From legendary short seller to god of American capital

Chapter 412 Betting Against Small Landlords: Real Estate Trusts Must Showcase Their Strengths

"But there's a problem, Mr. Livingston," Charlotte Astor said, every word carefully chosen. "What if the crisis doesn't come? Also, Manhattan land is very valuable, and if they flock to borrow money, we might not have enough to lend them."

“Good question, madam.” Larry smiled, a smile with the composure of a chess player. “The important thing is our strategy for selecting collateral. We won’t accept just any land. We only accept land that is adjacent to the existing properties of the Astor family. There are two reasons for this: first, to limit the size of the land that will be mortgaged to the company in the future; second, we only accept the best land in the most sought-after locations. And—”

Larry's finger traced several areas circled in red on the map, areas that Astor IV had acquired during the division of the family property.

Located along the planned subway line, “Look here, Madam, John. These are your three properties in the southeast corner of Times Square. If the other five adjacent plots—currently owned by three different people—can be mortgaged by our trust company, then in the event of a crisis, we could potentially acquire this entire block, all eight plots.”

King Astor IV's breathing suddenly quickened. He abruptly stood up, walked to the map, and stared intently at the area Larry had pointed to. It was a perfect rectangular block, bordering two main roads; if it were fully developed—

"My God! This is exactly the devil's trap you just mentioned, built with the devil's dictionary!" King Astor IV exclaimed, looking at the map.

"John! Don't mention the devil in front of me, it's disrespectful to God!" The old lady glared sternly at her son, then turned to look at Larry, her eyes revealing undisguised admiration and joy.

"The trust company will need a large sum of money, and we can certainly advance part of it for the Astor family. Can you find that money?" the old lady asked.

"Of course! Madam, I have $20 million in margin in a Chicago bank. That's all real capital reserves, fully paid up," Larry said with a smile. "Now, the Chicago syndicate has almost completed the liquidation of the Chicago Stock Exchange, and the money has been arriving in my account in installments."

"But I'm worried it still won't be enough—this is New York land, and even if it's discounted in the future, the money needed to buy it will be an astronomical figure!" The old lady's gaze also turned to the map, and she frowned slightly.

"Madam, this is where I come in!" Larry puffed out his chest. "The trust company won't let these mortgages sit idle once it acquires them. We can package these mortgages—the rights that may eventually be converted into land—and issue a new financial instrument."

"Financial instruments?" The old lady raised her eyebrows.

“Yes. We can call it—a ‘Land Mortgage Trust Beneficiary Certificate.’” Larry returned to the coffee table and quickly scribbled a few lines on a piece of paper. “We’ll package all the mortgages into an asset pool, and then issue two different tiers of certificates based on that: senior certificates and subordinated certificates.”

He drew two boxes side by side, wrote "Priority" next to the first box and "Secondary" next to the second.

"A priority certificate, face value of US$100, with an annual interest rate of 6%, payable semi-annually, and principal repaid at maturity. Its priority of repayment is..."

First, all the mortgaged land held by the trust company serves as collateral. This type of certificate is low-risk and offers stable returns, making it ideal for conservative investors such as life insurance companies, university endowments, and widows and retirees seeking a stable income.

"As for subordinated securities," Larry pointed to the second box, "they also have a face value of $100, but no fixed interest. Holders only receive any remaining returns after the principal and interest of the senior securities have been fully repaid. This means that if mortgage default rates are high and land disposal goes smoothly, the yield on subordinated securities could be as high as 20%, 30%, or even higher. Conversely, if default rates are low, or land disposal doesn't go smoothly, holders of subordinated securities could lose everything."

King Astor IV's eyes lit up. He fully understood the brilliance of the design: "So—senior securities attract conservative capital, providing low-cost financing for the trust company. Subordinate securities, on the other hand, are reserved for speculators willing to take high risks for high returns."

“Not entirely ‘speculators’.” Larry smiled, turning his gaze to the old lady. “The subordinated securities will be entirely held by my Livingston Trust Bank.”

The study suddenly fell silent.

The fire in the fireplace suddenly shot up, bursting into a string of sparks, before slowly settling down.

The old lady and King Astor IV both looked at Larry, their eyes filled with shock, scrutiny, and a hint of sudden realization.

"You—" King Astor IV's voice was somewhat hoarse, "You want to hold all the subordinate certificates yourself? To take on the greatest risk?"

“Yes,” Larry said calmly, “because I trust my judgment. I believe the crisis will come, I believe those mortgaged lands will default, and I believe we will eventually acquire those lands at extremely low prices. And if my judgment is correct, the yield on the subordinated securities will be far higher than the 6% fixed interest rate on the senior securities.”

