The story takes a few humble little people on the edge of Wall Street as the protagonists, telling the story of their experience of discovering the subprime loan bubble and betting on the entire subprime mortgage bond market with their own efforts. The movie provides a unique perspective to observe the subprime mortgage crisis in the United States and the financial tsunami that followed. Interested friends can use this movie as a material to understand the financial crisis. It is recommended to watch the movie before reading the original. Lewis's works are easy to understand, and there is no obstacle to understanding even in the non-financial industry. If you think he tells the story well enough, his "Liar's Playing Cards" can also be read together.
Introduction-Looking back at the 2008 financial crisis,
let’s look at a picture:
Source: US Federal Reserve Board (representing households and the non-profit credit market)
This picture was called by Timothy F. Geithner (Timothy F. Geithner,) who served as the Secretary of the Treasury from 2009 to 2013-"Mount Fuji Map "It can be seen intuitively from this chart that the proportion of household debt in the United States began to climb linearly around 2001, and reached its peak (97.9%) in 2008. What happened during this period? Geithner put it this way:
"Fanatical borrowing is always the harbinger of a financial crisis, and most Americans are enjoying their unattainable life in advance. From 2001 to 2007, the average mortgage debt per household increased by 63%. , And wages in the real economy have not changed much. The financial system is keen to lend money, even for individuals with low income or undisclosed income, and then package various loans into securities that are also secured by credit The financial sector now holds $36 trillion worth of debt, which has increased by 12 times in the past 30 years."
—The
sketch of "Stress Test" reflects the enthusiasm of American households and the financial sector when the bubble accumulated. What about the consequences? Let us take out a series of events that occurred in the United States in September 2008 to experience the horror of the financial crisis:
▪ On September 7, the US Federal Housing Finance Agency announced the takeover of Fannie Mae and Freddie Mac. Holds or guarantees mortgage-related businesses of more than 5 trillion U.S. dollars.
▪ On September 9, news of the Korea Development Bank's loss of investment interest in Lehman came out. Lehman's share price fell 45%. Two days later, on September 11, Lehman's share price fell another 42%.
▪ On September 14, Merrill Lynch, the third largest investment bank in the United States, was acquired by Bank of America at a price of $29 per share (total value of the transaction was $50 billion).
▪ On September 15, with the withdrawal of the last potential buyer, Barclays Bank, Lehman Brothers, the fourth largest investment bank in the United States, had to file for bankruptcy protection. This 158-year-old company came to an end. (It has 8,000 subsidiaries worldwide and more than 100,000 creditors.) The
U.S. stock market fell 5% that day, with Washington Mutual Bank down 27% and Citibank down 15%. The yield on the one-month U.S. Treasury bond plummeted from 1.37% to 0.36%.
▪ On September 16, the Federal Reserve Bank of New York announced to provide American International Group (AIG) with a $85 billion credit line, accompanied by a punitively high interest rate of 11%, and required AIG to transfer 79.9% of its equity. AIG has a $1 trillion balance sheet and 115,000 employees. Its business involves life insurance, life insurance, property insurance, and auto insurance. It also controls the retirement accounts of millions of American families. It also provides services to 180,000 companies. Insurance involves 2/3 of the labor force in the United States.
On that day, the money market fund "dropped below the face value" (imagine your "Yue Bao" lost money).
In the next week, institutional investors probably withdrew 300 billion US dollars of funds, stopped buying commercial paper, reduced repurchase loans, and short-term financing in the market disappeared.
▪ On September 18, the income of short-term Treasury bills fell to negative value. Investors no longer trusted the government. They paid the government to keep deposits. Morgan Stanley's clients withdrew $320 of funds a day. Goldman Sachs, the strongest investment bank, lost $60 billion in liquidity a week, accounting for half of its liquidity.
▪ On September 25, the Federal Deposit Management Corporation of the United States took over Washington Mutual Bank (the largest savings bank in the United States with 300 billion assets, slightly smaller than Bear Stearns) and sold part of its business to JPMorgan Chase for $1.9 billion. The owner will take over all its insured and uninsured deposits.
There is a scene in the movie about the investment bank Bear Stearns-Mark Baum of Qiandian Fund (Steve Eisman in the original book) and Bruce Miller (Bill Miller in the original book), a shareholder of Bear Stearns and a famous investor, who holds Bell There was a public discussion about whether it was wise to invest in Wall Street companies. Bear Stearns’ stock price fell from $47 to $29, a drop of more than 38%. After learning of the news, the audience scrambled to leave the venue, trying to sell the shares of Bear Stearns in their hands to reduce losses. The scene was impressive. The host was embarrassed when the audience was scattered like escaping from the scene of a fire. The next speaker: Alan Greenspan, former chairman of the Federal Reserve. Bear Stearns ranked 17th among American financial institutions. In March 2008, Bear Stearns was sold to J.P. Morgan at a price of US$2 per share and a total value of US$236 million. The value is 20 billion U.S. dollars. (It is worth mentioning that Bear Stearns was the only major company that refused to lend a helping hand during the 1998 U.S. Long-Term Capital Management Crisis.) The
above series of incidents is still frightening to read, and it is hard to imagine being in that time. How do people feel in the vortex. As a writer and journalist, Michael Lewis (he used to be a bond trader at Salomon Brothers) followed the whole incident. He noticed that some smart guys had foreseen in advance the design flaws of subprime mortgage bonds and what it was about to bring. The disaster, and made a big bet for it, and made extremely high profits in a short period of time after the subprime mortgage crisis broke out. He interviewed some of them and wrote the whole story as "Big Short". I guess his original intention for writing this book and agreeing to make it into a movie was to reveal the causes of such a large-scale disaster and to warn future generations to avoid the same disaster as much as possible.
