When the global financial market was severely shaken, stocks, futures, bonds, etc., fell one after another. However, many people found that the prices of crude oil and gold were fluctuating. It could even be said that they did not fall at all. Instead, they rose slightly.
First, those speculators who had fled from the bond and stock markets had entered the futures market. Futures are also commodities and can be considered as physical goods.
They can convert their bonds into USD and save them. But the USD is depreciating, and they will suffer losses if they save their money.
The stock market's fall and all sorts of negative news had caused a large number of investors to flee. Of course, some investment funds took this opportunity to short the stock market and make profits.
It's a pity they can't do this anymore. It's not because the government does not allow it, but no financial companies are willing to lend you shares.
Everyone knows the stock market is falling, and why should they lend you shares?
Previously, many investment companies had increased their leverage ratio from five times to ten times, then to thirty times, and some companies had even set a leverage ratio of fifty times.
Don't think these investment companies are stupid. They are asking for death by setting up such high leverage. They can buy insurance. It's a credit default swaps insurance.
Banks cannot use high leverage, but those investment funds can. What if they use high leverage to invest and the risk is too high?
They can buy insurance. Of course, this is not a traditional insurance, but the effect is the same as insurance.
The investment fund company will tell the bank that their investment risks are high, and they want you to buy insurance for them. For 10 years, I will pay you 100 million USD insurance every year. This is 1 billion USD.
If I did not breach the contract, you will be taking the insurance for nothing. Also, you will be able to make profits from my investment, right?
If I breach the contract, you will have to pay me compensation.
Party A thinks that I am using leverage to invest, and the profits are several times higher. I can take out 1 billion USD to buy insurance, and I will still have profits.
Party B analyzed and felt that the risk of Party A defaulting on the contract is very low. It is only 1%, and the profits are high.
If there is only one company, the profits will not be high. But what if I can get the same 100 customers? Won't I get 100 billion USD insurance?
This way, even if one of the companies is unlucky and breaches the contract, I will have the money to pay the compensation. Using the premiums of other policyholders to pay for insurance compensation was a normal business practice of insurance companies.
Therefore, the bank promoted the credit default swap insurance contract to the major fund companies. By collecting more premiums from the companies, they would be safe.
But it would take ten years to get this profit. Wasn't that too slow?
So they negotiated with a third party. These contracts of mine are worth 100 billion USD, but it will take 10 years to get them. I can sell them to you for 50 billion USD. Do you want it?
After bargaining, the third party bought the 100 billion USD contract at the price of 40 billion USD, and Party B got 40 billion USD in profits.
The third party also felt that 10 years was too long. So, he also marked the price and listed it for sale. 45 billion USD to attract the fourth party to buy it. They easily got 5 billion USD in profits.
After so many changes of hands, coupled with the attractiveness of this model, the market for this type of insurance contract had become extremely large, with a total value of more than 60 trillion USD.
All the participating financial institutions had made money. Their profits came from the leveraged subprime loans of the original company. In the end, these loans were all placed on the credit institutions and lenders.
That's why only the credit institutions and lenders suffered losses, and everyone else made money. By right, the banks will not suffer any losses, but the banks are also credit institutions. Even the fund companies under the banks also invested in subprime loans.
When the lenders defaulted, the insurance companies will have to pay.
Then the last buyer will be unlucky, and they will have to pay for this insurance. If there are only one or two defaulters, it's fine as they can afford it. But they did not expect the default rate to be so high.
From a few percent to more than 10 percent, how can the insurance premium be so high? Furthermore, the insurance companies are changing hands.
When the last buyer can't bear the losses and is about to go bankrupt, it will affect the whole chain.
At this time, everyone starts to look for the government. We are going to go bankrupt, and the government doesn't care?
But think about it. How much insurance did we receive in the beginning? But the compensation is more than 100 times more than the insurance.
What can the US government do if they don't have so much money? It's simple. They have Fannie and Freddie, the giants, and Fannie and Freddie are forced to swallow these bad contracts.
When the government intervenes, those fund companies that can't bear the losses start to declare bankruptcy. Some of their parent companies belong to large consortiums, and they can bear the losses.
But now, the government has taken over, and they can just throw the burden away. Those consortiums should take care of their own interests first.
As a result, the bankruptcies are getting worse. The number of corporate bankruptcies and personal bankruptcies is soaring.
It was also at this time that Obama announced a series of measures, all aimed at the poor, which attracted a lot of people to vote for him.
He also claimed that it was a mistake for the United States to start the war in Afghanistan. If the war can be resolved as quickly as they expected, it's fine. But the war dragged on for so long, and the US economy collapsed.
Anyway, George W. Bush is going to step down, and all the blame is on him. Many policies are decided by the Congress, and George W. Bush does not have much power.
The Bush family was also working hard behind the scenes. They wanted to stall for time and at least let Bush step down peacefully. Then, they would pass the trouble to the successor. This was to prevent their opponents from using this matter to attack them when another candidate appeared in their family.
The US economy's situation is getting worse, and Europe is also affected. Even UBS is suffering losses.
At this time, a lot of funds had escaped from the US market and went to Europe. This is also the reason why Europe is trying to save their economy. They want to attract these speculators to help their economy.
The US economy is doing well because they can attract the most foreign investments in the world.
Those funds went to Europe, and as Feng Yu and the rest had expected, they entered the futures market. Most of the investments are crude oil and gold.
Feng Yu and the rest were relieved when they saw this news. It should not be a problem for crude oil to reach 100 USD!
While Feng Yu and the rest are happy, one of Feng Yu's important business partners had a serious problem.
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