He paused, his gaze sweeping over the mother and son. "But this requires the involvement of the Astor family. The reason senior securities attract conservative investors is not only because of the 6% interest rate, but also because of its guarantee—all the mortgaged land held by the trust company. But if it's just these lands, their value could also shrink during a crisis, and investors will worry. So, we need a stronger guarantee."

The old lady spoke slowly, her voice carrying a knowing calm: "You need the reputation of the Astor family as collateral?!"

“Yes, madam,” Larry said candidly. “A newly established land-mortgage trust company has limited profit potential and the amount of capital it can raise. Furthermore, a new company's reputation isn't enough to secure substantial funding. But a company dedicated to reviving the Astor family's ancestral traditions is different!”

As he spoke, Larry looked at Astor IV and said, "If John were to come forward and send a signal to all sectors of New York society when the trust company is established that he is a practitioner of the Astor family's ancestral precepts and plans to acquire enough land to restore the Astor family's glory, then both the clients who mortgaged their land and the banks and insurance companies that will finance the company's plans in the future will agree with him."

"Wait, I want to ask, will this affect the land along our existing subway line? For example, will it require guarantees or something?" King Astor IV asked urgently.

"This won't cause your family to lose ownership of the land; it just adds a layer of legal liability," Larry said earnestly.

The explanation states, "Your family's properties in the same neighborhood can serve as enhanced collateral," as written into the issuance documents of the senior warrants. Specifically, this could mean that if the trust company's proceeds from disposing of the mortgaged land are insufficient to cover the principal and interest of the senior warrants, the Astor family has the right to acquire the land at an agreed-upon lower price to make up the difference; or, more simply, your family's land can serve as "second-priority collateral."

"In other words—"

"This means that your family won't lose ownership of the land; it just adds a layer of legal liability. But it's this liability that will elevate the credit rating of the senior tranche from risky mortgage-backed securities" to "quasi-Treasury bonds" backed by New York's oldest and most established real estate families." At that point, not only insurance companies, but even the most conservative banks and out-of-state pension funds will scramble to buy it.

Larry laughed and revealed his long-planned scheme, which was also his original intention in bringing the Astor family into the business together. Issuing another kind of "greenback banknote" was a trick he learned from Gage.

King Astor IV took a deep breath and slowly exhaled. He walked back to the chair next to his mother, sat down, clasped his hands on his knees, and lowered his head in thought.

The old lady kept looking at Larry, her pale blue eyes like two bottomless lakes.

"Let me sort this out," King Astor IV finally spoke, his words slow and deliberate, as if he were untangling complex threads in his mind. "The first step is to establish a land mortgage trust company. You will contribute cash, and our family will contribute some land along the subway line as seed and credit enhancement."

"The second step was for the company to offer high interest rates—for example, 12% per annum—to those who held prime land, but..."

We offer mortgage loans to homeowners who may face financial difficulties in the future, accepting only land adjacent to our family's land as collateral.

"The third step is for the company to package all these mortgage loans and issue two types of certificates: senior certificates—with an annual interest rate of 6%, guaranteed by Astor Land and sold to conservative investors; and subordinate certificates, which are held entirely by your bank and offered at a higher yield."

"The fourth step is to wait for the crisis. If a crisis breaks out and a large number of borrowers default, the company will acquire ownership of the mortgaged land and purchase the entire block at a very low price. If the crisis does not occur, the company can still obtain a considerable interest spread: 12% loan interest minus 6% certificate interest."

He looked up at Larry, his eyes gleaming with excitement and disbelief. "This isn't just buying land at rock-bottom prices, Livingston. This is—using the entire financial market as ammunition for our land acquisitions. The investors in the senior tranches think they're buying a safe, fixed-income product, but actually, their money is being used by us to bet on the collapse of the New York real estate market?"

"To be more precise," Larry corrected, his chess-player smile returning, "it's betting on panic that leads to the mispricing of quality assets. Investors in senior warrants get the safety and stable returns they want. We get low-cost funding and the ability to acquire assets during a crisis. And those homeowners who will be forced to sell their land in future panics—"

Larry didn't finish his sentence, but his meaning was very clear: this was a gamble between mortgage trusts and small landowners. And their despair would become the cornerstone of the New York real estate empire.

The old lady slowly stood up. She walked gracefully to the window, turned her back to the room, and gazed out at Fifth Avenue. Sunlight streamed through the glass.

Li, her silver hair was gilded with a layer of pale gold.

After a long while, she turned around and looked directly at Larry.