In order to facilitate understanding, first match the protagonist in the movie with the characters in the original book:
1.
Steve Eisman (prototype) Mark Baum (role)
Mark Baum, the fund manager of one of the hedge funds of Qiandian Fund Company (100% owned by Morgan Stanley), as a mean and sharp, is always angry and ready to scam companies on Wall Street Debunking their guy, Mark leads a team of pessimistic digital expert Vinny, former Olympic rower Porter Collins, and optimistic trader Danny Moses. They pay attention to Wall Street banks and housing construction companies. , Mortgage sponsors and other companies involved in the US financial sector (that is, Mark Baum's team is the most familiar with the mortgage industry among the groups, and he is born short).
2.
Michael Burry (prototype) Michael Burry (role)
Michael Burry, the founder of Tsinghua Capital, has a prosthetic eye like Charlie Munger has extraordinary concentration and learning ability. While studying in medical school, He taught himself to become an investment expert. When he was not an intern, he studied stock market investment and opened a blog to show his trading, until Wall Street fund companies began to follow his investment strategy. After deciding not to be a doctor, he founded this humble fund company, communicating with investors through emails and earning them far more than the market profit every year. In 2004, his fund management scale reached 600 million US dollars.
3.
Greg Lippmann (prototype) Jared Vennett (role)
Jared Vennett, a mortgage bond trader at Deutsche Bank, was originally an investor in subprime mortgage bonds. He was asked by his boss to sell short-selling tools against these bonds for reasons of safety and Can earn high commissions. Hearing that after Michael Burry bought a short position, he asked his people to study the mortgage market. After reaching the same conclusion as Burry, he immediately decided to sell these short-selling tools to the world. Of course, the most coincidental thing is that his people made the wrong call and found Mark Baum and his team-what he was looking for was another "Front Point Fund".
1. "The engine of the doomsday machine"-subprime loans and MBS
In the late 1970s, Lewis Ranieri of Salomon Brothers created a mortgage bond (Mortgage Backed Securities, MBS) Variety of bonds, thus ushering in a new era in the bond market. In the past, the bond market was a huge amount of loan vouchers issued by a single entity with high credit such as the government or large enterprises. These loan vouchers were subscribed by different investors, but any one of them had the same rating as the other shares, and the interest rate was the same. It is also equal, the final repayment person all points to the only issuer.
Figure 2: Examples of traditional corporate or municipal bonds
. Mortgage bonds-MBS, are a pool of thousands of housing mortgage loans. They classify these loans into different levels according to the debtor’s credit score, ranging from the most dangerous to the most dangerous. The safest order is ranked, the higher the risk, the higher the interest rate. In the assumptions of investment banks and rating companies (rating companies divide the security of bonds into ten levels from high to low in order of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D), BBB level The above bonds are investment grade, which means that the mortgage loans that make up these bonds will certainly not default on a large scale. Based on the fact that the U.S. real estate market has never experienced a nationwide decline in more than 60 years, they assumed that the default rate would not exceed 5%.
Figure 3: The simplified structure of MBS, the basic asset is the right to income from housing mortgage loans.
With this smart design, the original decentralized housing mortgage loans that are differentiated in terms of borrower credit, loan terms and interest rates suddenly become With standardized bond products, they have extremely high liquidity. In other words, the original commercial banks need to wait patiently for 30 years to release housing mortgage loans and slowly recover the principal and interest. Now, they only need to endure some interest loss, they can package and sell these loans, clean up their balance sheets, harvest cash, and no longer bear the risk of defaulting on these loans. Their status has changed from being a mortgage creditor to a supplier of raw materials for mortgage bonds.
Figure 4: The role change of mortgage originator.
For example, now there is a mortgage company A that issues loans to buyers after evaluating their income status, family asset status and credit level. Now it has issued a total of 1 100 million US dollars of housing mortgage loans, these loans will mature in the next 30 years, and the total value of the principal and interest of this part of the asset is 150 million US dollars. Now, it does not want to hold these loans until maturity. Wall Street investment banks said that if Company A is willing, it can sell this part of its assets to them for $110 million and sell them to investors in the market. In this way, Company A can withdraw funds in a short period of time without having to bear the risk of these loan losses. All it needs to do is to recover the interest on these loans, and then deliver the interest to the investment holding these asset return rights certificates on time. By.
