They’re all reborn, what’s wrong with being a little more almighty?

Chapter 229 The novel reflects reality
Thomas opened "The Big Short" with great anticipation. He really wanted to see as soon as possible what kind of work this Amazon's number one bestselling author would bring.

Soon, Thomas discovered that there was a lot of financial knowledge in "The Big Short". Fortunately, there were explanations for these financial knowledge in the book, and after reading the explanations, Thomas, a layman, could understand it.

"A large number of subprime real estate loans defaulted, but Wall Street investment banks did not strengthen supervision or find a way to remedy the situation. Instead, they planned to take advantage of this opportunity to make a fortune? This plot is indeed very Wall Street!"

When Thomas saw this plot, he didn't take it seriously. After all, it was a fantasy novel and all of it was the author's own imagination and shouldn't be taken seriously.

The following plot shows that the rating agencies and investment banks colluded with each other to deliberately raise the credit ratings of credit default swap products, and the various shameless behaviors of investment banks after the subprime mortgage crisis broke out.

"Although this is a plot that the author imagined, if you think about it carefully, it is also quite ironic of social reality. The tycoons on Wall Street have always been ruthless.

If such a work is published, the investment banks and financial rating agencies on Wall Street will definitely be unhappy! The author may even be sued!" Thomas thought to himself.

After spending a whole afternoon, Thomas finally finished reading "The Big Short". This time he could only be considered to have read it hastily without carefully savoring the content.

But at least Thomas remembered the plot.

“From a literary perspective, this work is very good. The plot is very compact and the story is full of ups and downs. It has everything a novel should have. It is an excellent work.

However, the final outcome was the subprime mortgage crisis that broke out in the United States, and the entire financial system was facing collapse. Many people would definitely not like this setting.

However, this work is still worth publishing. After all, Zhang Wei is number one on Amazon's bestseller list, and with "The Thirst Game" as a foundation, this alone can attract many readers to buy it. "

Based on his reputation as a best-selling author, Thomas would not refuse Zhang Wei's publication, but if he really wanted to publish his work, the work would still need to be refined.

"Tomorrow morning, I will give This Big Short to other editors and we can discuss it together!" Thomas said to himself.

The next second, Thomas suddenly realized a problem. He opened the computer web page and searched on Google for various financial products introduced in "The Big Short".

"MBS, mortgage-backed securities, really exist, and they appeared in the 70s!"

"CDO, collateralized debt obligation, we also have this, it is a financial product that appeared in the 1980s."

"CDS, credit default swaps, we also have this thing. It turns out that the environmental compensation caused by the tentacles of the Mobil Valdez cruise ship was paid in this way."

“Ordinary people definitely don’t have access to these financial products. It seems that our best-selling author has a very professional financial knowledge base!
That's not right. I remember when I first met Zhang Wei, he introduced himself as being in the Department of Biology at Princeton University. Biology has nothing to do with economics! He is indeed a Princeton University student, and he knows a lot. "

After pondering for a moment, Thomas found a number in the contacts on his phone.

This is the phone number of a fund manager who often sells various funds to Thomas. If Thomas has some spare money, he will occasionally buy some.

Thomas called the fund manager, and after a few pleasantries, Thomas asked directly about mortgage-backed bonds.

"Mr. Thomas, you are talking about MBS, right? Why? Are you interested in this kind of investment? If you are interested, I have some similar products to recommend." said the fund manager.

"Are you talking about a product that directly purchases this type of mortgage-backed bond, or a comprehensive product?" Thomas asked.

"Of course it is a comprehensive product. Banks will package various mortgage-backed bonds, as well as other financial products such as ordinary bonds, debts, insurance policies, etc. into a commodity and then sell it to the market. Generally, this type of product has fixed income." said the fund manager.

"Are you talking about a CDO?" asked Trust.

"Yes, it's called CDO for short, Mr. Thomas. It seems you have done your homework and actually know about CDO."

"What are the risks of this CDO?" Thomas asked.

"Any financial product has risks, and CDO is no exception. However, rating companies will rate financial products. The higher the rating, the lower the risk. If you are interested in this kind of product, I can recommend you several 2A-rated products. This level of product has very low risk and the return is also considerable!"

When Thomas heard the fund manager mention ratings, he immediately thought of the novel "The Big Short", in which credit rating agencies and investment banks colluded to deliberately raise the ratings of financial products.

"I'm overthinking it. It's just a novel. Don't take it seriously!" Thomas consoled himself and then asked, "There's something called CDS. Do you have it?"

“You mean the credit default swaps?”

"Yes, that's it. I want to ask, do you have any recommendations for credit default swaps related to real estate?"

"Mr. Thomas, you are really well-informed. Real estate credit default swaps are a new product that has only recently appeared. However, this product is only purchased by funds and investment institutions, and ordinary investors cannot afford it.

