The Son of Finance of the Great Age

  Chapter 140 Shadow Banking

Shadow banks, as the name implies, are banks in the shadows. They are not actually banks in the true sense, especially not subject to the supervision of regulatory authorities, but in practice they act like banks, so some people call such institutions shadow banking.

The concept of shadow banking was proposed at the annual meeting of the Federal Reserve in 2007, but in fact similar institutions appeared in the 1960s and 1970s, first institutions that innovated various financial products and tools, and then investment banks , hedge funds, insurance companies and other non-bank financial institutions.

  In the hedge fund industry, the first to create the shadow banking system is the famous Steinhardt, a Jew who is in charge of the bond market. Like the Quantum Fund's currency transactions, Steinhardt also uses the central bank as a counterparty to the transaction.

  In the early 1990s, the U.S. economy was in a recession, and President Bush Sr. lost to a young man from Arkansas—Bill Clinton. In order to stimulate the economy, the Federal Reserve decided to stimulate the economy by keeping short-term low interest rates, a policy that allows financial institutions to borrow short-term funds at extremely cheap costs. Steinhardt took advantage of the imbalance between long-term and short-term interest rates to earn a spread. He invested the short-term borrowed funds in the long-term bond market with much higher yields.

  There is a risk that if long-term interest rates rise, the price of long-term bonds will shrink, and bonds with longer maturities will be more volatile in price. But Steinhardt and his fellow researchers are well aware that in a recession, the demand for long-term capital also falls, and the price of capital—that is, long-term interest rates—is unlikely to rise. As they predicted, long-term interest rates fell instead of rising in the early 1990s, making Steinhardt's gains on bonds exceed the spread between long-term and short-term interest rates.

The reason why his behavior is called shadow banking is because the Federal Reserve originally wanted to use long-term and short-term interest rates to make the regular business of banks more profitable, but smart hedge funds issued long-term loans (buying bonds) by borrowing short-term loans. What I do is almost the same as that of a bank. What is particularly different is that hedge funds do not need to reserve deposit reserves and have no capital adequacy requirements, so they have more advantages than commercial banks.

   At the same time, Steinhardt and his hedge funds are getting bigger and bigger in the bond market, and even large financial institutions on Wall Street have been led into their trap. In April 1991, Steinhardt's hedge fund and the founder of another commodity company jointly took an auction of US treasury bonds worth 12 billion U.S. dollars, and then lent these treasury bonds to short-selling institutions, and then bought them in the market. In the bond futures market, the classic "multi-squeeze short" trick is performed, and the shorts will naturally lose a lot of money. These short sellers include Goodman, Salomon Brothers, and Bear Stearns, which specializes in recruiting PHD (poor, hungry, and eager to succeed), three well-known investment banks on Wall Street.

This model of using interest rate differentials was soon imitated by other hedge funds, and soon the European bond market across the ocean also entered the sight of hedge funds, and shortly thereafter, funds from North America continued to flow into various European countries. Bond Market.

  Since the currency crisis broke out in Europe two years ago, hedge funds have been paying close attention to the economic situation of this continent, and their attacks on certain currencies in the ECU system have never stopped. After the Finnish mark, British pound, lira, Swedish krona and other currencies announced their withdrawal from or no longer linked to the European exchange rate system, hedge funds led by Tiger Fund launched wave after wave of attacks on the French franc, and even once the French franc Foreign exchange reserves were depleted, but the franc eventually stayed in the European exchange rate system due to German intervention.

In the end, in order to avoid such currency attacks, the European Economic Community decided to expand the exchange rate fluctuation range from the previous 3% to 15%. It's already falling apart.

  With the end of the crisis of the exchange rate mechanism, Europe is preparing for monetary union, and the specific content of this process is to make the interest rates of the members of the entire European economy converge with each other. Since countries like Italy and Spain have high inflation, they have to subsidize investors by raising yields in the bond market. But now under strict inflation restrictions, interest rates in these countries will drop to the same level as Germany, which will inevitably make the prices of long-term bonds fluctuate upwards. Because this policy was not kept secret, hedge funds quickly analyzed the price trend of long-term bonds, and they began to borrow heavily from brokers or brokerage companies to buy bonds of European countries.

This is where the bubble is created, the government borrows money from issuing bonds that are leveraged through the futures market, and hedge funds hold Treasury futures by borrowing money from brokerage firms whose money can be Borrowing from other institutions through other channels, so behind this layer of debt, if one link goes wrong, it may cause fatal damage to the entire chain.

  Because of the lack of supervision, financial institutions such as “shadow banking” hedge funds and investment banks can unscrupulously use leverage to short any profitable financial products. As long as the "shadow banking" side of this trading model continues to make profits, the risks will not explode. However, once a loss occurs and the brokerage company requires additional margin, the entire market may fall into a collapsed situation.

