In the United States, real estate is a strong industry. Only the rise and the correction during the rise are long-lasting. It is not inferior to today's Chinese real estate, but it suddenly collapsed in 2007. Today I will mainly review the detailed process of the financial crisis caused by the real estate crash in the United States in 2007, and then I will give you a counterindication to what conditions the Chinese real estate will achieve will collapse. Articles describing financial crises are usually very difficult to understand. Today, I will use simple and easy-to-understand language to popularize science.
1. What is MBS Mortgage Securitization?
First of all, the time was allocated to 1970. At that time, American banks and American real estate were very traditional industries. Buyers paid a 20% down payment, and then borrowed from the bank with the real estate as collateral, and the bank issued After taking a mortgage, relying on loan interest to eat a deposit-loan spread is a very simple basic financial model.
Housing loans are extremely high-quality, risk-free loans, but the spreads are also very low, but the bank’s funds are limited and can’t make much money. It belongs to the orthodox business to make some stable money. So at this time, a banker invented MBS, an epoch-making invention.
What is MBS? Simply put, banks have issued a lot of housing loans. Thousands of housing loans have formed a huge asset pool. A stable monthly cash flow can be obtained every month, and the reliability is very high. So good, I pack this asset pool together to form a product and sell it, and distribute the cash flow proceeds to the subscribers, and then the bank charges subscription fees and annual management fees. More importantly, this product is a security product. It greatly reduces the threshold of subscription and the difficulty of sales.
With this MBS product model, the bank has realized the loan contract in its hands and obtained a huge cash flow, which can be used to issue loans again. Those who buy MBS can get a product with a very high credit rating and substantial profits, which is mutually beneficial and a win-win situation for everyone. This kind of MBS consists of a 20% down payment, a good job and a stable income loan for high-quality home buyers. What is the rating given by this MBS product? It is AAA. Many people may have no idea about this kind of evaluation. Let me tell. Everyone, the rating of US Treasury bonds is AAA. This is the highest rating among all products. That is, the market believes that unless the world is over, the security of this product will not be problematic, and he can Get a higher yield than the national debt, do you think it is a good product? So as soon as this product was released, it was snapped up by the pension funds of every state in the United States, and then sold in the United States. The sales situation can be described by an idiom, that is, it was sold out.
Loan contracts in banks that cannot be realized for decades, use their debt and cash flow as collateral to obtain cash, and then issue mortgages again. The bank has given up most of the deposit and loan spreads, leaving only a fraction, but MBS products can be used every year Collecting management fees, the most critical cash utilization rate has been greatly improved. The money that can only be used for one thing can now be made three, four or more. As long as you continue to issue the mortgage, theoretically you The charges can be repeated countless times, and the bank has made a lot of money and made a fortune.
But the United States is so big, housing is limited, and quality lenders are also limited. MBS products are still easy to sell. However, because mortgages cannot be issued, it is difficult to obtain new mortgages to form new products, and you have no products to sell. This makes the banks that have made a lot of money very dissatisfied. In order to be able to issue more mortgages, banks began to gradually lower the threshold for home buyers. By about 2005, the down payment threshold for housing loans was only 5%, or even zero down payment, and work income was basically not verified. Please apply for me. Just issue, such loans are called subprime loans, because they are less reliable, but the contractually agreed interest rate is higher.
If it is said that a 20% down payment, people with a legitimate and stable income cannot give up the house supply, and the single credit rating can reach AA, they are orthodox mortgages. Then this kind of zero down payment cannot confirm the individual credit rating of a person with a stable income, at most it can only reach B or BB. Americans call it subprime mortgages, which means that the reliability of this kind of loan is the difference A trash, his probability of default may be as high as 5%.
Does the bank know that this kind of loan is risky? The risk-to-return ratio is simply not worth it. The return is not enough to cover the risk and it is not worth issuing this kind of loan, he knows. But he doesn't care, as long as he packs it into MBS and sells it, the creditor's rights and risks are transferred to the subscribers. If nothing happens, it is best. If something does not harm the bank, why not issue a loan.
