The richest person in Chinese entertainment

Chapter 517 Theoretical Maximum Return of $9020 Billion, Bankers Can't Sit Still
CDS is an insurance contract against debt default.

The buyer pays a premium periodically, and if the underlying debt, such as a mortgage-backed security (MBS), defaults, the seller is required to pay the "face value" of the debt.

In theory, if the underlying debt defaults completely to "0", ignoring the premium cost or the premium is extremely low, and the seller has no default risk, then the CDS return is 100% of the face value.
Just like Zhang Chen bought $24 billion worth of CDS, its actual face value was as high as a terrifying $ billion.

But generally, there are some changes.

For example, MBS will be recovered, generally about 40%, so the compensation is 60% of the face value.
Premium costs also affect returns.

Zhang Chen's premium is US$3.2 million per year, which is a rate of 3.2/24=1.333%.

This ratio is very high, generally only 50 to 100 basis points, or between 0.5% and 1%.

After all, Zhang Chen is scattered among many sellers for customization.

But the total premium of $24 billion is placed here.

If they default, each company will have to pay compensation of over 10 billion US dollars.

They were also a little scared when they saw this huge "bet".

The premium was nearly one point higher than the original market price in order to make Zhang Chen back down.

However, after some negotiation, Zhang Chen managed to get the other party to give up their guard and get a ratio of 1.33%, which he could accept.

Because according to this ratio, the face value of the CDS held by Zhang Chen is much too high.

Now calculate based on holding for two years.

Face value = 24 billion/(1.33%*2) = 9020 billion US dollars!

The leveraged profit reached a terrifying 375 times!
This is the extreme tug-of-war between premium rates and the face value of compensation amounts.

If Zhang Chen loses, he will have to pay $3.2 million every year.

If the underlying asset does not default, that is, if the homebuyers covered by the CDS purchased by Zhang Chen do not default when their loans mature, then Zhang Chen's $24 billion will be wasted.

If the institution loses, then the amount to be paid must be based on this amount.

But judging from the market conditions at the time, no one believed that the real estate market in the United States would collapse.

However, in reality, there is a risk of counterparty bankruptcy.

For example, Zhang Chen’s impression of Lehman Brothers.

This will result in the CDS being unable to be redeemed.

In addition, there will also be risks of market liquidity. CDS may be difficult to close during a crisis and need to be held until default. This requires strong financial support, depending on which party of the buyer or seller can no longer support it first.

So in general, the theoretical net income of CDS is approximately between 30% and 60% of the face value.

In order to prevent the opponent from suddenly turning the table and carrying out a "bankruptcy liquidation" by throwing all his money into the pot, he simply refused to pay and made Zhang Chen's money go to waste.

When signing the contract, Zhang Chen introduced the United States’ government liquidation mechanism, namely CCP.

This is the purpose of bringing in BlackRock and Vanguard in the first place.

They helped Zhang Chen complete the process quickly and enter the clearing platform.

Pull Zhang Chen and the other party into this clearing system to prevent the opponent from running away.

Finally, it is the choice of institution.

Zhang Chen invested $24 billion in many investment banks.

Zhang Chen has “paid the bill” for many of the world’s top banks, including Morgan Stanley, Citigroup, and Goldman Sachs.

These companies have taken over more than 50% of Zhang Chen’s business.

Other insurance companies and asset management companies took over 30%, and the rest was handed over to small and medium-sized institutions.

Now, CDS of small and medium-sized institutions have experienced widespread defaults.

The face value of the compensation required has reached 1804 billion US dollars.

Among them is Zhang Chen's $744 billion, and the rest are from Vanguard, BlackRock, and several major Hollywood studios.

BlackRock accounts for more than 80% of the remaining capital, exceeding US$848 billion, and the remaining less than US$ billion belongs to several Hollywood studios.

Do the few small institutions that took over dare to run away?

With Vanguard and BlackRock around, it doesn't matter where they go in the world.

As long as the CCP is there, even if they run away, the CCP will directly liquidate their assets through the platform and compensate Zhang Chen and his partners.

Which of these institutions does not have assets exceeding 10 billion US dollars?
If you don't run away and sell your assets, there will be some left.

If the liquidation is done through CCP.

With the intervention of BlackRock and Vanguard, it is unknown to what extent their assets will be "sold at a low price".

This is the difference between eating alone and bringing in partners.

If Zhang Chen dared to do this alone, the $24 billion would be wasted and would not even be enough.

Faced with such high compensation amounts, these institutions will definitely go crazy giving money to those home buyers to prevent them from defaulting.

