banks, investment banks, be empty?
So the empty people opened up, and they started a huge bet — the Wall Street crash.
In order to make the empty trade easier, Paulson and even the United Bank created a toxic CDO to empty themselves. His team carefully selected over a hundred shit-like mortgage bonds to make CDOs, sell them to investors, and he bought his own insurance…
Is American supervision eating shit? It’s like you’re looking for a duel, not just for the weakest opponent, but for the first time in the game.
As a result:
Paulson, despite his logic and tact, still underestimates the inertia of many markets and, by the first quarter of 2007, even though United States house prices were clearly on a downward trend, the empty holdrooms were still in deficit:
(1) Although house prices have fallen, the majority of the population insists that there can be no major fall and that the year of general elections is approaching, and that the Government is unlikely to leave two or three million people on the streets.
2) According to U.S. legislation, once a property is sold, a high tax is paid to the government, which causes many people with an idea of selling to hesitate.
When market movements and prejudicions clash, ordinary people can easily fall into self-doubt or even slash, but Michael and Paulson are very determined, and they insist that Wall Street is playing with fire.
For example, in new-century finance, when other financial companies’ sub-prime-frequency thunderstorms occur, this financial institution, which specializes in sub-prime lending, claims an increase in income, which, if there is no problem, there will be no ghosts in the world.
Paulson’s team of analysts conducted a one-by-one follow-up of the New Century finance loans, which shocked — the old New Century bad debts were worse than other lending companies.
So they were determined to do a new century of finance.
February 7th, 2007, is the New Century Financial Annual Report. It’s possible to falsely report the proceeds in one, two, three quarters, but the annual report will be audited by an accounting firm.
February 8th, the new century’s stock price fell by 36%, and the empty ones finally saw the dawn of victory!
On 2 April, when the new century went bankrupt and the real estate market collapsed, it became clear to individuals that the building market was no longer plentiful, yet the prices of mortgage securities remained unchanged.
It’s because of the counterattacks of many heads, and Belsden even founded a “service company” for that purpose. When bad debts are exposed in empty bond portfolios, service companies exchange non-performing loans for good loans, or inject funds directly into asset pools, using the “Pende” approach and empty head-sawing.
But Paulson didn’t move, he wasn’t disturbed by this “off-site information”, he told his partner that the house price was not down by 40 per cent, and he would never sell his CDS.
On 31 July 2007, the Great Investment Bank Belsden persisted, with two mortgage funds falling under its banner, and the Benz game had recently been exhausted.
At this time, theoretically, the void has been fully won, but they still do not see a change in the price of the mortgage bond, which is described very vividly in The Great Empty:
Goldman said the system collapsed.
BOA says the power is out;
Morgan Stanley says the server crashed…
The reason why the investment bank did not announce the price was to sell the bombs on Mars to those who had not yet made it clear, at the last minute before public opinion had erupted.
However, in the end, the paper was unstoppable, and the market deteriorated and bad news followed.
The housing market is overwhelmed by a constant wave of capitalist and academic elders who are trying to use their authority to influence public opinion and advocate for bottom-ups to activate market confidence.
Federal Reserve Chairman Bernanke said, “The basics are fine, the real estate market is fine, and the subprime risk is perfectly manageable. I’m sorry.
The head of investment in the Pacific, Rogers, said, “The global economy is strong and there is no recession. I’m sorry.
“I can solemnly state that those transactions will not lose even a dime.” I’m sorry.
The financial world of the United States has proved to be the same as the entertainment industry in our country, and so-called rumours, promises and guarantees are not reliable.
The market continues to deteriorate, new house sales continue to fall, and default rates have risen dramatically. The Bush administration has also been unable to sit down and has begun to enact a rescue plan, not only to reduce the down payment, but also to assist 80,000 sub-prime borrowers.
The media has begun to promote a government relief project called “Hope is Right Now” — helping people to protect their housing.
God damn it, the government’s really going to go down, isn’t it time to sell that empty holdout?
Take it easy. Let’s see if the government can get to it.
Someone called the project mentioned above, claiming to be a spoiled owner: “I’m in debt to the bank for $200,000, but the apartment next door is sold for $160,000, and I can’t afford the mortgage. Can you give me some advice? I’m sorry.
And the phone said, “It’s pointless to continue paying.”
So what the government’s supposed to call relief is telling people not to repay the loan. Keep it empty!
Paulson has even seen parastatals like the beauty of the house and the beauty of the house on the verge of bankruptcy.
In the fourth quarter of 2007, the dominoes of the real estate market collapsed, and the empties finally turned their backs — the yield boom!
In March 2008, Belsden, coordinated by the Federal Reserve and the Treasury, was acquired by JP Morgan and the global financial crisis began to spread.
In July 2008, the mortgage bond fell to the point where Paulson had chosen to sell all his empty silos and, over a two-year period, his fund had earned $20 billion in profits, all from the price of a house that he said would never fall.
On 15 September 2008, Lehman went bankrupt and the global financial crisis broke out.
From the fall of 2007 to the beginning of 2009, the US stock fell by 60 per cent, with 30 million people unemployed globally and 50 million falling back below the poverty line, the largest economic crisis since the Great Depression. Paulson and others, however, took advantage of the crisis with great wisdom and gained a great deal of wealth and prominence for themselves.
Did you make money?
Not really!
Morgan’s securities department has a person who also discovered the risk of subprime mortgages and started to empty BBB-grade bonds in 2005, but on a long insurance day, he burned in a lot of money and sold a lot of A and AA-class CDSs to wipe out the cost of these emptys, and he concluded that only those below BBB are at risk, and above level A is safe.
In theory, the safer the bonds, the cheaper the insurance is, so this guy sold 15 billion A and A-class CDSs.