This is the process of "securitization". In this process, the income and risks corresponding to the loan assets of Company A are packaged, graded and sold, with liquidity, and investors can purchase and trade corresponding shares according to their own needs.
Company A’s risk has been transferred. Although it has lost part of its profits, it has received a large amount of cash in advance. In this way, the cycle of "lending-slowly withdrawing funds-lending again" by commercial banks has been greatly shortened, which stimulates their impulse to lend and makes them inclined to provide mortgage loans to more home buyers. However, the group of potential "qualified home buyers" is relatively stable, and their growth rate has not become faster due to the impulse of lenders. Therefore, in order to create more mortgage loans, commercial banks have to relax their application for loans. The threshold for the creation of “Sub-Prime Mortgage Loan” (Sub-Prime Mortgage Loan) is a product that actually provides loans to borrowers with poor creditworthiness and low income.
Following this logic and pushing it further down, commercial banks lend to more home buyers, leading to more buyers in the real estate market and pushing up real estate prices. The rise in real estate prices will in turn attract more speculators to risk borrowing and participate in this "stable profit without losing" business, forming a "positive feedback loop". Remember the "Mt. Fuji Picture" at the beginning? Now let's take a look at the trend of housing prices in the United States.
Figure: 5: The trend of house prices in the United States
from 2000 to 2010. From this figure, we can see that from 2000 to 2006, with the prosperity of housing mortgage loans, the US real estate market ushered in rapid development, and another "Mount Fuji" appeared. It's-house prices have doubled in 6 years. The real estate market is so prosperous, there is another important premise. After the Internet bubble in the United States in 2000, in response to the recession, the Fed cut interest rates several times, reducing interest rates from 6.5% in 2001 to 1%, a lower interest rate level. Encourage people's desire for loans. By 2008, the total amount of subprime loans issued by home loan promoters in the United States reached 1.5 trillion US dollars, and on this basis, investment banks sold 2 trillion US dollars of mortgage-backed bonds (MBS).
2. The emergence of big shorts and the perfect short-selling tool-CDS
Burry was the first person to discover the defects of this doomsday machine engine. From the end of 2004 to the beginning of 2005, he browsed hundreds of legal documents on mortgage bonds (read carefully) After dozens of them), Burry discovered two core problems: 1) Among these mortgage loans, the proportion of undocumented ("liar") loans reached about 50%; 2) In order to entice lenders, increase the loan Issuance rate, 3/4 of the loan companies set the loan interest rate for the first two years to a lower fixed interest rate of 5% (temporal interest rate), and after two years, this interest rate will soar to 11%! All of this points to a common conclusion: the default rate will be greatly increased! The real estate market and appraisal agencies have unanimously determined that the outage rate of subprime mortgages will not exceed 5%, and Burry judged that once house prices start to fall, this value is most likely to exceed 15%! This judgment turned him from an investor in the stock market to a short seller in the subprime mortgage bond market. So, how to bet on this market? He thought of a tool: Credit Default Swap, CDS, a credit default swap product for subprime mortgage bonds.
Here is a brief introduction to credit default swaps, which is a value-preserving tool created by J·P·Morgan in the mid-1990s: General Electric applied for a loan from Bank A, but the amount of the loan exceeded the upper limit of the bank’s willingness to lend. If not, When lending, the bank was worried that it would offend a good long-term customer. At this time, another bank B stepped in and promised that if General Electric defaulted, they would bear all the loan losses. In this way, Bank A can safely lend to General Electric. The product provided by Bank B is called a "credit default swap" for GE loans (somewhat similar to domestic "guarantees"). Later, CDS slowly became a speculative tool, because it did not require the buyer to be a person who lends money to General Electric. It became a tool for people to bet that General Electric would default.
Burry called the major banks on Wall Street and said that he wanted to buy CDS for subprime mortgage bonds, but almost no one knew what he was talking about—no one thought these bonds would default, so he was betting on their behavior. Incomprehensible. It wasn't until May 2005 that he bought a $60 million credit default swap product from Deutsche Bank (Goldman Sachs in the movie)-for six bonds, each $10 million, which was carefully selected by Burry. of. Burry is probably the only investor who conducted old-fashioned bank credit analysis on these housing loans, and this method of investigation and analysis is what he has always insisted on. This is the same in his previous case of investing in pioneer software companies. Burry did the investigation method. It is to read the annual report and all the information that can be obtained from public channels, including court rulings, transaction records, policy changes and any information that may change the value of the company. The criterion for his investigation is: After the due diligence is completed, he is the person who knows the company best in the world. Really a role model for investment managers.