The transaction can also be turned into a pile of waste paper through a series of means such as "bankruptcy".

They can only fulfill their promises when facing an opponent that they dare not provoke.

But fulfilling the contract is extremely difficult for them now.

This is the main reason why a group of senior executives from Citigroup, Morgan, Goldman Sachs and other companies came to China collectively.

"Leon, please name a price. How can you be more generous?"

As soon as Zhang Chen entered the door, he met a group of people that ordinary people in this world could never come into contact with.

Raul Derbez became CEO of Goldman Sachs in 2006.

John Mack, CEO of Morgan Stanley.

Chucky Prince, CEO of Citigroup.

Others include CEOs of various investment banks, institutions, and insurance companies, large and small.

There were more than thirty people.

In some situations, any one of these people can cause a regional earthquake with just a stomp of his foot.

But today they all came to the headquarters of Chenguang Group to "ask for a meeting" with Zhang Chen.

This "achievement" alone is an achievement that most people in the world cannot accomplish.

The person who spoke when Zhang Chen came in just now was Morgan's CEO John Michael.

But Zhang Chen did not answer his question. Instead, he walked straight past these pale-faced presidents, some of whom had dark circles under their eyes, and came to his seat.

"You all have come from far away, how about I ask someone to arrange for you to stay first?"

Zhang Chen sat in the boss chair, looking leisurely at these presidents who looked anxious but dared not speak.

“Leon, don’t worry about our accommodation. We can take care of ourselves.”

"How can I do this? Some of you are here for the first time. If I don't let you guys entertain you well, people will say I don't know how to entertain guests."

"Really, there's no need. Let's get down to business, shall we?"

Zhang Chen slapped his head when he heard this: "Oh, right, right!"

However, just as they were about to show their joy, Zhang Chen said, "It's about the movie, right? Are you all here to congratulate me on my movie's box office which is about to break 10 billion US dollars?"

John Mike's face instantly turned the color of liver.

He just didn't believe that the guy in front of him didn't know what they were here for.

Among these thirty-odd people, which one of them doesn't make tens of millions of dollars every minute?

A movie can only make a few billion dollars at best.

It is less than one thousandth of the funds they control.

However, considering that they came to ask for help today, John Michael could only suppress his dissatisfaction in his heart, and at the same time used his eyes to remind others who wanted to step forward to be patient.

"Leon, you should know why we are here."

"for what?"

Zhang Chen continued to play dumb.

CDS is a product that looks at the default of a single loan of a property held by the other party. Now he uses a movie to make people in the world who like or dislike investment withdraw their money from the bank and buy the fund he controls.

The longer it is delayed, the more likely it is that those who are thinking of making a fortune in a short period of time will also be affected, as well as ordinary people who have bought properties but lack savings.

As long as this issue is not resolved within a short period of time, these ordinary people will default more and more.

Drawing on ordinary people’s savings and investing them in the stock market is also part of Zhang Chen’s plan.

Now it's just a matter of delay.

The longer it drags on, the more defaults there will be, and the higher the "payout ratio" of the CDS he has will be, and the closer it will be to the theoretical maximum face value of US$9020 billion.

Why do you think these people who sold their houses would buy a fund that shorted their assets?
The whole world is shorting now. If they act slowly, they will become fat meat in the mouths of others.

This has to be said to be a symbol of the United States being a country based on finance.

Even ordinary people will invest their spare money in the stock market to earn profits higher than bank interest.

After Zhang Chen's incident, I dare not say that all the cash of American citizens has been invested in the stock market, but it has reached a terrifying number.

When there were signs of a housing market collapse, CG was not the only fund that shorted the market.

Subsequently, many institutions urgently put out a lot of funds to "hedge risks."

Among them are the funds that are being managed by several of us.

Shorting oneself is rare in the financial world, but it does exist.

Going long or short, as long as you buy on both sides, you can prevent the risk of a single investment direction.

Even within the CG fund, there are many real estate bosses who have bought into it.

Especially after suffering setbacks in actions against Zhang Chen time and time again.

The bosses who can no longer hold on no longer hope to overthrow Zhang Chen, but choose to join in to reduce their losses.

There are traitors all over the world.

There were problems within their allies, which was one of the main reasons why Zhang Chen dared to launch this financial crisis.

It is far from the time when there will be a large-scale outbreak of real estate loan defaults.

How can it be enough to just expose the second largest subprime mortgage company in the United States?

At least half of the thirty presidents present here need to look as pale as the CEO of New Century Financial Corporation.

“Leon, if this continues, it will do no good to either you or me.”

