Those Years When I Was Forced to Top the Forbes List

Chapter 370 The Road of Paulson

We departed from the UK on the morning of the 23rd.

According to the Chinese Spring Festival holiday schedule, Chen Xuebing's holiday was about to end in one day, so he joined the return-to-work rush in China and headed to the United States.

The team split into three groups: Lu Xiaochun returned to China to handle the equity change of ARM China in Shanghai.

There was a reason for bringing him along this time: he's from Shanghai, knows the area well, and besides, he also needs to go to his former employer in Shanghai, Bosera Funds, to collect debts.

Chongqing Iron & Steel will be listed on the A-share market on February 28th.

The announcement has been issued, and the opening price is set at 5.5 yuan. Chen Xuebing helped Boshi buy 6000 million shares at a price of 1.95 yuan. Chen Xuebing will take a 12% profit based on the opening price.

Of the 2.13 million yuan profit, 2556 million yuan belonged to Chen Xuebing.

According to the original agreement with Lu Xiaochun, Chen Xuebing would receive 8% of the money, totaling 1700 million yuan, while Lu Xiaochun would receive 4% of the money, totaling 850 million yuan.

Mr. Lu made a fortune and planned to use the money to buy a small villa in Shanghai. Chen Xuebing also rewarded himself and instructed Lu Xiaochun to go to Beijing after choosing a house in Shanghai and use the money to order a Rolls-Royce for him.

Mr. Lu bought a house and a car after the New Year.

Mr. Chen, however, had to go to New York to make money, despite his hardship.

Lin Bin, accompanied by two engineers, headed to Silicon Valley to work at a data center.

When Lin Bin set off, he asked Chen Xuebing how long it would take to get to the data center. Chen Xuebing hesitated for a moment and said within a week.

Aside from the time required for the trip, Chen Xuebing gave himself about five days.

The negotiations with ARM only took four days.

The task New York has to accomplish is not simple.

Wall Street is a vast industry comprised of thousands of financial institutions.

But what drives all of this is a very small group.

Investment banking.

Such institutions are generally referred to as "securities firms" in China, but the actual business of investment banks on Wall Street is much broader than that of securities firms.

"Securities firm" refers only to the part of the business that involves listing and underwriting stocks and providing stock market trading channels. It has a strong brokerage attribute and is subject to strict regulation.

Wall Street investment banks offer a wide range of services: IPO underwriting, bond issuance, M&A advisory, market making, derivatives trading, block brokerage services, private equity, wealth management, and fund distribution.

Their investment and profit focus is based on market cycle changes, and the complexity of their products is beyond imagination. Some explain economics, some redefine economics, and some even redefine the law.

Here, there is a revolving door between politics and business; the identities of politicians and businessmen are flexible, so everything is flexible.

There are currently about a dozen large investment banks on Wall Street.

As soon as Chen Xuebing landed in New York, he took Goto Miki to the North American Derivatives Investment Department of Goldman Sachs' Global Markets Division, one of the most prestigious banks in Asia.

North American derivatives, which should be a small business at a top investment bank like Goldman Sachs, has an office separate from headquarters in the prime location of One Wall Street, the Bank of New York Mellon Tower, reporting directly to the co-head of Goldman Sachs' global markets division.

As soon as Chen Xuebing arrived at the corridor area outside the office, he was attracted by several large artworks hanging on the wall. Mark, the person in charge who received them, saw that Chen Xuebing was interested and briefly introduced three of them, all of which were collections that had been purchased at art auctions for millions of dollars.

Entering the oval-shaped office, with its nearly 7-meter-high ceiling, sunlight streams in through the tall double-glazed windows, illuminating the dark oak desk. The fireplace on the wall hums softly, providing just the right amount of warmth. Even the sofa seems to have a touch of warmth, making it feel like a wealthy person's living room.

All of this shows that ordinary customers cannot come here.

Chen Xuebing was able to come because of the recommendation of Eileen Zhang, a person in charge of Goldman Sachs China. Eileen Zhang is a good friend of Liu Qiangdong, the CEO of Lenovo.

Of course, it also depends on the size of Chen Xuebing's funds.

Mark personally brewed two cups of coffee and then politely asked, "Mr. Chen, Eileen said you have $1.1 million in idle funds that you want to invest. I'd like to ask if this money has entered the country?"

Chen Xuebing pushed up his frameless glasses, which were meant to give him a refined look, and smiled, “Of course, we are a Cayman company with funds held in the Chicago Mercantile Exchange. These funds have yielded considerable returns over the past year, but the futures market is extremely volatile, and I’d like to make a more stable investment.”