The abacus is very savvy, but the market is not stupid. You know that they are all rubbish loans. I also know why I want to buy this rubbish from your bank. The risk is too great and I don’t want to, so I released a CDO product. .
2. What is a guaranteed debt certificate CDO
The core operating idea of CDO is that as long as the investment is sufficiently dispersed, the overall return is controllable. For example, if I buy a single bond, if his default probability is estimated to be about 5%, then He is rubbish. I risk losing 5% of my principal in order to gain a little bit more. I would rather buy Treasury bonds. But if it is composed of thousands of such debts, then their probability of defaulting at the same time is 0. There are people in default at all times, but the default is only a small amount. This part of the loss only offsets part of the income. Then such an asset package has greatly enhanced its stability and reliability. An asset package composed of a pile of junk B-grade junk debt plus a small amount of A-grade and AA-grade high-quality debt can raise the overall product rating to BB or even BBB grade rating.
At this time, the market is still worried. A group of people say that you are also BB grade. It still looks unreliable. I am a pension fund. I don’t dare to bear any risks. I don’t want high returns. I ask. Stablize. But another group of people said, um, although the risk seems to be not small, but it is OK. If you give me a higher return to cover this risk, I think this product can still be bought. Another core concept of CDO products has been released, and the product is structured in layers. He splits the entire product into priority, mezzanine and inferior.
First, let’s briefly introduce, the priority is the risk aversion, and they don’t need high returns. They want to buy AAA and AA grade products, while the mezzanine has a medium risk appetite and medium income demand. They usually subscribe for A and BBB and BB grades. Products, but after inferior risk appetite is very high, income demand is also very high, they subscribe for the usual B-level products. If the entire product suffers a loss, first lose the inferior share, then lose the mezzanine share, and finally start to lose the priority share. Of course, the gains obtained are also worlds apart. If there is a profit, it is first allocated to the inferior share. Generally speaking , CDO products, the annualized rate of return after inferiority is generally 2 to 3 times the priority.
Then, after splitting the share of the entire CDO into priority mezzanine and inferior models, they are sold to different risk types of funds in the market, which makes it easier to sell. Then this MBS can continue to operate again, and banks continue to make money, but as banks become more aggressive, more and more junk mortgages are issued. Finally, it is found that buyers with individual credit ratings of AA and A are already very strong. The share of B-level and BB-level garbage home buyers is increasing. The credit rating of the entire CDO is declining, corresponding to the risk-benefit ratio, the priority share is declining, and the inferior and mezzanine’s share is constantly decreasing. If the market does not recognize your risk-benefit ratio, your CDO products will not be sold.
However, the main source of funds in the market is still large funds. Their preference is stable income. The priority shares are quickly sold out, and the market for inferior shares is also limited. You send too much and cannot be sold in the end, and there is no inferior shares. As support, priority alone is useless, and the entire product cannot be sold.
So the third concept of CDO came out, debt guarantee. In order to let the inferior buy with confidence, the investment bank hired a guarantee company to guarantee the entire CDO product, paying a certain premium every year, and then if there is a default, the guarantee company will compensate. , It is equivalent to buying an insurance, that is, to find another inferior for the inferior, reduce the risk of the inferior to the level of a mezzanine, and then part of the income will be given to the insurance company.
The investment behavior convinced the insurance company to list out the mathematical model of risk diversification to prove that the risk of such asset allocation is extremely low, not to mention that the housing price has been rising, even if someone can't pay the mortgage default, we can still take back the house for auction, and the loss is very high. Small, the large-scale cut-off of houses across the United States is an unlikely event. In order to express confidence, our investment banks will subscribe to a part of the inferior products to show our absolute trust in the reliability of our products. Standard & Poor’s and Mu Di and other rating agencies also said that after their assessment, the overall risk of these MBSs is extremely small. They only give an A or AA because they are afraid that they will cry, or they will directly give it to AAA.
The overall risk is indeed very small. In addition to the temptation of premiums, the insurance company agreed. With the guarantee of a large insurance company, you will not lose a penny unless the insurance company goes bankrupt. In addition, the product itself is very reliable. So is there anything to worry about with this CDO product? No more, the rating was directly raised to AAA, which was equal to the national debt, and then soon sold out again.