Within a few months, Burry purchased more than $1 billion in CDS from nearly ten banks. Soon, the funds he managed were not enough. Here we need to talk about the pricing and payment methods of CDS, because this will affect the cost and revenue of gambling, and will cause a lot of trouble for Burry in the later period. The annual quotation given by Deutsche Bank is: 3A grade 0.2%, A grade 0.5%, and 3B grade 2%. And Burry wants these fragile 3B bonds. 1 billion US dollars for the CDS position of the 3B subprime mortgage bonds, pay 2% of the annual premium, which is 20 million US dollars. Since the housing mortgage loan is 30 years old, the longest time for betting is 6 years-30 The maximum expected life of a one-year loan (according to Burry's judgment, he only needs to wait 3 years for delivery). Therefore, the total amount of premiums to be paid is 120 million U.S. dollars, thus occupying all 600 million of funds under Burry's management (because Burry’s descendant capital is not a fund that specifically invests in CDS, he also has a position in stocks, and the size of the fund It will also be affected by investors requesting to redeem funds due to losses or other reasons at the end of the closed period), and will cause at least 20 million U.S. dollars in losses each year. This is why Burry later wrote on the whiteboard that the net value of the fund is getting lower and lower reason.
When Burry investors learned that their fund managers had quietly withdrawn their funds from the stock market and invested them in CDS products for betting on the US subprime mortgage bond market, they were shocked! They suspect that he does not have the "wisdom to stand at the high point of the 70-year housing price cycle", nor does he understand credit default swap products, and they do not believe that a big bank like Goldman Sachs will sell such good products to him-if these products It was as perfect as Burry described. In short, there was a rift between investors and Burry. Burry did not have the ability to convince his investors, but he refused to give up such a precious CDS position because investors demanded to redeem funds. In the end, he made a decision that annoyed investors: use the special terms of the contract to prohibit them from redeeming funds. Soon, he received an email from an angry investor: I'm suing! I want to sue you!
Vennett became interested in this kind of thing after learning that Burry had purchased CDS for subprime mortgage bonds from his boss, Deutsche Bank. In the beginning, he was asked by his boss to sell this product because it was safe and profitable, just like selling fire insurance designed for Dragon Palace. However, after the shrewd Venett discovered that the subprime mortgage bond was not a dragon palace, but a dangerous building made of wood and low-quality stone, he immediately decided to sell this product to the world, earning him a lot of money. overflow. The acquaintance between him and Mark is more like a destiny-his subordinates called another "pre-point company", but they dialed Mark by mistake. After Mark heard about it, he immediately asked him to come over and talk about it (and now it’s February 2006. As mentioned earlier, Mark knows what is going on with the housing mortgage loan company. In fact, Mark has already shorted the first time at this time. New Century Financial Corporation and Indymac Bank, and even some housing construction companies such as Trafigura Brothers).
Vennett told Mark what is happening in the mortgage market and what is going on with MBS (with a supply cut-off rate of 8%, the value of 3B bonds is zero), and what is going on with the short-selling tool he is selling against MBS— -He wants them to buy CDS from him and short the mortgage bond market. Mark almost agrees with his judgment on the mortgage market. What puzzles him is the identity of Vinnett. He is obviously a subprime mortgage bond trader! And now, the bond trader vowed to make himself short the product he is investing in!
3. "Weapons of Mass Destruction"-CDO
Burry knew that the banks that sold his CDS (such as Goldman Sachs) were not real risk-takers. They just designed products and then matched sellers and buyers to earn commissions. So, who is his real opponent? It wasn't until three years later that he knew that the giant opposite him was the giant with a 3A rating-American International Group AIG. Goldman Sachs found them and designed a very complex security—Collateralized Debt Obligation (CDO) backed by synthetic subprime mortgage bonds. Later, other investors in the market also joined in. These large companies with high ratings have become victims of the collusion of subprime mortgage companies, investment banks, and rating companies for their meager profits.
Briefly introduce CDO. Its design logic is the same as that of subprime mortgage bonds. Subprime mortgage bonds are the collection of thousands of housing loans according to different risks and returns to build a bond tower (see figure) 3). In the secured debt warrants, the underlying assets have become 100 different "mortgage bonds". The investment bank took out a certain layer (usually the level 3B) of the different mortgage bonds and rebuilt it. A tower of bonds, and persuading rating agencies that these assets are completely diversified, and the rating agencies have given a 3A rating for 80% of them. So you see, from 100% of 3B level to 80% of 3A level + 20% of 3B level, this is simply a "point of stone into gold."
Figure 6: The simplified structure of CDO, the basic asset is a certain part of the housing mortgage loan bond.
If the subprime mortgage loan bond was originally designed to help people with poor credit ratings obtain loan qualifications, to improve the financial market In terms of operational efficiency, the design of CDO can be said to be purely to cover up risks and sell things that cannot be sold at all in exchange for profits.
In the process of developing a CDO, the most difficult thing is to find enough MBS and take out their 3B level-in the original MBS, about 1 billion US dollars of subprime mortgage loans will generate about 20 million USD 3B bonds, which means that the proportion of 3B bonds only accounts for 2%. Therefore, if you want to create a $1 billion CDO, you need to have $50 billion of MBS (this is the first type of CDO-select the target from 3B subprime mortgage bonds to bet against), however, MBS not enough. However, Goldman Sachs has perfectly overcome this problem and developed a second type of CDO, also called CDOs or CDO², which is to choose the target from the CDO to make a bet. In this way, the number of CDOs derived from the underlying asset MBS is almost no longer restricted.
