Chapter 622: Gigantic graveyard
“Right, Tingsheng, what is CDO?” Huang Yaming suddenly asked Xu Tingsheng.
“I’d like to know too,” Old Jin said.
“You’re also asking about this?” Little Jinshan who had drunk two glasses of red wine tipsily looked up at his father, saying, “It’s in English…do you know it? You can’t even pronounce the syllables. Uncle Xu, let’s talk about this together, us two. Let me tell you, my English home tutor has exceptionally big breasts…”
Old Jin slapped him into silent mode.
“Where did you hear about this from?” Xu Tingsheng asked.
“Some mixed-blood called Wayne Yang. He said he knows you. He approached and promoted this to us,” Huang Yaming said, “Right, he also said that many investment firms on Wall Street are currently doing this.”
“What a pervasive bastard. There’s nothing he isn’t involved in. It’s fortunate he’s not an arms dealer. Otherwise, there might even be a world war,” Xu Tingsheng shook his head.
Wayne Yang was basically the middleman of the Wall Street banks. He had previously promoted this to Xu Tingsheng too. Xu Tingsheng had said he would consider it when he had helped take care of Apple. He had never expected that he would even look for Old Jin and Huang Yaming.
“What did you say to that?” Xu Tingsheng asked.
“I said this old man doesn’t know what the hell that is at all…also, I’ve never listened to people who wish to sell me something introducing what that thing is. Then, I got him to scram,” Huang Yaming said, “I’m asking you now purely out of boredom and curiosity.”
“It’s a pretty complicated thing,” Xu Tingsheng said.
“Don’t tell me-you actually don’t know too? Ha…” Little Jinshan who had had too much to drink got rowdy again.
In the same fashion as Old Jin, Xu Tingsheng slapped him into silent mode.
“Luckily, stinky fish didn’t see it…” Little Jinshan rubbed his head, saying pitifully, “You guys will turn me into an idiot sooner or later.”
“Collateralized debt obligation, CDO for short. We learnt about it in our finance lessons. It is really a complex thing to expand on like Tingsheng said,” Fu Cheng who majored in finance interrupted.
Old Jin and Huang Yaming showed with their expressions that they had not understood anything at all.
“How about this. I’ll simplify it and raise an example for you to hear,” Xu Tingsheng pondered for a while before asking, “You all know about housing loans, right? Loans for living in houses.”
“Duh. In this day and age, even an eighty-year-old granny would know,” Old Jin said.
“I thought that not needing it, you nouveau riche wouldn’t know about it,” Xu Tingsheng smiled and said, “Housing loans include two parts, the money yet paid for the house and interest. These are considerable sums most of the time, lasting rather long. Then, under most circumstances, the house itself is the collateral.”
“Now, pretend that I’m the bank,” Xu Tingsheng pointed at himself, continuing, “Then, one day, Old Jin buys a house and does a thirty-year housing loan with me. As the bank, while it’s profitable for me, I find that I get back my funds too slowly this way. In order to get back the funds at a higher rate, I take his housing loan out as a housing mortgage security, next finding some organisations to act as guarantor…then, I take it out to sell. This is CDO. It’s a debt security acting as a guarantor for mortgages.”
“Oh,” Huang Yaming said.
“Would you buy it? You get to share the profits with the bank,” Xu Tingsheng asked.
“It’s fine if I have money to spare! It’s guaranteed profit anyway. It’s Old Jin! Would he be unable to pay the housing loan?” Huang Yaming replied straightforwardly.
“That’s right. If everyone knows that this person is as wealthy as Old Jin, I think many people would be willing to buy it. But would I, the bank, eat a loss so readily? I wouldn’t sell them individually, but in bundles…for example, a bundle of a hundred housing loans at once. Conceivably, some may be rich bosses like Old Jin. Some may run small businesses. Some may be teachers, public servants…anyway, so I use the housing loans of various people with various occupations as a basis in producing CDO, classifying it at several different price levels and selling it. Will you still buy it?” Xu Tingsheng looked at Huang Yaming, smiling as he asked.