   Entering November, after Zhong Shi successfully established a short order of 100,000 lots in the crude oil futures market, he set his sights on the European bond market, which is his old business and a market with relatively low risk.

   Originally, two billion U.S. dollars were transferred. In addition to more than 200 million U.S. dollars and more than 100,000 short crude oil orders, another billion U.S. dollars flowed into the European bond market. Different from the long positions of hedge funds, his funds are divided into short positions in the bond futures markets of several countries such as the United Kingdom, Germany, and France.

  Because the fluctuation of the price of government bonds is small, the leverage can also be large. Generally speaking, a leverage of dozens of times is a small matter, and even a leverage of 100 times is possible. After Zhong Shi’s funds entered the long-term bond markets of these countries, there were not many waves. After all, the bond market is an extremely large market, and even the derived futures market has a huge amount of funds. Zhong Shi’s allocation of one billion US dollars When you go to various countries, it immediately becomes inconspicuous.

Just when Zhong Shi was arranging funds in the global financial market, Zhong Jianjun from Hong Kong called. It is true that it has been two months since the end of the first school year, and Zhong Shi has not returned home. Zhong Yi did not return to Hong Kong, which made Zhang Wei, who had been to Hong Kong a few times, come to nothing, but this time the Hong Kong side called the Zhong brothers because their uncle, whom they had never met, brought a business invitation The delegation came to Hong Kong for the office.

  Zhong Shi's uncle is Zhang Wei's father, named Zhang Yuanchao, a middle-aged man in his forties. He was born with thick eyebrows and big eyes, with a high nose bridge and slightly thick lips. He was wearing a loose suit, which looked very ill-fitting. When Zhong Shi saw his outfit, he wanted to laugh a little, but when he thought that this upright man was his elder, he suppressed his desire to laugh. After all, he and Zhong Shi lived in two worlds.

In the world Zhong Shi lives in, people with a little bit of status have their own private tailors. Most of the clothes they wear are tailor-made, and there are no nameplates. , clothing material, fit level, etc. can be distinguished.

Large financial institutions, such as Goodman Investment Bank, Stanley & Co., etc., pay special attention to the taste of employees' clothes. There was a joke that once a newcomer came to work wearing a suit with a big G letter. It is the symbol of the luxury brand Gucci, but was ridiculed by colleagues as "gap" because of this vulgar taste. In the end, the rookie had to resign and leave soon after.

  Zhong Shi doesn't pay much attention to what he wears on weekdays, but since he went to the Mid-Levels Club last time, he has reserved dozens of coats, shirts and other necessary clothes in his wardrobe. This time my aunt came to visit on his own, and out of etiquette, he also had to dress solemnly.

   "You are the Zhong Shi that Xiaowei often mentions, right? You really are a good-looking talent." Facing the junior, Zhang Yuanchao stood up and shook hands with Zhong Shi in a rare way.

  Shortly after Zhong Shi left Nandu, Zhang Yuanchao was transferred to the newly established Jiangdong City as mayor, at the level of the main hall. Although he left the position of deputy mayor of Nandu City at the deputy department level, Jiangdong City is a newly established prefecture-level city and is in a state of ruins, so the development tasks falling on his shoulders are very heavy.

  Before he came, he had heard Zhang Wei talk more than once about how rich the Zhong family was and how luxurious their residence was. Knowing a son is like a father, whenever Zhang Wei mentions it, he always smiles faintly and doesn't quite believe it. Now when he actually came to Zhong's mansion, he realized that what his son said was true, which surprised him.

Not to mention the spacious living area, the luxurious decoration inside the house, the shiny floor under his feet, and the soft and comfortable sofa under his body, they are much better than the city government office where he usually works, let alone a few people who are lower than him. The head waited for the servant who was dispatched with his hands down.

   And all of this was said to be written by the young man in front of him, which surprised him greatly. But he is a member of the officialdom after all, the astonishment on his face flashed and then he acted as if nothing had happened.

  In the center of the living room, sat the smiling Mr. Zhong Fangzhuo. At this time, he was staring at Zhang Yuanchao cheerfully, seeing this local official in charge of a party's power with horror.

PS: Steve Cohen, the founder of the SAC hedge fund who was fined $1.8 billion last year, made a personal profit of nearly $5 billion this year due to his bet on the timing of the Fed’s exit from QE. king. SAC's annual rate of return is 40%, but unfortunately all external funds will be returned. ——Thank you for the monthly ticket support from book friend Mouse Fei! Thank you for making me think, the reward of Demon Dragon and Warrior Ghost!

  (end of this chapter)