Then we all knew there was no safe bond, all shit:
This guy made a profit on a BBB-grade bond, which was a glass of water, compared to a loss on a multi-A and AA-grade bond, and almost got Morgan to roll over. It can be seen that successful emptiness requires a venomous vision and a desperate effort.
In The Big Blanche, only Peter’s rookie group saw the opportunity for AA class bonds:
Why did they win?
You know, before that, Paulson, Michael, and the new guy in the front, they don’t have any investment experience in subprime loans and real estate, but why are these outsiders, rather than the so-called industry experts, the ones who accurately predict the collapse of the house price?
One important reason is that because they do not have a hold on real estate and mortgage bonds, their brains are not determined by their buttocks, and they will not be like everyone else — believing that the United States government’s strong regulatory power will never let the market collapse.
However, financial experts who misjudged and seriously misled the public did not assume their responsibilities; they simply claimed that this was an unforeseen catastrophe, not an individual’s decision-making error, and set aside their responsibilities and continued to have decent jobs and professional status.
Greenspan, for example, became the Fed’s chairman in 19th, creating a climate of monetary and regulatory speculation and, in fact, encouraging the disorderly expansion of financial capital and long-standing endorsement of Wall Street’s financial innovation, fuelling bubbles. But after the crisis, the past was covered up by the phrase “foam only becomes known after it breaks.”
Even more ironic, after the crisis, this former Federal Reserve Chairman, who advocated never-ending house prices, ran off to the biggest building in the city.
This is America’s genre of liberalism – the tyrannical revolving door!
04
How can we, as ordinary people, ensure that wealth is not looted by the impending crisis?
Like an alligator? Unrealistic, ordinary people lack both tools and vision and energy.
So is there a secure and easy-to-operate portfolio of assets that can offset the losses caused by the financial crisis?
Dario, the Bridge Water Fund, designed a 24-hour fund, which rose 14 per cent in the subprime crisis, a remarkable achievement for those who lost 30 per cent or even went bankrupt.
1) In his book Principles, he refers to the process of designing the All-Wide Fund:
2) When people have money, they want to pass on their wealth for generations to come, but who can guarantee that future generations are as smart as their generation?
3) The economic crisis has been throughout human history and there is no asset that can be preserved forever. A portfolio must be designed to overcome all economic circumstances, and investment strategies must be fixed and accessible to anyone.
4) Having studied all the major economic events in history, and understanding how wealth was created and destroyed, he found that the most critical factors affecting investment earnings were growth (growth, recession) and inflation (inflation, deflation).
5) Two or two combinations form four different combinations of strategies for different economic cycles:
How does this strategy fit into all economic circumstances?
First, we need to know that the performance of different assets varies greatly in different economic environments:
1) High growth + low inflation called recovery period.
At this point, stocks performed best, usually from the start of the bull market;
2) High growth + high inflation called hot season.
Real estate is the best at this time, as monetary policy can contribute to rising housing prices through repeated flooding;
3) Low growth + high inflation called stagnating period.
In past experience, gold is the best at this time, but countries usually press gold prices in order to preserve their position as banknotes, so it has recently been flat.
In addition, as the debt crisis approaches, holding cash and waiting for a collapse is the best option;
4) Low growth + low inflation, called recession.
When the stock market collapses, the economy falls into a low deflation period, during which the authorities will continue to borrow, expand fiscally and stimulate economic growth, while at the same time minimizing interest rates, replenishing liquidity, reducing the rate of return on long-term bonds and, accordingly, increasing their prices, so long-term bonds will perform best.
One has to ask, since the logic is so clear, if it is enough to predict exactly what cycle the economy is in, can it not be able to invest precisely in the most appropriate assets? What are you trying to do?
Because it’s not good to predict. Macro-volatiles in the economy are difficult to grasp, so the idea of all-weather is not to predict, but to make targeted adjustments to the configuration of the warehouse.
How would each asset be repositioned?
1) Prices of all types of assets are volatile, increasing or falling, right?
2) Certain asset prices fluctuate in the opposite direction, such as equities and long-term national debt.
However, the prices of some assets fluctuated significantly, and others were less volatile, for example, equities were much more volatile than national debt.
The all-weather thinking is to try to keep the same degree of volatility in the reciprocal assets.
In junior high school physics, two waves, the same amplitude, the same frequency, but in the opposite direction, the vibration seems to have disappeared from the surface.
If the rate of stock volatility is 10 times that of the national debt, then the hold-up of the national debt should be 10 times that of the stock, so that the impact of the stock and the national debt on the portfolio is the same.
While the volatility of national debt is low, it can be leveraged to magnify the volatility as large as equities, so that overall volatility of the portfolio can be tempered.
Dario’s design is very stable, and no matter how the macro-level situation changes, he needs only the opportunity to adjust the position of different assets to minimize volatility, a risk-benefit balance that is best suited to us all.
Now, what I’m advocating here is this risk-to-risk approach, and I don’t recommend the “all-weather” approach, because it’s not a strategy that can keep wealth for generations, in fact, 10 years later, or even nearly burying Dario’s decades of accumulation.
Because the design worked so well against the 08 subprime mortgage crisis, which led to a competition among Wall Street fund managers, the actions of the major agencies were so similar that they were stomping in the stock crash at the beginning of 2020, when there were rumours that Dario’s Bridge Water Fund had been flattened.
Here’s the lesson:
1) There will never be a thousand generations of French doors;
2) The success of the past cannot be superstitious and must be constantly reformed in keeping with the times;
2) Retroactive thinking, composing is the way to die.
The above is the story of the smart people who were grumbled in the subprime crisis of 2008, hoping to inspire investment decisions and personal development. Case number: YX11 KrdmL83
I don’t know.
Keep your eyes on the road.