Understanding the structure of the CDO product may require a little financial knowledge. I try to make it as popular as possible.
The credit default swap product selected by shorts like Burry for grade 3B subprime mortgage bonds has two elements: 1) It has an exact corresponding subprime mortgage bond subject matter (these subjects are often from different MBS A combination of a certain part, such as Burry holding approximately US$1 billion worth of CDS); 2) Burry will pay 2% of the premium each year, that is to say, the subject of this US$1 billion subprime mortgage bond will generate 2% annually. % Of cash flow.
Now, Goldman Sachs "virtualizes" the subprime mortgage bonds selected by Burry into several secured debt warrant (CDO) products and sells them to buyers in the market (as mentioned earlier, these CDO products are packaged by Goldman Sachs. 80% of them have achieved a 3A rating). Because these warrants are "virtual", you don't need to actually spend money to buy them, that is to say, the purchase action only needs to sign a contract without actually paying funds.
Now let’s review the two features of CDO: 1) It is “virtual”. The so-called “virtual” means that both buyers and sellers do not really hold subprime mortgage bond assets. You only need to select the target you are interested in. Just place a bet; 2) The purchase of such warrants does not require actual payment of funds, but only signs a contract with the investment bank to determine the rights and obligations-the right is that the buyer can enjoy 0.12% interest per year (the premium paid by Burry is 2%, On the one hand, Goldman Sachs wants to earn a commission from this 2%; on the other hand, remember, the rating has been changed from 3B to 3A, the risk has been reduced, and correspondingly, the return has also been reduced); the obligation is once the CDO corresponds The subprime mortgage bond defaults, and the buyer needs to pay cash to actually bear the loss (the bet required by Burry).
How to understand this 0.12% interest-because the buyer of the CDO does not actually pay the funds, it can be understood that he is financing the purchase of virtual subprime mortgage bond assets (of course, the financing is also virtual), and the financing The cost is the London Interbank Offered Rate (for example, 2.88%), and this 0.12% interest can be understood as the interest (for example, 3%) generated by purchasing subprime mortgage bonds after deducting the financing cost (3%-2.88) %=0.12%).
Therefore, for buyers in the market, CDO is a kind of warrants that can be bought "for free" that simulates high-rated subprime mortgage bonds, which can bring safe and lasting cash flow returns (on the surface), and In exchange, you only need to bear the risk of a theoretical bond principal loss (the rating company Standard & Poor's believes that the probability of a loss for a 3A CDO is about 0.12%, which is not the case in fact).
In CDO's gold-making technique, Goldman Sachs does not even need stones to make gold. In the housing mortgage business, the borrower was initially lost, and then the lender was also lost. Now, investors like AIG are also lost under the bewilderment of investment banks and rating companies. By 2008, on the basis of the MBS of US$2 trillion, Wall Street investment banks had created more than US$10 trillion in secured debt certificates.
Figure 7: The "inverted pyramid" of financial derivatives built on the basis of subprime mortgages.
Fourth, the problem of rating companies The
reason why MBS and CDO can grow to such a large scale in a short period of time, there is one more thing that I have to mention Reason-rating company.
How do investors make investment decisions in the bond market? Suppose there is a new issue of Alpha company bonds in the market, but you don’t know the company. Apart from the investment bank’s introduction to the issuer, it is difficult for you to find any relevant information. Therefore, you spend a lot of time collecting information. , But unable to make a reasonable investment decision. The emergence of rating companies is to solve this problem. A third-party agency like them will review the bond-related information, and then assess the risk level of this bond (is it AAA or AA, or other levels), and then the market will evaluate different bonds. The risk level gives the corresponding risk pricing. Because this model improves the efficiency of the financial market, it is recognized and fixed by the market. Even Buffett believes that Moody's, one of the rating companies, has a reliable profit model and a broad moat-he holds 20% of Moody's equity at most. In this model, investors pay attention to the bond's rating, maturity, and interest rate, and then judge whether to invest and how much to invest based on these factors. So, why would a rating company, which was originally known for the impartiality and professionalism of third-party agencies, give AAA ratings to assets that are clearly problematic?