Beginning in 1970, after 30 to 40 years of expansion, by 2006, 90% of the US housing mortgage CDO products consisted of BB and B grade garbage subprime loans, and only 10% of A and AA quality home buyers % Is less than, but the overall product rating is still AA and AAA, and the financial market believes that there is no risk.
No one thinks that the US housing loan will collapse. From the chairman of the Federal Reserve to the bottom of society, they are very optimistic that there is only a rise and a correction in the US real estate market. M, the first hedge fund manager to short the US real estate market in 2005, was almost forced to liquidate his short position CDS due to two years of continuous losses and was forced to clear his short position CDS. On the eve of the US real estate crash, the entire fund was already in collapse. On the verge of the collapse, if the US real estate collapses three months later, he will be tragically liquidated on the eve of the collapse if he holds a large amount of short positions.
Before 2004, interest rates in the United States were very low, with the benchmark interest rate being only 1%, but since 2004, the Fed has raised interest rates 17 times in a row.
The result of these 17 interest rate hikes is that the U.S. benchmark interest rate has risen directly from 1% to 5.25% in two years, and the corresponding mortgage interest rate has risen from 2~3% to about 7-8%. In other words, Americans’ Mortgage interest rates have risen by 200~300%. What’s more frightening is that the US mortgage contract is the same template as China today, that is, the floating interest rate system. At a fixed time each year, banks can carry out corresponding mortgage interest rates based on the Federal Reserve’s benchmark interest rate. For adjustment, few banks choose fixed interest rates. Doing so can greatly reduce the bank's interest rate fluctuation risk. This kind of interest rate fluctuation is nothing to high-quality home buyers. Even if the interest doubles, can you still give up the down payment and sell the house? But for those with low down payment or zero down payment, it’s different. Whether it’s equal principal and interest or equal principal method, they basically paid interest in previous years, and their monthly payment is also based on their own income limit. To be sure, if the interest rate doubles, it means that their monthly payment will also double. Many people are not short on real estate, they want to repay the mortgage, but due to limited income, they really can’t afford the monthly payment. If the property price does not rise again Even if it falls, you have no choice but to give up the house, and your bank can take it back and go to auction.
Therefore, when the prices of local products are always rising, everyone is happy with this system. Banks have become rich, investment banks have become rich, insurance companies have also become rich, and home buyers have also become rich due to rising housing prices, and everyone has become rich and did not lose money. of. But when the market went down, such a high leverage ratio began to detonate terrible consequences.
In the second quarter of 2007, banks began to implement new interest rates to levy mortgages. The default rate of mortgages soared to 12%. The mortgage market collapsed. Currently, the number of houses confiscated by banks due to arrears for more than 90 days has reached a terrifying number. After the bank repossessed the house, it was forced to conduct an auction, leading to a collapse in real estate prices, triggering a more serious chain reaction. The entire CDO system collapsed, and a very small probability event occurred, that is, the real estate in the United States collapsed at the same time, the lender defaulted on the contract at the same time, and the cornerstone of the CDO collapsed. According to the original insurance agreement, various insurance companies, investment banks and banks began to perform themselves. Liability for breach of contract.
The entire U.S. housing loan market totals 500 billion U.S. dollars. Even with a 12% default rate, even if the auction value of the recovered house is zero, the ultimate loss is only 60 billion U.S. dollars. This loss is just a tickle to the U.S. economy. Why is it? The chain triggered a large-scale bankruptcy in the US financial crisis.
Because MBS can create CDOs, then CDOs can create new CDOs. Simply put, I bought a CDO, I own the debt and income, and have a stable cash flow. What is the difference between it and a mortgage? Then I packaged a bunch of CDO shares together. Is it also a debt pool? Then find an insurance company to guarantee it and sell it as a new CDO. If it is sold, I will greatly reduce my risk and get multiple benefits. The overall rate of return is higher than that of my independent holding. There are original CDOs.