His dollar fund experienced two surges in US soybean prices over the past few months, with the forward contract rising from 702.5 cents to 1070 cents, an increase of 51.9%. Although it also experienced a decline in between, and did not capture the biggest market movement, it still grew from $4300 million to $1.1 million with triple leverage. Liu Chuan, Guo Guangchang, and Lu Zhiqiang also made a profit. Apart from Chen Xuebing's 30% commission, they actually made more than double their money, earning $1050 million.

The fact that Chen Xuebing could make 1.5 times his initial investment in overseas markets in just three months amazed President Liu. Upon learning that Chen Xuebing was about to make an even more profitable investment, President Liu naturally spared no effort in introducing him to Goldman Sachs.

When Mark learned that the funds were from a legitimate source and required no complicated procedures, his smile deepened, and he gave a thumbs-up, saying, "A wise move."

Investment banks respect client privacy. Mark only inquired about the source of funds before having someone bring over three investment proposals.

The packaging for the proposal features a rather ceremonial gold border, seemingly symbolizing that it's a sure-fire way to make money.

Chen Xuebing picked them up and looked at them: a technology convertible bond, an oil-linked note, and a real estate CDO combination.

He quickly put the first two investment proposals back on the table, his gaze lingering only on the last one for a few minutes.

He's here today to short-sell US real estate assets.

This refers to a CDS (Credit Default Swap) contract.

Current US mortgage loans have been packaged into large amounts of asset-backed securities and sold to investors looking to profit from price differences.

A CDS is an insurance contract against debt default. Its original purpose was to allow investors to buy bonds and then buy a CDS to hedge against the risk of default. If the debt defaults, the CDS contract will pay out to the buyer.

This has effectively become a tool for short selling; those who buy CDS are bearish on the real estate market.

What Goldman Sachs offered him was a CDO (Collateralized Debt Obligation) contract, a financial product that bundles together a basket of debts (such as selling 1000 mortgages together). It is the opposite of a CDS, a long position contract, and has a credit rating of AA.

This is not what he wants to buy.

But it's not just a simple CDS contract; it's a carefully selected portfolio of the worst, most likely to default mortgage CDSs.

This is not a regular product, because if someone wants to buy CDS, someone else has to buy the corresponding CDO to make it a complete betting platform.

Such a product did not exist on the market before. But in the history of the subprime mortgage crisis that is currently unfolding, a fund manager named Paulson asked Goldman Sachs to create such a portfolio of CDS.

Paulson was the buyer in this gamble. He selected a portfolio of mortgages and regularly paid "premiums" to the product. If those mortgages defaulted, he would receive a huge payout, just like an insurance claim.

Goldman Sachs was responsible for packaging this product and finding investors willing to act as sellers for Paulson. These investors collected "premiums" from Paulson and then assumed the risk: if the mortgage defaulted, they would have to pay Paulson money.

This was a carefully planned fraud by Goldman Sachs to earn brokerage fees. They embellished Paulson's mortgage portfolio, presenting it to investors as an investment portfolio and even implying that it was a carefully selected, risk-controlled, high-quality asset.

Most importantly, Goldman Sachs did not tell investors who selected this "junk portfolio." Investors assumed it was a fair selection by a neutral third party. Goldman Sachs deliberately concealed the fact that Paulson, an extremely bearish investor who specialized in selecting junk mortgages, was deeply involved in and dominated the asset selection.

Of course, Goldman Sachs didn't really want to help Paulson make money. They also believed that real estate prices would rise, and Paulson's money would be wasted, giving it away to investors for nothing. The fraud was just to sell the product as quickly as possible and earn a commission.

This scheme started making money before the subprime mortgage crisis fully erupted, turning the $2 billion given to Paulson into an eightfold profit of $15 billion.

Most of the short-selling opportunities during the subprime crisis occurred in 2008, when several mega-investment banks went bankrupt due to their CDO products.

Paulson's CDS combination represented the biggest upfront shorting opportunity before 2008.

Chen Xuebing could have used his expertise to get Goldman Sachs to create such a CDS portfolio, but he couldn't guarantee he was more professional than Paulson. More importantly, there was a risk of fraud involved. Goldman Sachs was sued afterward and fined over $5 million. Although Paulson wasn't ultimately found guilty of malicious intent and didn't have to pay compensation, Paulson is a Wall Street fund manager, while Chen Xuebing is a Chinese investor. If he had created such a contract himself, the court's final judgment against him would have been unpredictable.

We had no choice but to follow the crowd and board the ship.

Moreover, he had to pretend to be unaware and follow the trend, as Goldman Sachs "proactively" recommended an investment portfolio from Paulson to him, so that he could shirk all responsibility when facing the court.

Completing this task is quite challenging. First, he doesn't even know which Goldman Sachs department is handling Paulson's contract. Second, since Goldman Sachs has specifically "packaged" the product, the specific contract won't be shown to ordinary clients, making it difficult to participate. Therefore, he asked General Manager Liu to recommend him to the most likely option, the "North American Derivatives Investment Department." This department is responsible for domestic real estate derivatives, and due to the recent boom in real estate derivative bonds, the department is at a very high level.