Two answers are given in the film and the original book, namely: 1) competitive market share and 2) the use of Wall Street investment banks. Regarding the first point, when Mark and the others approached S&P staff and questioned the fairness of subprime mortgage bond ratings, they reluctantly said-if we don't do it, they (investment banks) will go to Moody's. In the emerging, complex, and fast-growing buyer's market of financial derivatives ratings, S&Ps have forgotten their identity and the principles they should have, and they even give ratings hastily when there is insufficient information. As for the second point, it is mentioned in the original book that the salary of Wall Street investment bank employees usually reaches 7 figures, which means that they attract the top talents in American schools, and even people who work in rating companies (usually their salary is only 5 Number), and these smart people have used the rating company’s model together to make it more favorable for their own product ratings. (For example, using the FICO scoring system-this is a method for measuring the credit value of individual borrowers invented by Feizhe in the 1950s. In this system, the highest score is 850 points and the lowest is 300 points. The number is 723 points. The rating company uses this system in the rating of mortgage bonds, but does not require the FICO scores of all borrowers, but only the average FICO score of the loan pool. In order to obtain a 3A rating, The average FICO score of the borrowers in the loan pool must reach 615. However, this indicator does not take into account that the possibility of a loan pool with 615 points for all people suffers losses is much lower than that of half of the borrowers and 550 points for the other half. A pool of 680 points. In order to find borrowers with a FICO score of 680 points to increase the average score, Wall Street took advantage of another neglected part of the rating model: the credit history of the borrower. That is, those with a short borrowing history. People who have borrowed several times and have no record of default will usually get very high scores. This also leads to two other reasons why rating companies make mistakes: 3) The rating model is too old and rudimentary, and it is not suitable for rapid development. The ability to fairly evaluate derivatives; and 4) Relatively static historical data to evaluate the ability to repay future payments, which results in the rating being given outdated at the same time (even if it is tracked annually).
In reality, in 2000, Moody's changed from a private company to a public company. His income has soared since then, from US$800 million in 2001 to US$2.03 billion in 2006. Most of these growth came from the ratings provided for structured financing, namely MBS and CDO.
It is mentioned in the original book that after a head-to-head confrontation with rating companies, Steve Eisman shorted Moody's stock at a price of $73.25 per share after returning from Las Vegas. There is another detail. In May 2006, Standard & Poor's announced that it would change the model used for subprime mortgage bond rating after July 1. As soon as the news came out, the issuance of subprime bonds soared (see how to recover Is something wrong?).
V. Taki shakes
From mid-2004 to 2006, in order to curb inflation, the Fed raised interest rates 17 times in a row, raising the benchmark interest rate from 1% to 5.25%. The sharp rise in interest rates has increased the burden of repayment of home buyers (because most contracts stipulate that their loan interest is a floating interest rate following the benchmark interest rate), mortgage defaults began to appear, which eventually pierced the bubble in the US real estate market.
In June 2006, real estate prices began to fall. At this time, Mark finally bought CDS from Venett, and then, in order to understand what they were doing, they launched an investigation (Mark, they are shorts in the stock market and are not familiar with bonds).
Vinny and Danny flew to Miami and saw vacant blocks built with subprime loans. After realizing how bad the situation was, they started looking for crooks and idiots in the market. Their strategy is: 1) Look for those states where housing prices rose the fastest during the boom, and these states’ housing prices are likely to be the fastest at the moment of decline; 2) The most suspicious loans are those that are the most unreasonable. Lenders, such as the Long Beach Savings Company, which was the first to adopt the origination-sales model (a company affiliated with Washington Mutual Bank, issued a zero-down payment floating-rate mortgage-the lender can postpone interest payments as long as they request it. Burry I also shorted this company); 3) These loan pools contain above-average low-document or even undocumented loans ("uncertified loans" without income proof, "scam loans" with false income, and no income and no job There is also no asset "ninja loan"), which means the possibility of loan fraud is high. Following this logic, they found many incredible cases of subprime mortgages, such as the Jamaican nanny of Eisman's daughter. She and her sister owned 6 houses in Queens. After they bought the first house, the price Soaring, the lenders suggested that they refinance. After they got 250,000 US dollars, they bought a second house, and then the price of the house rose again. They repeated this action until they bought 6 houses (in the movie). Striptease girls also own 5 houses). If the house price of such a person falls, the supply will definitely be cut off.
After several months of investigation, Mark found the problem in the subprime mortgage market and locked the bonds they planned to short. Unlike Burry, who focuses on loan structure and locks in a high default rate loan pool, Mark understands that the way subprime mortgages are mortgaged is to focus on specific lenders and borrowers. They find the lenders and borrowers who are most likely to have problems, go to the scene to search for evidence to confirm their judgment, and then directly bet against them (this typical short-term idea was also reflected when Mark later said that he was going to be empty Zhao Wen) .
In reality outside of the movie, by the fall of 2006, Greg Lippmann (Vennett's prototype) had privately told 250 large investment institutions his idea of shorting the real estate market, and made a public announcement at the Deutsche Bank sales conference. At the end of the year, according to PerTrac's statistics, among the 13,675 hedge funds, thousands of institutional investors had obtained the license to invest in credit default swaps (International Swaps and Derivatives Association Agreement, International Swaps and Derivatives Association, ISDA, which is the film The Brownfeild fund, which China uses its own funds to invest, desperately wants to obtain a license. In the film, the staff of J.P. Morgan told them that they need to have 1.47 billion U.S. dollars. In fact, Deutsche Bank requires at least 2 billion U.S. dollars in assets), of which 100 Family members are involved in credit default swaps, but most of them are to hedge against the risks of real estate-related stocks and bonds. Only more than 10 people (no more than 20 people) directly bet on subprime mortgages worth several trillion US dollars. market. These people include a Minneapolis hedge fund named "White Box," a Boston hedge fund named Baupost, a San Francisco hedge fund named Passport, and a New Jersey hedge fund named Elm Reggie. The fund and a group of hedge funds from New York: Elliott Partners, Cedar Hill Capital Partners, QVT Finance, and Philip Falcon’s Pioneer Capital Partnership. The common feature of these investors is that they have directly or indirectly heard of Lippmann's views.