Of course it is feasible, and it is actually done. CDO can create CDO^2, and then CDO^2 can create CDO^3. According to the results of the FBI survey after the financial crisis, a total of 500 billion mortgages have been created. The 20 trillion U.S. dollar derivative bond market has been established.
Since the cornerstone of the 20 trillion bond is the 500 billion housing loan market, when the mortgage collapsed, the 20 trillion also collapsed. The sequelae of the accumulation of the illusion that everyone is making a lot of money, unified broke out on this day, resulting in losses. As much as US$700 billion, this is not something Wall Street can afford. Therefore, insurance companies, investment banks, and large banks in the United States have been bankrupted one after another. If the government does not rescue them, the entire US financial system will directly return to zero. Without the operation of the financial system, the US industry It will come to a standstill, and the difficulty of financing will increase by 5 to 10 times, which will lead to the collapse of the US real economy, and then enter the end of the world. The US government and American civilians will accompany Wall Street to an end. This is the 2008 financial crisis.
So the US government rescued the market, used taxpayers' money to make money on Wall Street, and injected 700 billion US dollars to purchase bank assets to avoid bank bankruptcy. Do you know what is the concept of 700 billion US dollars? On the eve of the 2008 financial crisis, the Fed’s balance sheet was only about one trillion US dollars. Where did the Federal Reserve spend 700 billion US dollars to purchase bank assets, so it was forced to carry out large-scale quantification? Easing, the Fed’s liabilities changed from 1 trillion to 1.7 trillion with a big stroke. The extra 700 billion US dollars purchased banks, insurance companies, and investment banks to form their own assets. The balance sheet was flattened, which was equivalent to an extra 7000 out of thin air. 100 million US dollars, such a large-scale printing of money must have huge sequelae. In order to avoid the sequelae affecting the US economy and make the US economy stable, the United States suffers from drug-taking dependence on printing money. The era of quantitative easing has begun. By 2017, the Federal Reserve The balance sheet has reached 4.5 trillion yuan, 4.5 times that of before 2008.
3. Are financial derivatives the source of
all evil? Many people blame the financial crisis on US financial derivatives, thinking that if it weren’t for the 20 trillion derivative debt, the collapse of a mere US$500 billion in mortgages would not be enough to shake the foundation of the United States. For derivatives, this level of volatility can be ignored by the government.
That’s right, if there are no financial derivatives, then any degree of volatility can actually be ignored by the government, because derivatives represent leverage, and more derivatives represent greater leverage. But this does not mean that derivatives are the root of all evil. On the contrary, a wide range of financial derivatives is the root of the strength of American finance. Compared with Chinese finance, American finance is extremely powerful, and the balance of power between the two parties is probably equal to that of adults versus babies. The well-developed financial system in the United States makes the flow of funds in the U.S. economy extremely smooth. The currency amplification effect of one dollar in the hands of the U.S. financial circle is about three times that of the Chinese financial circle.
Such a powerful ability allows them to make full use of the value of every penny and greatly reduces the difficulty of financing for American companies. In the United States, small and medium-sized enterprises not only have a much lower financing difficulty than China, but also have a financing interest rate far lower than that of China. It is caused by the developed financial system in the United States. It is obvious to everyone that reducing the difficulty of financing and financing interest rates for small and medium-sized enterprises has a good effect on the national economy.
Therefore, the richer financial derivatives, the more developed the financial market. One of the reasons for the US financial crisis is that financial supervision has not kept up with the speed of financial innovation. The Fed has never thought that a small 500 billion market has a 12% default. Loss can lead to a shortfall of 700 billion U.S. dollars on Wall Street. Just like the 15-year stock market crash in China, it is actually caused by the fact that the supervision of the China Securities Regulatory Commission has not kept up with the innovation of the stock market, and the old thinking of supervision has not adapted to the new era of highly leveraged stock markets.
Another question is that in the financial chain of the above house loan-MBS-CDO-CDO^n, everyone has reduced their own risks through the contractual agreement of derivatives, and obtained a higher profit-to-risk ratio, but From the perspective of the whole country, the total profit is so much. No matter how many layers of banks, investment banks and insurance companies are sandwiched, the final income comes from the monthly mortgage payment. The more food chains in the middle, the thinner the income. Why? There will be situations where everyone will benefit, which is not in line with the common sense of economics.