Because a credit default swap can cost tens of millions of dollars, or even hundreds of millions of dollars, if ordinary investors want to buy it, they can only buy funds that invest in this kind of product!"

The fund manager continued, "Mr. Thomas, I suggest you don't touch this kind of product. The real estate market in the United States is very good now, and house prices have been rising. If you buy a house today and sell it after a while, you can still make money!

Therefore, it is impossible for the real estate market to default on credit in the short term. Buying this kind of credit default swap product is equivalent to giving money to investment banks!"

The fund manager's words shocked Thomas again. Isn't this exactly what was mentioned in the novel?
In the novel "The Big Short", one of the protagonists approached an investment bank and asked to buy credit default swap products, but the investment bank thought that this was a gift of money to it.

The result was the outbreak of the subprime mortgage crisis, the protagonist made billions, and the investment bank shamelessly shorted itself in order to recoup its capital!

"Isn't this a fantasy novel? How did the content of the novel reflect reality?!"

Unconsciously, cold sweat broke out on Thomas' forehead. He had a premonition that what happened in the novel was happening and the subprime mortgage crisis was really coming!
"I'm overthinking it! I must be overthinking it! This is just a fantasy novel, it can't be true!"

Subconsciously, Thomas took out the manuscript of "The Big Short" and read it again, especially the content about defaults in the subprime mortgage market, which he read many times in a row.

Finally, Thomas couldn't help but dial Zhang Wei's number.

"Mr. Zhang, there is something I want to ask you. What you wrote in the novel, will it really happen in the future?" Thomas asked earnestly.

"I wrote the novel up to 2008, which is only two years from now. You will know whether the things in the novel will happen by then, right?" Zhang Wei said happily.

"Mr. Zhang, it's like this. I also know a few friends in the financial circle. I specifically asked them. According to their descriptions, many of the things you introduced in the novel exist in reality."

"This is normal. Artistic creation comes from reality! Many excellent works of art are processed based on reality."

"That means that all the content in the novel is your artistic processing? Then I feel relieved!" Thomas breathed a sigh of relief.

"Of course it's artistic processing! This is a novel, not a non-fiction. What's more, the background of my story is the next two years. I'm not a wizard, so how can I predict what will happen in the future!" Zhang Wei continued.

"You make sense. I was overthinking it. Maybe I've been under too much mental stress lately. My mind is a little fuzzy and I'm too nervous." Thomas said.

Zhang Wei asked, "Why? Mr. Thomas? Have you bought a house recently?" "I haven't paid off the mortgage on the house I live in yet! How can I have the money to buy another house?"

"That's good. If you live there yourself, you have to continue living there no matter whether the price goes up or down. You can neither lose money nor gain. But if you buy it for investment, I suggest you sell it quickly!" Zhang Wei said with a smile.

"Take action quickly?" Thomas was stunned.

According to what you said, what you wrote in your novel is true!
……

The most famous book about the 2008 subprime mortgage crisis is naturally "The Big Short". This book was published in 2010 and the original author is the American super best-selling author Michael Lewis.

Michael Lewis graduated from Princeton University and the London School of Economics. He used to be a bond trader on Wall Street and later became a writer for the New York Times. He once wrote a book called "Lying Poker", which is hailed as a classic masterpiece describing Wall Street in the 1980s.

The work "The Big Short" is a novel based on several Wall Street fund managers and short-selling professionals, adapted from their actual operations during the subprime mortgage crisis.

The main content of the novel is the story of a few unknown people who saw the impending US subprime mortgage crisis early on, and thus bet on the collapse of the US financial system, making a fortune.

The tool they use to make money is credit default swap, or CDS for short.

When talking about the US subprime mortgage crisis in 2008, we have to start from the end of the th century. At that time, the US had very strict supervision over the banking industry, and the division of labor among commercial banks, investment banks, trust funds, insurance companies and other financial institutions was relatively clear.

But at the end of Clinton's second term, he signed a bill that relaxed the scope of operations of financial institutions, which laid the seeds for the subprime mortgage crisis.

In 2000, after the Internet bubble, a large amount of funds had nowhere to go and poured into the real estate industry, so house prices in the United States began to rise.

The booming real estate market also led to the rapid development of the subprime mortgage market.

Americans all use credit cards and have a credit score at the bank. Under normal circumstances, loans are issued to those with high credit scores, but subprime loans are specifically issued to those with low credit scores, but the interest rate is higher.

Due to the relaxation of financial institution regulation, a large number of financial institutions issued subprime loans to people with low credit scores between 2000 and 2007.

People with low credit scores are more likely to not be able to repay their loans and have a greater chance of incurring bad debts.

