Those Years When I Was Forced to Top the Forbes List

Chapter 371 You're not even willing to vote for the Singularity?

In two days, Chen Xuebing made dozens of phone calls to people in China.

The core idea is to obtain some foreign exchange investment quota.

He can get the money; borrowing over a billion yuan through Changzheng's investors shouldn't be a problem.

However, this is different from ODI (Outward Direct Investment), which is for business operations and non-financial purposes. Currently, there are only two formal channels for large-scale investments with financial attributes.

The QDII (Qualified Domestic Investor) system launched its first pilot program last November – the Huaan State-owned Assets Allocation Fund – allowing domestic investors to flexibly invest in overseas capital markets.

Domestic guarantee for overseas loan refers to issuing loans overseas by mortgaging domestic deposits or fixed assets. This channel was opened up in 2005 in the "Notice on Improving Foreign Exchange Management of Foreign Mergers and Acquisitions (Huifa [05] No. 11)," but it requires approval from the State Administration of Foreign Exchange on a case-by-case basis, and there are no clear operational details.

These two policies are essentially paving the way for state-owned enterprises to go global, and are not yet open to private enterprises.

Chen Xuebing used many connections, even contacting Central Huijin Investment Ltd., but still did not receive a positive response.

The Hong Kong route is no longer viable. Firstly, the amount of money involved is too large, and secondly, the control over underground banks has been tightening since 06. Next year, Lao Huang of Gome will be eating cornbread because of this, and he doesn't want to be implicated.

After some deliberation, he sent a copy of Singularity Technology's latest audit report to Goldman Sachs China through Liu Chuan to see if Goldman Sachs' direct investment department was interested.

Since Singularity needs to raise funds from international institutions anyway, Goldman Sachs is certainly qualified to be an overseas strategic investor in Singularity. If a deal can be reached, then directly holding the investment funds in an overseas account for CDS investment is also a viable option.

Two days later, he received a document from Goldman Sachs.

The information in the document was very comprehensive, and he didn't even look at it in detail. He then saw the name Paulson & Co. Inc. on the seller's list of a CDS contract with the designation "ABACUS-7S".

This contract, which was launched in January of this year, outlines $240 billion in underlying assets and is still searching for a counterparty.

The underlying assets of the contract surprised him. After looking at them carefully, he was still not quite sure about the underlying model for this asset selection, so he forwarded the information to Cai Zhijian.

Cai Zhijian called him just ten minutes after receiving the email:

"This is an AA-rated asset contract with underlying assets in four states: California, Florida, Arizona, and Nevada. Although the specific asset details are not visible, the housing price growth in California and Florida is very good, so the default risk should be very low! How can you join the seller's insurance (CDS)? Moreover, this contract was initiated by the seller. If you want to join, you have to get the seller's company to sell you the credit line, or you have to expand the underlying assets of the contract."

Chen Xuebing needed to understand the underlying logic of the contract for this reason, so he said with a hint of research: "First, study its underlying asset composition and think about why I'm showing you this contract."

Cai Zhijian felt a little unsure after hearing Chen Xuebing's certainty.

After all, the chairman never makes a mistake.

He hesitated for a moment, then said he would think about it again.

The following morning, in the Chinese night, Cai Zhijian called again, his tone extremely excited: "I understand, I finally understand!! I checked the real estate situation in California and Florida! Although the real estate market is performing very well, that's precisely why it's so easy to refinance! Most properties have been mortgaged twice! With such leverage, once the price increase stagnates or falls, borrowers have borrowed too much money, their willingness to repay will decrease significantly, and they are very likely to default! Moreover, because of their high credit ratings, the insurance rates for these assets are also very low! Overall, the average annual premium is only about 2.3%, and for a four-year contract, the total premium is less than 10%! So this team can leverage $20 billion to secure a $240 billion contract! Twelve times leverage! It's all because of leverage!"

After this explanation, Chen Xuebing finally understood.

In fact, given his experience of the real estate bubble bursting in his previous life, it was very easy for him to understand.

Under current US lending policies, the loan-to-value ratio can reach up to 90%, and second mortgages are allowed during periods of rising housing prices. For example, if you buy a $200 million house with a $20 down payment and owe the bank $180 million, and the house price rises sharply to $300 million, you can immediately borrow another $100 from the $80 million increase, leaving you with a principal debt of $260 million.

Once these house prices start to fall, the secondary housing market will quickly lose liquidity. The US doesn't have housing price restrictions like China, so the price could very well drop rapidly back to $200 million or even lower. Borrowers would then have to pay $260 million in debt, plus interest. Who would be willing to pay that?

Chen Xuebing smiled and shared his opinion: "I think this so-called AA rating is also inflated. It may be the result of collusion with the rating agency. Its actual rating may be 3B or even 2B."