Burry was like the first person to be infected with the subprime mortgage bond short virus, and he only infected Greg Lippmann. After that, he could not even infect his own investors, and Lippmann brought the virus to the world. By 2008, he had sold a total of about 35 billion US dollars in CDS positions.
Attentive readers and friends may pay attention to this detail: from the identity point of view, Burry is a pure buyer, he is afraid of imitators, and because of his lack of infectiousness, he cannot really infect others; while Lippmann is a seller, he needs to infect enough More buyers to maximize profits. Both of them have achieved the ultimate in their respective fields.
There is also a group of investors influenced by Greg Lippmann—Jamie Mai and Charlie Ledley, who used their own $110,000 as initial capital and worked in the garage. They are The only guy in the shorts who directly used his own funds to bet against, runs a fund called Brownfeild. By identifying events that the market thinks are the least likely to happen, and betting that they will happen this way (that is, looking for market inefficiency and mispricing transactions), they made an impressive $30 million in a few years. . Although the threshold of ISDA is still far away, considering their poor initial capital and experience, this is simply a perfect return on investment, so when they got Greg Lippmann's promotion from a friend to short subprime mortgage bonds You can imagine how excited they are about such a perfect transaction. Moreover, they directly bet on the 2A-rated part of the CDO (really brave), because they analyzed that the 2A-rated bonds are not really safer than the 3B-rated bonds, and the 2A rating means lower insurance premiums. In other words, it is a higher rate of return. Of course, this is also related to their later entry into the market, and they will soon be able to see very detailed data and analysis. In the end, by May 2007, with the help of Ben (Ben Hockett, a former derivatives trader of Deutsche Bank’s Tokyo Department), they obtained ISDA and purchased USD 205 million (at a price of 0.5%) for USD 1 million. The CDS of the 2A rating part of the CDO (because the product is too complex, very few people in the investment bank understand, and they are unprofessional, so the buying process is more difficult).
6. The "painful time" for the bears
On November 29, 2006, the subprime mortgage bond price index ABX showed an interest rate gap for the first time. Borrowers will not be able to pay enough interest to cover the lowest grade subordinated bonds. Related mortgage loans have begun to have problems, but the price of the bonds backed by these loans has not changed, which also means that the price of CDS held by the shorts has not changed at all. They are confused.
At this time, the net value of the Descendants Capital managed by Burry fell by 19.7%. In order to continue to pay the premiums, he had to sell his precious CDS position and even lay off more than half of his staff to reduce expenses. At the same time, he was also redeemed by investors. Tormented by demands.
To help his investors build confidence, Venett arranged for Mark to meet with a man named Zhao Wen in a Japanese-style teppanyaki restaurant. Zhao Wen said that he is from Harding Consulting Company and is a "secured debt warrant manager", that is to say, he is the CDO buyer in the market-the person who stands on the opposite side of the gambling situation. After discovering that Zhao Wen did not understand what the position he held means, Mark raised a bet against the secured debt warrant held by Zhao Wen.
On February 21, 2007, the market began trading a secured debt warrant index called "TABX". This was the first time that investors could see the price of secured debt warrant products on a big screen. But on the first day of the index’s listing and trading, there was a huge disconnect in the market: In the primary market, Wall Street investment banks are selling 2A-level secured debt warrants for a face value of $1, but in the secondary market, the same bond index is formed. It has fallen to 49 cents. At the same time, on the one hand, the investment bank that traded with Burry told him that the price of credit default swaps was falling, but on the other hand they refused to sell him more CDS at the price they claimed. Burry guessed that some people in investment banks have discovered the problem and started to buy CDS to hedge their own risks.
On April 2, 2007, New Century Financial, the second largest subprime loan provider in the United States, declared bankruptcy. This accelerated the pace of investment banks snapping up CDS, but they still did not revise the price of the short positions, but continued to cover up when Burry called to inquire.
7. The hunting moment
As more and more Wall Street companies join Burry's camp, his bet is finally about to usher in a fair price. On June 29, Morgan Stanley sent an email to confirm that "the price is fair." The next day, Goldman Sachs also came. "This is the first time they have adjusted our bids accurately," Burry said, "because they have to join the deal themselves."
Immediately afterwards, large companies successively reported their huge losses on subprime mortgage bonds. Previously, two funds under Bear Stearns that invested in MBS were closed. Subsequently, Morgan Stanley broke out the largest one in Wall Street history. A single transaction loss-also related to CDO, the loss figure is about 9 billion US dollars!