If house prices keep rising, then the house is a high-quality asset. Even if you can't pay back the loan, you can still make a profit by selling the house. Even if you go bankrupt, the bank can take the house and sell it, and you can still sell it again without losing money.

But once house prices fall and houses become negative assets, or interest rates rise and borrowers cannot repay their loans, the entire subprime mortgage market will collapse.

I would like to add one more thing here. Most of the loans Americans take out to buy houses do not have fixed interest rates, but floating interest rates. This is especially true for subprime loans, which are inherently high-risk. In order to avoid interest rate risks as much as possible, banks have to adopt floating interest rates.

Therefore, the Fed's interest rate hike will have a huge impact on the U.S. real estate market. Whether the interest rate on home purchases will increase is secondary. The key is that rents will increase, increasing people's housing costs.

The increase in housing costs means the increase in living costs, which will directly translate into inflation. So once the Fed raises interest rates, U.S. inflation will soar.

To get back to the point, after commercial banks issue loans, in order to get their capital back as soon as possible, they will convert these loans into bonds and then sell them.

In this way, the bank can quickly recover funds and transfer risks to others. At the same time, it has more capital to issue loans and earn more money by compounding interest.

This type of bond is a mortgage-backed security, also known as MBS, and investment banks are big buyers of MBS.

When investment banks buy MBS, they will not wait to collect interest, but will split it up, package it into new financial products, and then sell it to other investors to make a profit. Then they will use the funds they have recovered to do the same operation again.

The financial product issued by investment banks is a collateralized debt obligation, known as a CDO.

Therefore, the essence of CDO is actually the interest income of loans issued by banks, which is just a product after many loans are split and aggregated. If the loans can be recovered, investors who buy CDO can make money, and if the loans cannot be recovered, investors who buy CDO will lose money.

However, ordinary investors cannot determine the risks of a CDO and do not know whether to buy it. This is when credit rating agencies come into play.

Rating agencies such as Standard & Poor's and Moody's will give each CDO a rating. The higher the rating, the lower the risk, and vice versa.

But there is a trick here, that is, the rating agencies are actually supported by investment banks. Investment banks will pay you to rate. Since investment banks are the financial backers, they naturally cannot offend them, so when rating, they will deliberately rate higher, even several levels higher.

For example, a 2B product would be rated 2A, and a B product would be rated A. It is also for this reason that a large number of so-called 2A and A financial products on the market are actually B or even C, which all collapsed during the subprime mortgage crisis.

But investors don’t know this. They still think that the 2A rating is very high and that it is a financial product with extremely low risk, so they continue to buy it in large quantities. In fact, what they buy are some junk financial products.

The large amount of bad debts generated during the subprime mortgage crisis were mainly from these CDO products.

The protagonists in "The Big Short" saw this. They realized that the subprime mortgage market was about to collapse, so they took a gamble with the investment banks.

They signed a credit default swap, or CDS, with an investment bank.

This thing is like an insurance, which means that within a certain period of time, I will pay you an insurance premium. If the bonds I hold fall in value or default, then you will compensate me with money. If the bonds I bought do not fall in value, then you will earn the insurance premium for free.

Investment banks believed that house prices would not fall in the short term, so real estate-related bonds would not fall or default either. This was like giving me money for free! So they were happy to sign this CDS agreement.

In actual operation, I don't need to actually hold such a bond to sign the CDS agreement, as long as the investment bank can pay the compensation at that time.

Investment banks don’t care whether you have the bond or not; they just want to earn premiums.

To put it bluntly, this is gambling within the scope permitted by law.

This is equivalent to buying car damage insurance. The bank will sell the insurance to you as long as you are willing to pay the premium, regardless of whether you have a car or not.

As a result, the next day, all the cars in the world exploded into ashes at the same time. At this time, even if you don't have a car, as long as you have an insurance contract, the bank will have to pay you.

As a result, when the subprime mortgage crisis broke out, these CDS agreements naturally made a lot of money.

The story of "The Big Short" is about such an operation.

Historically, in the second half of 2005, some smart people realized the collapse of the real estate market and signed CDS agreements with investment banks such as JPMorgan Chase, Goldman Sachs, Citigroup, Deutsche Bank, and UBS.

So when Zhang Wei came out with "The Big Short", the first batch of big short sellers had actually completed their layout.

Zhang Wei had no intention of making money from this. Firstly, the amount of the CDS agreement was relatively large, with the minimum starting at tens of millions of US dollars, and Zhang Wei could not afford so much money.

Secondly, there are still two years and three months before the moment when Bell waits for his turn, and the investment return cycle is too long. These two years are the golden period of China's rapid economic development. If there is spare money, it will definitely be invested in China, which will not be less than what can be earned by speaking out during the subprime mortgage crisis.

Therefore, Zhang Wei will not get involved in the subprime mortgage crisis and just focus on earning royalties from his writings!
(End of this chapter)