efore the crisis breaks out. They cannot see that more and more people are not paying their mortgages, they cannot see that housing prices are skyrocketing, and they cannot see that banks do not even look at people’s credit when they take out loans to buy houses.
When Han Xuan was twelve years old, he wanted to understand a truth, that is, to make money by using the effect of herds. As long as he guides public opinion and creates the illusion of safety, stability, and high profits, the world economy will be his guide. A new machine!
The most wonderful thing is that they don’t even need to think about a way. They can defraud a large amount of money by relying on what they did a few years before the subprime mortgage crisis. Han Xuan already knows the result, just like a gambler who knows the cards in other people’s hands. There are enough chips in front of you, and it is difficult to lose.
The reason why I say this is because Mr. Dick Fuld, the CEO of Lehman Brothers, called Han Xuan last night and said that he had an excellent investment idea, which was conceived by several mathematics experts in their company. I hope to cooperate and invest with Han Xuan.
According to the model established by those math experts, it showed that if you use it to invest in the real estate industry, you will get sufficient returns. However, this is a novel investment method, and the senior executives of Lehman Brothers were not sure, so they tried to Come and work with Han Xuan.
Today, Lehman Brothers is considered a medium-sized company, and East West Bank is a behemoth that needs to be looked up to.
Imagine, for example, Han Xuan, the general manager of East West Bank, called Lehman Brothers and said: “The last hundred mortgage customers have each borrowed one million U.S. dollars a year from us. We plan to buy your insurance. To prevent them from defaulting. Judging from the application form, we believe that each of them has a 3% chance of defaulting. How much insurance premium is appropriate?”
One hundred customers each have a 3% chance of defaulting, so it is probably expected Three clients default next year, which means Lehman Brothers will need to pay $3 million next year. Assuming an interest rate of 3% per year, it is now only worth $2.91 million.
Therefore, Han Xuan’s East West Bank had to pay at least US$2.91 million for insurance. Lehman Brothers is not a charity. In order to make money, they will double the price, which is US$5.82 million. premiums and expects to earn an average of $2.91 million on these trades. This type of insurance is called a credit default swap (CDS).
In the early days, only insurance companies participated in this kind of insurance, but because the profits were too high, banks and private investment institutions were later involved, and the scale became larger and larger.
Wall Street naively believed that people would repay their loans and banks wanted to make money, so they liberalized lending. Coupled with the rising housing prices, the scale of credit default swaps was astonis