There is only one reason. Housing prices have been rising. If housing prices stand still, then the returns are balanced. Someone has an excess return-to-risk ratio, and someone must have an out-of-poor return-risk ratio. Your high-yield and low-risk must be Based on the high risks and low returns of others, if everyone has equal risk-return clauses, then the entire chain cannot exist. However, if housing prices are rising, then the condition of equality of human rights and responsibilities for the signatories may realize this chain.
Let me give a simple example. Chinese people deposit in banks at a 5% interest rate for financial management. The bank pays 9% interest rate to investment banks, and investment banks pay 15% interest rates to real estate developers. The real estate developers operate a building and sell it to For home buyers, the real estate agent's return on principal reached 25%, paid off 15% of his loan, and earned 10% out of thin air. Everyone is happy, everyone has made money, and everyone is very happy.
So is the buyer a fool? All the profits are paid by him. No, the buyer borrows a mortgage at an interest rate of 5%. Assuming that the average annual increase of the house is 8%, the buyer has also made a fortune, so everyone is happy again .
Whose interests have been damaged? There are no losers. Everyone makes a lot of money. As long as housing prices continue to rise, the entire economy will thrive. The chain is constantly running. Everyone feels that they have made a lot of money and are rich people who can spend at will. This is very similar to when the stock market is rising, everyone is making money, no one loses money, everyone's wealth increases, and everyone gets a sum of money out of thin air. Until the day of the crash and entering the liquidation day, all the excess unreasonable profits were vomited out during the crash.
4. How did China's real estate collapse?
This is the entire process of the 2007 US subprime mortgage crisis leading to the US real estate collapse and then the chain reaction leading to the US financial collapse. Based on the above, we can summarize some things that are helpful to the prediction of the Chinese real estate collapse. .
First of all, in addition to decent mortgages in the United States, there are still such things as subprime loans. A 20% down payment, the lender has a decent job and a stable monthly income is called a high-quality loan. 5% down payment or even zero down payment, no decent work, unstable monthly income loans, called subprime loans, subprime loans are more risky but higher interest rates, due to the existence of subprime loans, many unqualified people also buy When it came to the house, some speculators even bought four, five or more sets with zero down payment, because the United States is a market economy, and there are no restrictions on purchases and loans.
Then look at China. At present, China’s current first set is 30% down payment, the second set is 50%, and the follow-up is even higher. According to the Bank of America standard, this type of loan has an AAA rating, the reliability is equivalent to the national debt, and the default probability is extremely low. Even if the contract defaults, the bank will not lose money, because the down payment is too high, and the house is sold. In China, only down payment is a high-risk thing. It will suddenly increase the leverage of home buyers, which is equivalent to subprime loans in the United States. If the down payment of home buyers is all borrowed, it is not the same as the zero down payment in the United States. Any difference, once there is a turmoil, this type of loan will simply collapse.
China’s down payment loan is a black market. No data can be found. There is no official data. What’s more, I’m sure that because they can’t see the light, the outcrop will be beaten by the supervision, so the scale will not be very large, so it should occupy a share of the real estate market. Very small.
Then, the United States is a market economy, private land, and the government does not care. If it does not eventually lead to the collapse of the U.S. economy, the price of your property will drop to zero and the government will not intervene. Who dares to save the city and Congress directly spray you to waste taxpayers’ money Then impeach you to step down. The Chinese market is occupied by the government and the land is state-owned. For the government, the fall in land and property prices is not only an issue that affects the economy, but also caused huge losses to its vital interests.
American real estate is a child without parents, but he has the inertia of rising continuously for decades, so when will this inertia support him to collapse? When the mortgage default rate is 5%, the market is healthy, when the default rate is 8%, the market is healthy, and when the default rate is 10%, the market is still healthy! The tipping point of the crash was a default rate of 12%.