“Are the profits high?” Huang Yaming asked.
“It’s different according to the levels. The greater the risk, the greater the returns. Of course, it presently looks to be not bad. At least, it’s currently a popular thing in America,” Xu Tingsheng said.
“Under what circumstances will I make a loss?”
“Of those taking loans to purchase their flats, a large batch of them default on their loans. And also, having taken the houses back, the banks are unable to sell them.”
“You mean many people not wanting their houses anymore?”
“Right. Not only do they not want their houses, they do not want even their downpayment from before and the portion of money they’ve paid.”
“I’m relieved then,” Huang Yaming said, “I’d buy it! It makes sense to.”
“Why?” Xu Tingsheng continued asking.
Huang Yaming glanced at him, seemingly finding it obvious but still explaining, “I don’t understand how it works in America, so let’s take China as an example. Housing prices are skyrocketing…even among a hundred people, I’ve never seen one who can bear to stop paying for and give up on their flats.”
“It seems so…actually, the current situation in America is more or less the same. The government has lowered the interest rate to encourage the purchasing of flats. The housing market is booming,” Xu Tingsheng said, “Still, have you ever considered that if people lost their jobs and went bankrupt, being forced to cease their payments despite their reluctance, they would still have no choice but to give up on their flats?”
“Even if there is, if it’s just one or two, it wouldn’t be much of a loss, right? Moreover, the bank can still take back the house to sell,” Huang Yaming said, “Where in business is there no risk? The risk can already be considered very low here.”
“So what you mean is that you’d buy it?” Xu Tingsheng asked again.
Huang Yaming was a bit overwhelmed by his questioning as he hesitated and turned to ask Fu Cheng, “Expert, what do you think?”
Fu Cheng thought about it and said, “Right now, I think ninety percent of people think the same as you. Me included.”
“Buy it then! What’s there to be afraid of?!” Huang Yaming exclaimed, “Anyway, this here is but an example. When it really comes down to buying it, it’ll still be up to yourself to decide.”
Xu Tingsheng forced a smile…this was not an easy decision to make.
“Now, let me explain something else to you guys. It has an inverse relationship with CDO. Generally speaking, if there is no forced interference, it falls when CDO rises and rises when CDO falls,” Xu Tingsheng said.
“What’s that?” Huang Yaming asked.
“CDS, credit default swap. It’s generally used to avoid risk, or…”“Or what?”
“Short-sell.”
“How does it work?”
Xu Tingsheng considered it for a bit before saying to Huang Yaming, “Okay, let us continue that earlier example. Right now, you’ve bought a lot of CDO.”
“Right. What then?”
“Then, someone, say Little Jinshan,” Xu Tingsheng pointed at Little Jinshan who was sprawled over the table,” Little Jinshan now feels that the CDO in your hands will become a pile of scrap paper…so, he decides to short-sell you.”
“Is that because he’s drunk? Or he’s been slapped into an idiot by you,” Huang Yaming laughed.
“Either way is fine. Anyway, he now feels that the CDO in your hands will become a pile of scrap paper, deciding to short-sell you…so, he will go to look for a bank or insurance organisation, buying insurance for this CDO you possess. This insurance is the CDS I just spoke of.”
“What?” Huang Yaming asked, “I’m stumped. How is he entitled to buy insurance for me? Who’s the beneficiary?”
“Good question. If it’s the insurance which we normally see-for example, you suddenly run to an insurance company now and buy a personal accident insurance for the son of the school’s security guard, Li Er, with you paying and you the beneficiary…this is not allowed,” Xu Tingsheng said.
“Rubbish! If even that was allowed, wouldn’t this world be in utter chaos? Buy one, off one. Buy one, off one. It’s not someone related to you anyway,” Old Jin interrupted.
“Right. However, this CDS I just mentioned, it allows for that. Little Jinshan buys insurance for your CDO, paying for the procedures and the annual insurance. If your CDO becomes a pile of scrap paper and loses money…the banks and insurance organisations will compensate him,” Xu Tingsheng said.