Without connections, you can't even get through this door.

Chen Xuebing had been planning this for a long time. When he brought Liu into the agency, it was because he was interested in Liu's connections at Goldman Sachs.

Seeing Chen Xuebing repeatedly looking through the CDO proposal, Mark smiled and said, "I heard you're an investor in Chinese technology companies. We've prepared a technology convertible bond specifically for you. Don't you want to take a look?"

"Hmm." Chen Xuebing snorted twice and shook his head: "My goal is to hedge against the risk of RMB appreciation. I don't want to transfer my dollar holdings back to China for the time being, so I want to allocate some relatively stable dollar assets, preferably with some inherent appreciation potential. The volatility risk of technology companies is too high. I've heard that the US real estate market has appreciated quite well in recent years, so I'd like to look at CDO-related products. We are willing to pay some premiums regularly, as long as the risk is controllable and we can receive money in the long term."

He didn't immediately express his desire to buy CDS, since short selling always carries a degree of malice and would raise suspicion.

CDOs also involve betting. Paulson's CDS portfolio entered at a very precise time. If he had shorted earlier, he would have lost a lot of money in the previous market conditions. The contract started around the second half of 2006 to the beginning of 2007. If he is still looking for a betting partner now, he might be taken out by Goldman Sachs.

However, what was presented was a reciprocal contract.

Upon hearing this request, Mark immediately had several copies of the CDO product brought to him and introduced them to the product.

Chen Xuebing looked at several copies, but he wasn't very satisfied with any of them.

“Well, I work on mobile operating systems in China and I’m used to looking at the underlying code. Any financial product must allow me to understand the underlying asset logic—such as the combination rules of mortgage loans, the formula for calculating the probability of default, and the underlying asset data. Your product introduction is not in-depth. What I want to see are the technical details.”

He pushed up his glasses, adopting a professional and calculating demeanor.

Mark seems a bit difficult to deal with.

What specific technical details do you need?

"It must include subprime floating-rate mortgages for the corresponding year of the product, preferably products created last year or the year before. Most importantly, I need information about the counterparty. When I make investments, I must understand my opponents. It would be best to have an investment model for the product, because I plan to enter the US financial market and want to do some related research. Do you meet these requirements?"

After Chen Xuebing made his request, Mark's expression turned troubled.

“US$1.1 million. If this amount of money were deposited in a Chinese bank, the bank manager would have to be available at any time,” Chen Xuebing said leisurely. “The bank would also have to provide my whole family with enough soybean oil to last fifty years.”

Goto Miki, standing nearby, chuckled and then chimed in with a helpful comment:
“Mark, my boss is difficult to deal with, but he’s also an easy investor to get along with. If you get him to eliminate the initial risks, everyone will have fewer problems later.”

"Okay, but the information you need needs to be obtained from headquarters. Could you be more specific? That way I can provide you with more accurate product information."

Chen Xuebing pondered for a moment, then said, "How about this, you only give me portfolio contracts with underlying assets exceeding ten billion US dollars. I prefer 'big ships'."

For a business to generate $15 billion for Paulson, it must have underlying assets of over $20 billion. However, if Paulson had approached more than just Goldman Sachs... $10 billion would have been a safer bet.

Mark then said, "Well, we have many contracts like that. Could you be more specific?"

Chen Xuebing cursed inwardly, "Damn it."

Goldman Sachs earns more than three percent in commission on a single contract, whether it's a long or short position, and there are many contracts exceeding 20 billion.

Accumulating just one contract can net you 3 million. It's like making money while lying down.

Their biggest profits aren't from financial derivatives, but from directly ripping people off in gambling.

Even if my own 110 million is multiplied eightfold, it will still be less than 900 million.

When I first started working in finance, I even dreamed of being on par with Goldman Sachs.

I still feel like I didn't earn enough.

"Since there are so many opportunities, let me see them all. Maybe I'll invest more, maybe two hundred million, or even three hundred million."

Chen Xuebing stood up, his mind racing as he considered the most profitable investment portfolio.

Such a tremendous opportunity and a sufficiently large platform are hard to find, so it's worth spending more time on it.

Upon hearing this, Mark also began to re-evaluate Chen Xuebing.

Two hundred million, three hundred million. The service fee will double, and his attitude will naturally double as well.

Moreover, Goldman Sachs didn't even have a list of such wealthy Chinese individuals.

He couldn't help but show an even warmer smile: "Okay, Mr. Chen, let me register your information. The information you need will be sent to your email. Goldman Sachs is honored to serve you."

(End of this chapter)