Chapter 547: The Dinosaurs of Wall Street

As early as June 7, Bear Stearns, the fifth largest investment bank in the United States, announced that it would stop redemptions on its two hedge funds.

Investors who were terrified and confused soon discovered that the two funds of Bear Stearns held a large number of securities related to subprime mortgages.

Regarding the suspension of redemptions by its two hedge funds, a spokesman for Bear Stearns also said that this was an act of protecting investors because the actual value of the assets was higher than its current market pricing.

"We believe that the fund's investment portfolio is good and can survive until the market returns to normal. We believe that stopping redemptions will help best protect the long-term interests of investors."

Prior to this, Sowood Capital, a hedge fund that manages $3 billion in Harvard University assets, saw its asset value shrunk by nearly half in just one month due to its holdings in subprime mortgage business.

However, until this time, Wall Street was still unaware of the coming storm...

On July 19, 2007, the Dow Jones Industrial Average of 30 Industrial Stocks in New York Stock Exchange hit a record high, breaking the 1,400-point mark for the first time.

Until this time, in the eyes of investors, the "fluctuation" in the real estate market only affected companies related to subprime mortgage issuance, while other industries were still thriving and stock prices continued to rise.

Even some investment banks and bank executives did not realize how widespread the subprime mortgage-related bonds would be.

The current situation is like a boil growing in the American financial system, but no one has discovered this fact. They only think that the pain in the body occurs occasionally. It is not until the boil is punctured and can no longer be hidden that people will face up to this irreversible deterioration...

Barron, what you need to do is to wait quietly for those boils to be punctured one by one...

Now it is just "foreplay".

When those banks and investment institutions find that they have so many subprime mortgage bonds, the subprime mortgage crisis will officially break out.

Just when July comes, in secret, some changes are coming.

On June 14, the two hedge funds under Bear Stearns declared bankruptcy.

In the next two weeks, the publicly traded 3B subprime mortgage bond index fell by nearly 20%...

The Black Swan Fund made a huge profit from it - from their betting agreements in CDO bonds and the expected profits of CDS bonds.

"For a period of time before this, they always used the excuse of 'systemic failure' to delay the settlement of our CDO bond bets, but in July, those investment banks finally began to actively find us and prepared to 'have a good talk'..."

On the phone, Ferran O'Neill, general manager of the Black Swan Fund, said to Barron.

This is also the problem encountered by some funds that are currently shorting the subprime mortgage crisis, especially some small funds - they have held short-selling chips for too long and need to make profits to stabilize investor confidence, but for those investment banks, they believe that the previous downward trend in subprime-related bonds can be controlled in the short term, so they continue to use various excuses to delay the settlement of those short-selling products.

But it was not until July that they finally began to face up to this problem and found that if they continued, their losses would become greater and greater. Of course, the investment banks that can realize this are not the majority at present, and these investment banks are already very sensitive...

It is so ridiculous that even after the bankruptcy of two funds under Bear Stearns, many investment banks did not really realize the danger.

People in the future will wonder why they are so slow-but if you imagine how many businesses those big investment banks have, their top management does not have time to confirm the true situation of each business, and they all need feedback from the bottom up step by step. However, the departments that actually incurred losses often do not report their losses to their superiors at the first time, but try to cover them up in order to solve them by themselves...

It is not until they realize that they cannot solve it alone that they may report these losses.

Just like now, some investment banks including Goldman Sachs and Morgan Stanley finally felt the pain from the tails of these dinosaurs to their heads...

On June 29, the day when Apple publicly sold the iPhone 1, the Black Swan Fund finally received a call from Morgan Stanley. The other party was a senior vice president of Morgan Stanley. He said that Morgan Stanley needed to confirm whether the market price of CDO bonds held by the Black Swan Fund was "fair" for the betting contract between them and the Black Swan Fund...

The next day, Goldman Sachs also contacted the Black Swan Fund, and their attitude was more straightforward. Goldman Sachs hoped to talk to Phelan O'Neill about resolving the betting agreement between them, and Goldman Sachs expressed the hope to buy some short-selling chips held by the Black Swan Fund - they knew that the one who currently holds the most such chips in the market is the Black Swan Fund, the previously unknown "small fund company".

Goldman Sachs' attitude also shows that the market has turned around. Goldman Sachs, which has the fastest reaction, is ready to change lanes. The Global Alpha Fund they manage has suffered huge losses on subprime loans. They have decided to switch from betting on the subprime mortgage market to betting against this market as quickly as possible...

In fact, Morgan Stanley is the one of the Black Swan Fund's betting "clients" who is most unwilling to admit defeat.

A week before Ferran O'Neill called Barron, the Black Swan Fund had officially notified Morgan Stanley that the credit default swap products (CDS) they had sold to the Black Swan Fund more than half a year ago had turned to be favorable to the Black Swan Fund.

The value of this batch of CDS reached 5 billion US dollars, and according to the model calculation of the Black Swan Fund, Morgan Stanley currently needs to pay the Black Swan Fund 1.5 billion US dollars. Of course, Morgan Stanley can still continue to stalemate, but the next time they are notified, I am afraid that the amount they need to pay for this CDS bond may exceed 2 billion US dollars, or even 3 billion US dollars...

When they first received this notice, Morgan Stanley was unwilling to believe this result. They claimed that the correlation of thousands of 3B-level bonds in their batch of collateralized debt warrants was very low, so the problem of a few bonds did not mean that they would be worthless.

"According to our model calculation, these CDS bonds did not make you earn so much income, at most less than 200 million US dollars..."

For Morgan Stanley's "persistence", the Black Swan Fund did not explain too much, but told them that this was just a goodwill notice, and perhaps they could wait for some time to confirm the settlement price of this bond.

Time is on the side of the Black Swan Fund. The large amount of short-selling chips in their hands puts the Black Swan Fund in a favorable position, so they are not in a hurry. The ones who are in a hurry should be the "clients" who are betting against them.

Sure enough, a few days later, Morgan Stanley took the initiative to find the Black Swan Fund. At that time, Morgan Stanley had to pay the Black Swan Fund $2 billion for this batch of CDS...