"Hiss, this is a rating from Moody's!" Cai Zhijian said in disbelief.

Chen Xuebing grinned: "What's wrong with Moody's? I don't believe S&P either."

Before the subprime crisis, the US financial system was the model for the whole world. Who would have believed that world-renowned rating agencies like Moody's, S&P, and Fitch would accept money?
But he doesn't have this psychological barrier; in fact, he has developed a habitual way of thinking that doubts the referees.

However, the time for short selling is quite tight, as March is the annual report season.

Because the quarterly financial reports in the United States were not strictly audited, the financial reports of subprime mortgage companies were still thriving in the previous quarters. However, the annual report audit is very strict, and many subprime mortgage companies will not be able to hide their previous losses when they are released in the annual report, and they will be revealed all at once.

There will inevitably be panic in the market, and the window for shorting ABX (the composite index of subprime mortgage-backed securities) may gradually close, while the liquidity of derivatives such as CDOs and CDSs will also deteriorate.

Without further hesitation, he immediately called Mark at Goldman Sachs, expressing his desire to join the sell-side of the "ABACUS-7S".

Then there's Goldman Sachs, their New York headquarters.

The hospitality has been upgraded.

Chen Xuebing led Goto Miki to the bronze sign at 85 Broad Street, where Fabrice Tour, director of Goldman Sachs' SPG (Structured Products Group), came downstairs to meet him.

“Mr. Chen, you’ve presented us with two difficult problems.” Fabrice shook hands with him and said, “Paulson’s team is unwilling to reduce their share, and your valuation of Singularity Technology is also putting my colleagues in a difficult position.”

"I've heard that Goldman Sachs can solve all the world's problems, isn't that right?" Chen Xuebing asked rhetorically.

"of course."

Fabrice smiled, led him upstairs to SPG headquarters, and got straight to the point:
"As an intermediary, we ensure that all documents are transmitted confidentially through DTCC (Depository Trust Company of America) to avoid direct contact between the buyer and seller. Of course, you also cannot meet Paulson's team."

“That’s a real shame.” Chen Xuebing raised an eyebrow, put his hand in his pocket, and pressed the button on the prepared recorder. “I also plan to meet the architect of the contract.”

“Mr. Chen may have misunderstood.” Fabrice said somewhat cryptically, “ACA Management is the one that selects the underlying assets, while Paulson Fund is just a sell-side investor.”

If the fact that the seller is the selector is exposed, the buyers of the CDOs may be furious.

"Okay, I don't quite understand your contract model. It seems I'll need you to explain it to me." Chen Xuebing shrugged. "Do you think I can make money by choosing Paulson's side?"

Fabrice frowned when he heard Paulson's name again, but describing CDS as "Paulson's camp" was indeed not wrong.

"Yes, I think there's a great chance."

"So the CDO buyer will lose money?" Chen Xuebing asked again.

Fabrice was embarrassed. Wouldn't saying this be irresponsible to the buyer?

"That's not necessarily true."

"Then where can you make money?" Mr. Chen asked, pressing for details.

"We believe this is a relatively neutral contract. The possibility of widespread defaults on real estate is very small, and the buyer of the contract has a good chance of getting the security deposit. However, over a period of four years, there will always be some properties that default. Each default would result in a 12-fold return, which would be a huge reward for those who dare to gamble."

Fabrice heard from Mark that Mr. Chen preferred conservative investments and really wanted to ask Chen Xuebing why he was betting on a real estate default. However, Chen Xuebing had already decided on his investment direction and wanted to sell company shares to increase his leverage. Fabrice didn't want to cause trouble and just wanted to sign the contract as soon as possible. Controlling his curiosity might allow him to earn more.

When Chen Xuebing heard Fabrice mention "12 times the return," his smile resembled that of a gambler in Las Vegas.

Fabrice noticed the smile and thought to himself that Singularity, the company favored by Goldman Sachs China, might not be worth Goldman Sachs' investment. With such a gambling leader, it might collapse soon.

He had originally planned to discuss the value of Singularity, but he changed his tune: "Well, Mr. Chen, we've found a counterparty for you, ABN AMRO. They're willing to sell you an additional $1.1 million insurance policy based on the underlying assets of ABACUS-7S, meaning this contract has two layers of insurance. However, our investment department isn't too optimistic about your company's valuation; 66.2 billion RMB might be too high. Can you accept a offer of $6 million?"

Chen Xuebing frowned.

$ 6 billion.

It's less than 48 billion RMB.

“PwC gave me a valuation of 66.2 billion, and that valuation is still increasing,” Chen Xuebing cautioned. “To be honest, I wouldn’t have accepted this valuation if it weren’t for investment. For you, this is a rare opportunity.”