What is the concept of a default rate of 10%, that is, relatives, classmates and colleagues around you, among 10 people, the bank confiscates his house for auction because he cannot repay his mortgage. In this case, the US market is still dragging 2 It collapsed only a few months ago. If it is China, what about the government intervening to rescue the market? How would it crash.
Physics tells us that if an object with very large momentum is to reverse the original trend, it will undergo very fierce resistance. The larger the object, the longer it will take to turn around. In the United States, the first hedge fund manager M who shorted real estate In 2005, he believed that the housing loan market would collapse. He bought a large number of short positions CDS. When the default rate rose to 5%, he believed that the time for the collapse had already arrived. Hedge funds are about to collapse. In the past two years, his losses were very huge. The huge losses ran out of his liquid funds. Investors withdrew their funds and his fund was on the verge of liquidation. Although he finally made a substantial profit and became a legend in the investment industry, he himself was very tortured in the past two years, and his spirit was on the verge of collapse many times, and he repeatedly questioned whether he had misunderstood and whether the U.S. housing prices would last forever. rise.
In this long-short gambling game, all the big banks, investment banks and insurance companies in the United States, as well as the US government, are betting against the shorts. Shorts are small, longs are extremely powerful, and you will never know what your opponent will do to interfere in the market.
Treasury Secretary Henry Paulson had a conversation with Federal Reserve Chairman Bernanke. Note that the following conversations are not jokes and jokes, but real historical conversations.
Paulson: "I went to see Greenspan a few days ago and asked him about the solution to the collapse of housing prices."
Bernanke: "What method?"
Paulson: "The most effective way is for the state to directly The defaulted house is bought and burned."
Bernanke: "..."
Then if the US housing prices collapse in 2007, the Chinese government is rescuing the market. What will the government do? Let’s suppose and guess. :
1) Land supply is stopped in areas where housing prices have plummeted, and private land owned by residents is prohibited from entering the real estate market by legislation. Privately held land can only be used for agricultural production and is not allowed to build houses. If the property is to be converted into residential land, the approval of the Ministry of Housing and Urban-Rural Development is required. Developers are forbidden to lower the opening price. If the price is lowered arbitrarily, the pre-sale certificate will be cancelled.
2) Debt-to-equity swaps for Lehman Brothers, Bear Stearns, Washington Mutual Bank and other companies are not allowed to force creditors to force debts, and debts can be converted into stocks to solve corporate dilemmas and maintain economic stability.
3) Call on foreign migrant workers to buy a house, call on immigrants to buy a house, buy a house, give a green card, and give a permanent residence.
I only think of so many for the time being. This is very likely to be implemented. If you are impatient, it will be unpredictable what kind of brainstorming policies will be introduced. It is like in 2008 that economists all over the world predicted that the US economy will definitely be over. No one would dare to think that the Fed, with a balance sheet of only US$1 trillion, would dare to directly issue US$700 billion in new loans for blood transfusions to Wall Street, but then the US government did just that.
So when China's real estate collapses, what policies will the government introduce? Do you want it? As long as the price is stabilized for 5 years, and calculated at 5% per year, the 25% bubble will be squeezed out. The original high and unreasonable prices may be reasonable, and there are too many possibilities for policies.
Therefore, we can think that with the US government's control of land and such a low down payment, real estate prices finally collapsed when the default rate is as high as 12% according to the strong rising inertia of real estate. Strength, I can think that China's real estate mortgage default rate must reach at least 12% before real estate prices may collapse.
Therefore, I have repeatedly issued articles saying that China's real estate will only start the next wave of rises in the face of strong regulation and control for 3 to 5 years. I don't think housing prices will rise in the past few years, but I have never dared to say that real estate prices will fall too much. Deep, because of the existence of the government, making short-selling is a very dangerous behavior, so when I replied in the comment area, I thought that in the 3-5 years of large sideways, investment housing is fine, and you can buy it later. If you just need a house, it is recommended to buy it if you have enough money, because you have to live and cannot afford it.
In a general undergraduate book, every additional formula will reduce the number of readers by half. Today I wrote such a complicated theory of financial concepts. I don’t know how many readers will be lost, but I think it’s the essence. A pure science-based financial crisis movie "Big Short", I think it is also very good.
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