“This plan, Mr. Livingston, it’s… elegant,” the old lady chose a rare adjective. “It solved all the problems we’d discussed: how to secure land at low prices when we had money, how to have sufficient funds when a crisis hit, and how to transform the Astor family’s land credit into financial leverage. It even,” she paused, a complex emotion in her voice, “perfectly bypassed my father-in-law’s ancestral rule of never selling land. We didn’t sell the land; we simply used it—to enhance our credit.”

She walked back to the coffee table, picked up the sketch Larry had drawn, and examined it closely. Then, she looked up at her son, "John, what do you think?"

Astor IV met his mother's gaze, his eyes filled with undisguised excitement and determination. "Mother," he said, "I believe we should do it. This may be the biggest opportunity for expansion for the Astor family in a hundred years. We will no longer be passive rent collectors; we will become—the shapers of New York."

The old lady nodded slowly. She placed the sketch back on the coffee table, sat back down in her wing-back chair, and sat with the dignified bearing of a queen.

“Well then, Mr. Livingston,” she said, her voice regaining its usual calm, but something ignited deep within her pale blue eyes, “the details. We need lawyers, actuaries, trust documents. The size of the senior tranche, the interest rate, the term.”

The equity structure of the subordinated instruments. The specific legal arrangements for the Astor family land as enhanced collateral. And—" She paused.

"Thump, with sharp eyes—that's the name of this trust company. It should have a name that reflects our spirit of cooperation."

"As for the name, I think we could call it Metropolitan Land Mortgage Trust Company. It's simple, direct, and unobtrusive, but it implies ambition," Larry suggested.

The old lady nodded slightly, and for the first time, a truly relaxed smile appeared on her face.

"An equally elegant name, isn't it, John?" The old lady looked at her son.

King Astor IV nodded. "Yes! Ultimately, to get this done, we need to leverage our respective strengths, just like the name suggests. Oh, by the way, Larry, what are your thoughts on the equity distribution for the mortgage company?"

We've finally gotten to the core of the topic!

Larry's face broke into a knowing smile, as if it were a long time coming. After a few seconds of contemplation, he looked at the two of them and said frankly, "Madam, John! In this deal, we will each play an irreplaceable role. Without the Astor family's reputation, we wouldn't have been able to raise so much money; and without my involvement, the trust might not have been able to achieve its most sophisticated operation—after all, I'm the one who advised John to acquire land along the subway route before construction began, and who can now foresee the future crisis."

Larry's words were a subtle reminder to the Astor family not to try and use my ideas to collaborate with others. Without my insightful perspective that cuts through the fog of history, you wouldn't truly maximize your profits.

Of course, this was just a subtle reminder. King Astor IV and his mother were shrewd enough not to miss their unique role.

After Larry finished speaking, both mother and son nodded in unison in agreement.

"I suggest a 50/50 split, with the Astor family taking 50% and me personally taking 50%," Larry said carefully, choosing his words. "The initial capital doesn't need to be too much; the real estate mortgage trust only requires a registered capital of $2 million, and we'll each contribute $100."

10,000. But I can use bank or securities firm channels to issue corporate bonds. And once we obtain the first batch of collateral, we can issue both senior and junior tranches of income certificates. At this point, my trust bank funds can enter the market —

Therefore, we only need to acquire land in batches, in fixed quantities, and according to our capabilities, so that we can complete the land acquisition while keeping the risks under control. After this crisis, we can sell the scattered plots and retain the entire landmass.

In short, the future is promising!

Larry reiterated the overall risks and benefits of the project, aiming to emphasize the risk-reward ratio of both parties and their distinct and irreplaceable roles. He also stated that a 50% equity stake for each party was the fairest outcome for both.

King Astor IV looked at his mother again, and the old lady looked at Larry with admiration and approval.

“That’s a great idea!” King Astor IV concluded. “Mr. Livingston, we, the most legitimate heirs of the Astor family in New York, will cooperate with you in a spirit of honesty and mutual benefit. After we have consulted with the family lawyers, we can proceed with the establishment of the Metropolitan Mortgage Trust.”

"It's my pleasure!" Larry said with a smile.

The old lady calmly looked at Larry and said, "Very well. So, Mr. Livingston, when do you think we can begin?"

"The sooner the better, madam," Larry said, glancing at the calendar on the wall. Today was April 17, 1893.

"I suggest you finalize the legal documents this week. My banking team will meet with your lawyer next Monday. Complete company registration and the first round of mortgage screening by mid-May. Issue the first batch of senior warrants in early June. And by this fall—"

He paused, looking out the window—the snow on Fifth Avenue had mostly melted, and the dirty meltwater flowed into the roadside drains, rushing and gurgling like the unstoppable flow of time itself.

"By this fall," he said softly, as if stating a preordained prophecy, "when the first withered leaf falls, we should be ready for New York's worst winter in a century."

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