Listening to Ren Pingsheng's assertion, Jiang Qiurong showed a thoughtful look on her face. She turned the pen in her hand and continued to use her understanding of financial products.

"MBS is a very creative invention, and it is perfect in practice. In this process, banks earn intermediate fees, management fees and interest rates, wealthy investors get stable investment returns, and poor people buy houses with loans. Occasionally, a few people don't pay back the loans, because the house prices have been rising, and the bank just takes back the house and auctions it. The bank's risks are well controlled."

Ren Pingsheng shook his head and continued:

"It's not just MBS, but also the CDO's fuel.

Seeing that Zhang Wenwu was about to ask another question, Jiang Qiurong quickly explained:

"CDO guaranteed bond certificates are a kind of bond-type financial derivatives. Investment banks acquire these MBSs with a total value of more than one trillion and divide them into different asset packages. They mix different MBSs together, combine principal and principal, interest and interest, divide them into different financial products, and then take action to earn interest spreads. The so-called CDO is the bond product derived after the investment bank packages and combines them again."

In order to increase persuasion, Jiang Qiurong walked to the whiteboard in the conference room, picked up a pen and drew formulas and diagrams on it, and kept saying:

"For example, there are two MBSs now. The principal value of A is 100 yuan, the interest income is 8 yuan/year, the principal income of B is 200 yuan, and the interest is 22 yuan/year. The investment bank buys these bonds at a price of 300 yuan, and the principal part is made into a principal CDO (total value of 300 yuan), and sells it at a price of 283 (equivalent to an annual interest rate of 6%), and the interest part is made into an interest CDO (total value of 30 yuan), and sells it at a price of 25 yuan (equivalent to an annual interest rate of 20%.

"Why is the interest rate difference between principal CDO and interest CDO so big?"

Zhang Wenwu said inexplicably:

"The reason why the price and interest rate of principal interest is different is that the principal is repaid first when repaying the loan, so the interest part is not as safe as the principal. Assets with greater risks have to pay higher interest rates to attract investors to buy. This is common sense."

Jiang Qiurong explained very carefully like a teacher.

Although Ren Pingsheng had some understanding of the essence of CDO, he had not undergone systematic financial knowledge training, so he also listened to Jiang Qiurong's explanation with interest.

Jiang Qiurong said while drawing numbers on the whiteboard:

"For such a CDO, the investment bank spent a total of 300 yuan to buy MBS and sold it for 308 yuan. It made 8 yuan a mile or one to go, which is equivalent to a 2.67% return. Although this return is not high, the 2.67% time is very short (generally 3-4 weeks), then the annualized return is more than 20%.

"And, if the 300 yuan used by investment banks to buy bonds at the beginning were all borrowed, and the short-term loan interest rate was 1.3% (i.e., the annualized interest rate was 15.6%), then the investment bank would be equivalent to a 1.34% arbitrage without principal (i.e., 300 yuan * 1.34% = 4 yuan). This model is a typical financial derivatives leverage trading model."

Ren Pingsheng applauded gently and expressed his appreciation, but he also pointed out:

“CDO transactions are inseparable from rating agencies.”

When Jiang Qiurong heard such an expert's words, she nodded in agreement and said:

"The packaging composition of financial derivatives is very complicated, and traders generally cannot understand it. Their buying and selling credentials are based on the ratings. Generally speaking, the company's rating level determines the interest rate level, and what the rating is is more important than who the company is. This also creates conditions for packaging bonds with the same rating."

"And, CDOs traded in the market are often not as simple as packing the principal with the principal, and the interest rate with the interest rate once. They are often packed multiple times."

"For example, in the above example, the principal CDO was sold for 283 yuan after packaging. Some companies may package the asset and then package part of the CDO into another CDO, that is, derivatives of derivatives. This also makes it difficult to regulate."

"In other words, after many packages, investors themselves do not know what bonds they are buying as the basis. After several packages, most people buy by looking at the ratings. The larger the company's ratings are, the more trustworthy the ratings are."

Ren Pingsheng tapped the table with his fingers and said slowly:

"The three major rating agencies in the United States all adopt the issuer paid model, which means that the rating revenue of the three major rating agencies comes from bond issuers. Then, the issuer and the rating agency form a common relationship. Since high ratings can reduce the cost of funds raised by issuers, the issuer all hopes to obtain high ratings as much as possible. Since the rating revenue of the rating agency comes from the issuer, the analysts of the rating agency may adjust their rating model, or suggest that the issuer adjust in a direction that is conducive to obtaining higher rating results."

Zhang Wenwu asked with confusion:

"Aren't the three major rating agencies recognized by the most authoritative agencies internationally? Are they not giving up the principle of professional neutrality?"

Ren Pingsheng smiled slightly and shook his hand and said:

"The so-called most authoritative is just because of their long history and great influence. Think about it, if you keep the principle of neutrality, there are no customers who will give them business, and they will never live to become the three major eras. The so-called principle of career neutrality never exists in the business field."

Jiang Qiurong stopped talking, but her eyes showed that she completely agreed with Ren Pingsheng's judgment.

Ren Pingsheng stood up at this time, his eyes cast a dazzling light and said to the two of them:

"Whether MBS or CDO, their essence is financial leverage."

Jiang Qiurong and Zhang Wenwu both looked at Ren Pingsheng attentively and listened to his explanation.