John Michael walked past everyone and sat down opposite Zhang Chen's desk. The others followed closely and stood behind John Michael.

The scene looked like a gangster boss coming to negotiate with his subordinates.

Zhang Chen also sneered at this: "What? Threatening me?"

As he spoke, he picked up the phone on the desk and ordered, "Bring someone over."

When a group of bank CEOs were puzzled, Zhang Chen did not explain.

The other thirty-odd people were left alone for a full ten minutes.

When there was a knock on the door, John, Mike and others who were still thinking about how to restart the topic were awakened.

As soon as they glanced at the door, they stood up to greet the visitor.

“Leon, why are you calling us here so urgently? Is there something wrong?”

Zhang Chen also stood up to greet the visitor: "Robert, have you finished dealing with the company's affairs?"

"Done! Perfect! The board is very happy!"

Robert Egger, the person who liaises with Zhang Chen.

Choosing to trust Zhang Chen during this crisis put him under a lot of pressure.

But these days, he spent his time surrounded by praise and compliments.

Before the crisis broke out, many shareholders sold a lot of their stocks before the stock price fell, not to mention leaving the market early.

It also puts Disney on the right side in this crisis.

Although Disney was not very confident about the collapse of the U.S. real estate market in the early stages, the face value of the CDS it took over from Zhang Chen was only around 10 billion U.S. dollars.

But this unexpected wealth was enough to allow shareholders on Disney's board of directors to keep their assets from shrinking, and even increase them slightly.

This achievement alone has made Robert Iger's position in the company even more secure.

"Oh, by the way, you should know the people behind me." Robert Egger pointed at the CEOs of several Hollywood studios behind him and said to Zhang Chen.

Zhang Chen looked at Barry Meyer, the CEO of Warner Bros.

Ron Mayer, CEO of Universal Pictures.

Brad Grey, CEO of Paramount Pictures.

Tom Rothman, CEO of 20th Century Fox.

There is also Kazuo Hirai, who is represented by Sony Pictures and Columbia and is somewhat marginalized.

Zhang Chen nodded to several presidents he had met a few times, then looked at the remaining two who did not speak but silenced the thirty or so bank presidents after they entered the room.

"Leon, I've heard of your name for a long time." One of them stepped forward and extended his hand to introduce himself, "John Berger, Pioneer Navigator."

Another person also stepped forward and shook hands with Zhang Chen: "Larry Fink, BlackRock."

"Welcome, both of you." Zhang Chen smiled and shook hands with the two men before asking, "Are you two here to discuss business as well?"

"No, we're here to watch." John Berger smiled and walked to the corner of the conference room with Larry Fink.

As he left, he glanced at the bank's executives and said to Zhang Chen with a friendly smile, "Don't worry about us. Just talk about your business."

Zhang Chen nodded and watched the two of them walk to two special seats in the corner and sit down.

This location is right in the center of the entire conference room.

As long as the thirty or so people sit down, they can see the figures of these two people with their peripheral vision.

Zhang Chen, along with several Hollywood presidents, sat opposite the bank presidents.

Don’t be fooled by the fact that there are more than thirty people on the other side, and each of them manages assets worth hundreds of billions or even trillions of dollars.

Compared with Zhang Chen, the Hollywood CEOs here only have companies worth tens of billions of dollars, their strength is several levels higher.

The two parties, who would never sit together before, miraculously sat together under the influence of Zhang Chen.

And they are on opposite sides.

If outsiders saw the expressions of these people, they would be even more shocked.

Because Zhang Chen and the seven people from the Hollywood studio, who should have been the weaker party in theory, all had beaming faces.

In contrast, the presidents of more than 30 banks including Morgan, Goldman Sachs and Citigroup looked dejected.

They never expected that Zhang Chen actually invited both Pioneer Navigation and Blackrock’s two great gods.

Every president present here counts.

The companies behind them include both of these two companies.

Others don’t understand the horror of these two companies, but those who hold the power in the world’s top companies certainly know what these two companies represent.

referee.

In an instant, this word emerged in the minds of John Mike and others.

For Vanguard and BlackRock, it doesn't matter much to them whether the two sides win or lose.

That's the benefit of hedging your bets.

The banks win, and the value of the stocks held by these two companies will not shrink significantly.

Zhang Chen and others win, although the bank stocks they hold will shrink or even become worthless paper.

But they can also reap hundreds of billions of dollars in spoils, which is a guaranteed profit.

"Well then." After both parties sat down, Zhang Chen looked at the thirty or so people who looked like they had lost their parents and said with a smile, "Let's talk?"

(End of this chapter)