Have you noticed? Initially, investment banks were just middlemen. They designed products and then looked for buyers. But later, as the market share of MBS and CDO became larger and the circulation became more and more widespread, investment banks also began to buy. And hold a considerable share. They hold and trade these subprime mortgage bonds, use them for positive repurchase operations, and increase leverage to earn higher profits, just like ordinary bonds. In this game, even the investment banks did not escape the fate of slipping into the "lost" camp, so huge losses occurred when the price of subprime mortgage bonds fell.
Anxious MBS traders looked around for CDS and bought them regardless of cost in order to reduce the loss on the bonds. On August 8, Ben helped Jamie and Charlie sell their CDS positions and made a net profit of US$80 million. Three-quarters of this was bought by UBS at a price of more than US$60 million.
On August 31, Burry began to sell his credit default swap products. By the end of the year, he had achieved a profit of more than US$720 million with a portfolio of less than 550 million. Investors who have been involved since the establishment of his fund have made a total of 489.34% of the profit by June 2008 (yes, it is the number Burry wrote on the whiteboard at the end of the movie).
In early July 2008, the Marks sold their last positions to Venett. Danny and Vinny made a $50 million deal and made $25 million, while Mark made a $550 million deal and made $400 million. .
The moment when the truth was revealed: The default rate of subprime mortgages eventually exceeded 17%, and the true default rate of 3A-level CDOs reached 28%, more than 200 times the S&P forecast. Burry they are right.
For shorts, I would like to say a few more words. Many people are biased against shorts, believing that they are responsible for the market's decline. In fact, it is very clear in the movie that the bears only spotted mispricing transactions in the market. They took advantage of the inefficiency of the market to make big bets, and then waited for the market to correct their mistakes. In essence, they also rely on the judgment of market trends to make profits, which is no different from bulls, except that they are betting in the opposite direction. Moreover, since short selling often uses margin trading, this exposes shorts to higher risks, which means that if they make a wrong bet, their losses are more serious.
8. Reincarnation-the time of financial crisis and rescue
has come again in the autumn of 2008. Investment banks have suffered serious losses due to their mortgage bonds or CDO positions. Excessive leverage (insufficient capital) has made them extremely vulnerable. In a market environment where liquidity has almost disappeared, their credibility and operating ability have been seriously suspected. Counterparties have cancelled transactions or demanded a higher percentage of margin. This has exacerbated the deterioration of the situation and is facing the threat of bankruptcy. Institutions one after another.
In order to prevent the rapid spread of the crisis, the US Federal Reserve, the US Department of the Treasury, and the Federal Deposit Insurance Corporation provided direct liquidity support to the financial system (including guarantees, capital injections, loans and other support methods, which were close to 7 trillion US dollars during the peak period) , They also created a series of crisis relief tools, such as "Term Auction Facility" (Term Auction Facility, TAF) and Primary Dealer Credit Facility (Primary Dealer Credit Facility, PDCF), etc., to indirectly provide guarantee for market liquidity . These direct and indirect support together exceed US$30 trillion.
In order to understand how dangerous financial institutions are and what measures should be taken to effectively contain the core issue of the spread of the financial crisis, the US government decided to conduct stress tests on financial institutions. They sent government staff to the financial institutions to study Financial institutions’ operating conditions and financial statements hope to find out where the crux lies and prescribe targeted prescriptions. Through investigations, they learned that in addition to the 400 billion US dollars that have been lost during the crisis, financial institutions are likely to have about 600 billion US dollars in losses (in fact, the IMF also took this subprime debt-related assets that originated in the United States. The loss is estimated at US$1 trillion). What’s interesting is that on the second day after the Fed announced the results of the stress test, the world’s largest hedge fund-Bridgewater Fund also released a report in the "Daily Economic Observer". The judgment is basically the same!
Figure 8: Fed stress test results and Bridgewater Fund's predictions
It is precisely because of the investigation and analysis of the real operating conditions of financial institutions that the US government can decide on which method to invest bailout funds, to whom, and how much, etc. problem. At the same time, they made the results of these analyses public, which also greatly boosted the confidence of the market and enabled the United States to get out of this unprecedented financial crisis in a short period of time.
Finally, let me quote Geithner's sentence again as a conclusion:
History shows that before the official announcement of a financial crisis, everyone felt that the financial crisis was a thing of the past.
PS Since this film was released in the United States on Christmas Eve in 2015, it may not be very timely to write a film review. However, I recently watched the film and the original again, and it is still very rewarding-the first time When I watched it, I didn't realize that this movie is almost faithful to the storyline in the original work to the maximum extent. Therefore, I pay my respects to the director here. In addition, I take this opportunity to pay tribute to Murph, my most admired blogger on Mtime-Murph's big short film reviews are the best I have ever seen, and her film reviews are wonderful, everyone is welcome to read it.
Hao
2017.6
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