"Real estate mortgage loans are essentially a financial institution that allows you to buy a house with three times the leverage, which is the first leverage. This is basically controllable. MBS is to put the first leverage into the market and allow securities investors to further buy through leverage funds. This is the second leverage that adds leverage to leverage. CDO is to pack various MBSs together and then trade them. This is the leverage on leverage, and this is the third leverage."

"In this way, through the tools of financial derivatives, the original most basic mortgage loan funds were put into tens to millions of times. While these funds with countless leverage entered the real estate market, they also brought thousands of times of risk into the real estate field."

Jiang Qiurong couldn't help but retort:

"The risk control mechanism of banks is calculated by many mathematicians and large computers, and has high mathematical rationality. The pricing of MBS and CDO was created by David X. Li, a genius mathematical analyst and insurance actuary on Wall Street, invented by Li Xianglin, a Chinese named Li Xianglin. He used everyone's credit record Fico Fee Credit points as a reference standard, so that the overall health of each asset package can be quantified, the amplitude can be calculated, and thus pricing."

Ren Pingsheng smiled slightly and said:

"However, you have to remember that any number processing cannot be separated from artificial interference, especially in financial institutions that pursue profits. The CDO asset portfolio package can also use large computers to disperse and package a large number of defective toxic assets into good assets, and create artificial beauty by offsetting and hedging each other. For customers who do not have financial knowledge, these securities look beautiful, but in fact they are poisonous."

Ren Pingsheng's words hit the essence of financial institutions. Jiang Qiurong could not refute it. Only Zhang Wenwu was still asking:

"Financial institutions know that their assets are toxic, but they continue to sell these MBSs and CDOs. Aren't they afraid of the chain reaction caused by the poison?"

Ren Pingsheng nodded at Zhang Wenwu and continued:

"Financial institutions certainly know, but they believe that the public will not know the secret. They just need to continue selling MBS and CDOs to promote the prosperity of the real estate market, and then cause overall housing prices to rise, and at the same time offset the losses of those toxic assets."

Jiang Qiurong had a cold face just now, and then she reluctantly added.

"From long-term market tracking, real estate prices will eventually get better, and future profits will cover immediate losses."

Ren Pingsheng smiled and said:

"Finance institutions thought so at the beginning, but as financial derivatives sell more and more, profits are getting better and better. The new generation of investors have forgotten the risks that existed in the beginning of this product and took the rise in real estate prices for granted."

"Of course, this is also inevitable to fuel the US government, especially the "Householders have their own houses" plan proposed by Clinton when he was in power, encouraging and requiring major banks and subprime lending institutions to lower the threshold for buying a house. In addition, the federal interest rate has been lowering, so anyone can get a loan to buy a house. The original down payment was 30%, and the income proof was required. Now the down payment is 5% or even 0 down payment. You can get a loan by standing on the street and taking a photo. The house you bought with a loan can also be used as a mortgage and then a loan can be bought for a second house.

"Under the dual stimulation of the government and financial institutions, Americans have been constantly leveraging and leveraging to buy houses, creating a false prosperity in the real estate market, and the bubble has also arisen."

Zhang Wenwu nodded frequently while listening, and he echoed:

"Well, I think the real estate market in our country is similar, and it feels very bubbled."

Ren Pingsheng did not take on his words, and continued:

"When the market is rising, no one will feel that there is a bubble. The rising prices will cause any risk control agency to fail. After all, the bubble is a bubble. No matter how gorgeous a bubble is, it will still burst with one punch."

Jiang Qiurong finally spoke, she calmly said:

"The Fed raises interest rates."

Ren Pingsheng nodded in approval and said:

"Since 2005, the Federal Reserve felt that the US economy was a bit overheated, so it began to raise interest rates continuously. When interest rates rose to a certain level, some subprime lenders could not afford to pay off their loans. On the one hand, the pressure to repay loans increased, and on the other hand, the tight monetary policy reduced the employment rate and wages. The market began to change. At first, there were only more and more subprime loan defaults, and housing prices began to take a sharp turn for the worse."

"When the housing prices fell, it became difficult to sell a house. The house that was originally worth 1 million yuan is only 750,000 yuan now, and it seems that it will continue to fall by 50% next year. People with normal minds will feel that they have lost. So they took the initiative to default, demanding that the bank take back the house and refuse to continue to repay the loan, which means forcibly defaulting. Now there are more houses in the bank's hands, and the house prices have fallen even harder."

"At this time, the underlying mortgage loan contracts that MBS relies on had already been breached on a large scale. Now the bank cannot get the money at all, and only a batch of houses that are rotten in hand. Customers who purchase MBS, CDO and other secondary products first lose money, then sub-prime, and even the least risky premium can't get the principal."

"The banks that issued loans, those who deposited money to the banks, institutions and individuals who bought MBS derivatives, and institutions and individuals who invested in MBS derivatives suddenly couldn't get the money. So New Century Financial went bankrupt, Bear Stearns suffered huge losses, and all financial institutions invested in MBS suffered huge losses. This is the origin of the subprime mortgage crisis."

Jiang Qiurong and Zhang Wenwu can only nod their heads now. Although they don’t know how Ren Pingsheng mastered such rich and profound financial knowledge, his analysis of the subprime mortgage crisis is indeed very precise. Even Jiang Qiurong, a financial expert, can only be amazed by it.

But Jiang Qiurong still doesn't understand it, saying:

"Even if we know the root cause of the subprime mortgage crisis, there is no feasible tool for how to use arbitrage."

Ren Pingsheng shook his head slightly and said confidently:
Chapter completed!