“What about me? Will they compensate me?”
“No. It’s got nothing to do with you.”
“It’s at least got to go through me, right?” Huang Yaming asked.
“There’s no need for that too,” Xu Tingsheng said.
“The heck…it’s me who’s investing, but it’s got nothing to do with me at all?”
“That’s how it is. He doesn’t even have to know you. The sole connection between you…is that your fortunes are completely at odds. If you make an utter loss, he’ll make an utter profit. If you make an utter profit, he’ll make an utter loss.”
“Stop it. The way you’re putting it, this isn’t insurance at all. It’s…”
“What is it? Say it.”
“It’s a gamble.”
“Bingo. That’s right,” Xu Tingsheng inhaled deeply, “This is a gamble. Also, it’s a mega gamble which can be infinitely magnified. Not only can he bet against you, he can also bet against any Tom, Dick and Harry…as long as there are banks or insurance organisations willing to buy it, as long as he has money to pay the insurance premiums, he can even bet against the entire Wall Street.”
Now, Xu Tingsheng surveyed everyone at the table. The cool glint in his eyes…it was as if he was really about to engage in that massive gamble of an era.
“How much would that cost then?” Old Jin seemed intrigued.
“CDS itself has a 10 to 20 magnifier. That is to say that because in terms of money, you’ll only have to pay a few percent as insurance annually…if you have a billion and are bold enough, if you judge that the term will be short enough, you could…gamble against other people’s 10, 20 million.”
“The problem is that your funds must be able to last till the day you win your gamble. Also, the bank or insurance organisation which sells you CDS cannot go bankrupt. If it does, it doesn’t matter how much you win. There won’t be anyone to compensate the money to you,” As he finished, Xu Tingsheng poured himself a glass of wine and downed it in one gulp.
Looking at him, Old Jin suddenly smiled, saying, “You’re worked up.”
“Right, weren’t you raising an example?” Fu Cheng looked at Xu Tingsheng too.
“The heck, you wouldn’t be thinking of going at it for real, right?” Huang Yaming stood up and said, “Don’t mess around! We’re earning money perfectly fine now. There’s no need to play something so intense. Let’s be clear, alright? We won’t buy CDO, and we won’t buy CDS too…people can do whatever they want, but we’ll concentrate on stably earning money.”
Xu Tingsheng thought about it and nodded.
“Let’s be serious. Don’t scare me, Tingsheng,” Huang Yaming still could not rest assured as he continued, “I get what you mean. Don’t bully me for not studying properly in university. I did seriously study history in senior high. For CDS to really win as crazy as you say, it’s not possible, unless…”
“Unless what?” Xu Tingsheng asked.
“An economic crisis!” Huang Yaming exclaimed.
Xu Tingsheng smiled brilliantly.
“I was just joking. I’m not someone who likes gambling, you know that. I don’t even play mahjong.”
In truth, Xu Tingsheng really was hesitating…he was raring to go at that.
He knew that the time Zhou Yuandai was giving him was running out. Also, her assets were really too abundant, her strength too high. Ruanjin alone, the tip of the iceberg which had been revealed, was under normal circumstances already more than enough for him to go against for several years.
As for a pit like Symbian, however badly Zhou Yuandai fell down, it still wouldn’t be enough. She would still have enough space to turn around as it would simply be a fruitless effort.
Xu Tingsheng was afraid that he would not have the chance to slowly develop. He also dared not hope that Zhou Yuandai would suddenly let him go out of goodwill…
His sole chance that might only come once was to devise a grand, shocking scheme, dig a gigantic pit…a pit that could allow an ant to bury an elephant, taking her down in one shot.
Xu Tingsheng wanted to find Zhou Yuandai a colossal graveyard…for instance, a subprime crisis at Wall Street.
Yet, how massive an undertaking it was if he wanted her to plunge completely into it without being seen through.