If this investment hadn't been able to increase eightfold, he wouldn't have considered raising funds for Singularity at this time; he would have waited until the Kirin was officially launched.

Fabrice shook his head again.

Chen Xuebing patted the sofa armrest and simply got up.

"Then let's not talk about financing, let's just have $1.1 million in cash, let's sign the contract."

A dozen minutes later, the contract was handed over, and a translator who understood Chinese sat down next to Chen Xuebing, explaining some of the technical clauses.

Goldman Sachs is known for its ruthless exploitation, so Chen Xuebing was very wary of their contract. He carefully reviewed it before handing it over to Goto Miki for review.

While waiting, a phone call came in. Chen Xuebing saw the caller ID and answered immediately.

Director Luo of Central Huijin.

He had called the other party quite a few times in the past few days, but this was the first time the other party had called him on his own initiative.

"Director Luo! Is there any progress?" Chen Xuebing asked as soon as he answered the phone.

"Mr. Chen, how much money do you plan to transfer to the United States?"

"Hmm, it should be around a billion or more! Around two hundred million US dollars!"

Chen Xuebing's words reached the ears of everyone in the conference room. When the Goldman Sachs translator heard this, he also whispered to Fabrice.

Director Luo pondered for a while.

"Well, it's still difficult for us to handle this for you, but I can reveal a policy to you."

"Well, you said."

"Here's the thing, there's a regulation on the management of overseas trusts that the China Banking Regulatory Commission will release early next month. Trust companies will be able to make overseas investments with quotas approved by the State Administration of Foreign Exchange. Don't you have a trust license? You can directly apply for overseas fundraising products with a quota of two hundred million US dollars. That shouldn't be a problem."

Chen Xuebing was overjoyed.

The policy is really here!

But after a moment's hesitation, he asked, "Won't this application process be very long? I'm in a bit of a hurry."

Director Luo chuckled: "We can't really help with things outside of policy, but things within policy aren't difficult. Here's what we'll do: I'll help you with the State Administration of Foreign Exchange, and as for the China Banking Regulatory Commission, I'll introduce you to Director Liu of the Non-Bank Financial Institutions Department. The Non-Bank Financial Institutions Department is the regulatory authority for trusts. You can have a meal together and discuss things. As long as the investment is compliant, I think the application can be processed within a week."

Chen Xuebing breathed a long sigh of relief, his smile growing even wider.

The contracts currently under review indicate that long-term investment contracts for clients in China have payment grace periods, given the strict foreign exchange controls; funds should arrive within a month without any issues.

"Thank you very much, Director Luo. I will definitely treat you to a meal when I get to Beijing."

"Hehe, you've given us our first profit in the secondary market, and such a brilliant result at that! As a result, the restrictions on our investments have been loosened considerably! We're able to relax the restrictions and directly enter the secondary market thanks to you! President Xie instructed us to help in any way we can. However, if Changzheng has another large-scale withdrawal plan like before New Year's Day, please remind us."

"Okay, definitely!"

Chen Xuebing hung up the phone with a smile and immediately raised his hand: "Let's revise the contract, add two hundred million US dollars."

Fabrice looked somewhat puzzled: "Mr. Chen, you still have flexible funds in China? You should have told us sooner! Goldman Sachs can help you transfer them through some channels."

Facilitating the transfer of Chinese funds to the United States is also one of Goldman Sachs' businesses.

However, the channels are mostly gray areas.

Art auctions, for example, involve inflating trade figures.

Goldman Sachs collects a substantial commission from this.

Many Chinese entrepreneurs made their fortunes through Goldman Sachs.

For Chen Xuebing, such channels are no different from underground banks in Hong Kong, and are even more conspicuous.

Chen Xuebing grinned and said, "No need. My funds can come in through legitimate investment channels. You don't need to worry. This money will be from a legal source."

The Goldman Sachs staff were somewhat shocked.

Legal channels.

They are well aware of how difficult it is to access legitimate channels for Chinese outbound investment.

Fabrice, as a candidate for the next vice president at Goldman Sachs headquarters, understands this even better.

He suddenly felt a little regretful. Anyone who could manage to turn $200 million into a business in China must be extraordinary, and a company run by such a person must have a bright future.

Although he was surprised, he remained outwardly calm and said, "Mr. Chen, I know this funding will probably consume a lot of your interpersonal resources. Actually, we can still talk about your previous proposal regarding the investment in Singularity Technology. Although Goldman Sachs does not recognize external companies' assessments, we can send a team to your company for investigation."

Chen Xuebing chuckled and slowly shook his head:

“Mr. Fabrice, let’s focus on the contract at hand. As I just said, the investment in Singularity Technology is an opportunity. You see, opportunities can disappear so quickly.”

(End of this chapter)