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.
Frightened and confused investors soon discovered that the two funds 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 to protect investors because the actual value of the assets was higher than its current market pricing.
"We think 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 Index of 30 Industrial Stocks in New York Stock Exchange hit a record high, breaking the 1,400 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 loans, 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 loan-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 is occasional. 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 bonds, the subprime 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%...
Black Swan Fund made a huge profit from it - from their betting agreements in CDO bonds and the expected profits of CDS bonds.
"For some 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 were ready to 'have a good talk'..."
On the phone, Ferran O'Neill, general manager of Black Swan Fund, told Barron. This is also the problem that some funds that are currently shorting the subprime crisis are facing, especially some small funds - they have held short-selling chips for too long and need to make a profit 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 until July, they finally began to face 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 in the majority at present, and these investment banks are already very sensitive...
It's so ridiculous that after the bankruptcy of two funds under Bear Stearns, there are still many investment banks that did not really realize the danger.
People in later times would wonder how they could be so slow - but if you imagine how many businesses those big investment banks have, their top management would not have the time to confirm the true situation of each and every business. Feedback would be required from the bottom up, but the departments that actually incurred losses would often not report their losses to their superiors first, but would try to cover them up in order to solve the problem themselves...
Only when they realize that they cannot solve the problem on their own, will they report the losses.
Just like now, some investment banks including Goldman Sachs and Morgan Stanley, the pain has finally been transmitted from the tails of these dinosaurs to the heads...
On June 29, the day when Apple publicly sold 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 and them was "fair"...
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 bet agreement between them, and Goldman Sachs expressed the hope to purchase some short-selling chips from the Black Swan Fund - they knew that the Black Swan Fund, the previously unknown "small fund company", currently holds the most such chips in the market.
Goldman Sachs' attitude also shows that the market has come to a reversal moment. 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, and 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 in favor of the Black Swan Fund.
The value of this batch of CDS reached 5 billion US dollars, and according to the Black Swan Fund's model calculation, Morgan Stanley currently needs to pay 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 between the thousands of 3B-rated bonds in their batch of collateralized debt obligations products 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 that much income, at most less than 200 million US dollars..."
Black Swan Fund did not explain too much about Morgan Stanley's "persistence", 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...