"According to our investigation, John Paulson's Paulson Hedge Fund has raised some funds, initially as high as $150 million, and started shorting CDO in July…"
Phelan O'Neill, CEO of Black Swan Fund, told Barron's:
"This also means that he holds the same view as us, but he entered the market earlier. At present, the US real estate market is still booming, and there is no sign of a recession on the surface. So far, Paulson's hedge fund has been losing money on this."
The size of the Black Swan Fund has increased from the initial total of $100 million, with IC Capital and Blue Valley Capital each investing $50 million, to more than $4 billion after each of them subsequently added $2 billion in funds...
In fact, up to now, the assets they control have exceeded 5 billion US dollars, because after the initial funds were invested in real estate-related bonds and stocks, as well as the bullish outlook on related financial loan industries, they have already made nearly 1 billion US dollars in book profits during this period.
Just like the strategy of Paulson's hedge fund, it uses a complex fund operation model to short subprime loan related debt CDO while purchasing the very cheap subprime loan insurance debt CDS at the same time...
Prior to this, the Black Swan Fund was bullish on CDO, so unlike the Paulson hedge fund which continued to lose money, they made profits on the opposite side.
The CDO and CDS they mentioned are two types of bonds related to subprime loans, which are also the main reasons for the subprime mortgage crisis.
It is very difficult to explain all of this, so to put it in simple terms, in the United States, home purchase loans are divided into several tiers based on the qualifications of the lender. Some lenders are not well qualified, so they can only use subprime loans with higher interest rates - that is why borrowers of subprime loans have lower credit ratings and the corresponding risks are higher.
But at the same time, banks and lending institutions are not willing to take too much risk, so what should they do? Of course, they use Wall Street's core technology - various debts to offset the risk, or in other words, transfer the risk.
Just like when DS Capital acquired O2 Telecom, it obtained 5 billion pounds of high-interest financing from Barclays Bank and Goldman Sachs Group. At that time, these two banks sold most of the loans by issuing underlying debt claims. With their joint operations, this type of bond could even be rated as a higher buy level and had an interest rate far higher than the market, so it was very popular.
The same is true in the subprime mortgage market. Wall Street financial institutions, including investment banks such as Goldman Sachs and Morgan Stanley, used high-interest subprime loans as collateral to issue a type of bond called CDO. They even used financial innovation to combine the original high-risk subprime loan claims with some low-risk, high-credit bonds, and through certain means, they improved the rating of this CDO claim.
In this way, in the eyes of some uninformed investors, CDO is absolutely the best investment product, with a high credit rating and high interest rate. What are you waiting for? Buy it now.
As for CDS bonds, they can be understood as risk hedging for CDO bonds, that is, insurance purchased for those subprime loans. Just like if earthquakes often occur where you live, you will be more willing to buy insurance for your house and property. If there has never been an earthquake where you live, I am afraid that almost no one will think of spending money to buy earthquake-related insurance.
Therefore, if the real estate market continues to prosper, house prices will continue to rise, and the price of CDO will continue to rise, while the price of CDS will fall.
On the contrary, the price of CDO will fall and the price of CDS will rise - because if house prices fall, those homebuyers who have taken out subprime loans at high interest rates may not be able to repay their loans and will stop paying.
Why is this so?
Because the real estate market is so hot now, too many people are buying houses, and not just one - because house prices continue to rise, and it is too easy to get loans. At the hottest moment of the real estate market, even in the UK, the loan ratio can reach 120%, which means that if you buy a house worth 1 million pounds, the bank dares to lend you 1.2 million pounds!
What's more, in America, many people use revolving loans to buy houses in such a crazy atmosphere. They buy a house, then go to the bank to borrow more money, buy another house, and then take out another loan...
As long as housing prices continue to rise, this approach is equivalent to applying leverage, which can generate several times or even dozens of times the returns.
It's like what Ferran O'Neal told Barron about when he came to America and went to a dance club - well, it's the kind you think of, but don't think too much about it, Ferran O'Neal went there to do research...
During the chat, he found that even a dancer in the club said that she had bought five houses...all with loans!
This shows how hot the American housing market is now, or how dangerous it is.
Although Baron knew that the subprime mortgage crisis would not begin to show signs until the end of this year, he was still deeply involved in it. Therefore, in order to prevent any changes, the Black Swan Fund will gradually withdraw its long positions in the real estate and financial markets next month and start to do what the Paulson hedge fund is doing now - short CDO bonds and start buying CDS bonds.
By then, we will inevitably need to gamble with those big investment banks...
…
"How are you feeling lately, babe."
Barron did not stay in New York for long and soon went to Los Angeles. In the Flower of Leith Manor, he met Fan Bingbing who was still there.
"It's fine. Although it's a little bit visible now, I feel fine. I don't have any major pregnancy reactions. I'm just not used to eating Western food before, but it's much better after changing to a Chinese chef."
Fan Bingbing is now more than three months pregnant and her belly is slightly bulging, but it is not too obvious because she is wearing a slightly loose skirt.
During the time that Barron was away, Fan's mother took time out to come here and stay with Fan Bingbing for two weeks.
Fan Bingbing also told her parents about her relationship with Barron. Although her parents initially found it hard to accept that their daughter was planning to give birth to a child for a "foreigner" without any official status, Fan Bingbing has always had her own ideas. Seeing that their daughter insisted, they finally accepted it.
Before this, Fan's mother and others had also looked up information about Barron and learned that he was a British Duke and very rich, ranking fourth on the world's richest list.
But in the end, she didn't feel too much about these things. After all, Fan Bingbing's family had always been relatively wealthy - there was no doubt about that. After all, in that era, being able to afford to send her to an art school meant that, although not extremely wealthy, they were definitely much richer than the average person.
It was not until Fan's mother came to Los Angeles and entered the Flower of Lees Manor that she saw this huge and magnificent manor that she had never seen before, as well as Fan Bingbing's life at that time - there were more than 15 people of various types in the manor on a daily basis, including maids, chefs, medical teams, bodyguards and drivers, all serving Fan Bingbing alone. It can be said that he was taken care of in all aspects.
Moreover, all of these were just purchased and arranged casually by His Royal Highness the Duke.
At this time, Fan's mother had a deeper understanding of Barron's identity and status.
Now seeing that her daughter was being taken care of so well and that Barron had given her solid protection, she was finally able to slowly begin to accept Fan Bingbing's choice.