Golden Spoon Investment Portfolio - Chapter 39

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This chapter was translated by Lunox Novels. To support us and help keep this series going, visit our website: LunoxScans.com
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39. That’s right. Opportunity always comes hand in hand with crisis.

Long-Term Capital Management, commonly abbreviated as LTCM, was a hedge fund that I was already quite familiar with.

[It’s a hedge fund founded by Jacob Wiseman, who was the chief and vice president of the bond trading team at Salomon Brothers, along with traders he once managed.]
“Jacob Wiseman is someone Wall Street recognizes as a skilled operator, isn’t he?”
[That’s correct. Andrew Mallow apparently said that over the past few years, Wiseman was responsible for most of Salomon Brothers’ profits on his own—quite remarkable.]
“If he rose to the rank of vice president, that means the company acknowledged him. So why did he leave?”
[That’s rather complicated. Wiseman left the company the year before last.]

I leaned back against my chair and listened to the explanation while sipping the Americano from my tumbler.

[Apparently, one of the traders he managed submitted false reports during a government bond auction to boost profits and conducted trades based on that. It caused quite an uproar—not just the Treasury Department, but the Federal Reserve as well. In the end, the CEO of Salomon Brothers took responsibility and was forced to resign.]
“It seems Wiseman was also held accountable at that time.”
[Even though he was the ace generating the highest returns at Salomon Brothers, the incident occurred within the team he directly managed. It would be difficult for him to escape responsibility.]
“True. If the CEO submitted his resignation, it would be strange for the manager to come out unscathed.”

Landon Shore agreed and continued.

[But according to rumors circulating behind the scenes, the current CEO of Salomon Brothers found Wiseman troublesome and pushed him out first.]
“He saw him as a rival threatening his own position.”
[Given that Wiseman delivered the highest returns and had a good reputation within the company, it would have been awkward for the CEO. Understandable, really.]

Corporate politics were no different in America than anywhere else—it was entirely plausible.

[But after Wiseman left, the bond trading team’s returns plummeted, so apparently they had no choice but to propose his return.]
“Yet he refused and founded his own hedge fund instead.”
[How could he harbor good feelings toward Salomon Brothers after they cast him out once? Besides, with the hedge fund boom following Black Wednesday, Wiseman must have been tempted as well.]

In fact, Greenwich, Connecticut—known as the cradle of hedge funds—had so many hedge funds being established that office space was difficult to find, and the area was thriving.

“Since he already has a track record from Salomon Brothers, founding a hedge fund would make it far easier to attract investment capital.”
[Not only that, but it’s drawing considerable attention because renowned professors from prestigious universities like MIT and Harvard University are participating as partners.]
“That’s quite fascinating.”

Though I already knew this, I played ignorant.

“I heard that among the scholars he recruited, there are some who have developed very famous economic theories and are being considered as Nobel Prize candidates.”
“If that’s true, Wall Street should be buzzing with excitement.”
“That’s the thing—everyone is hesitant to invest because of the fund management structure Jacob Wiseman proposed.”
“What kind of structure is it?”

Landon Shore answered as if it were utterly absurd.

“Well, he wants to take 2% of total assets annually as a management fee, and on top of that, 25% of annual profits as a bonus.”
“The fees are higher than average, aren’t they?”

Even for the most successful hedge funds, the standard was typically 1% of assets and no more than 20% of profits as fees.

“What’s even more outrageous is that the fund Jacob Wiseman is raising is a closed-end fund with a minimum three-year lock-up period. In other words, once you invest your money, you can’t withdraw it until the three-year maturity is reached.”
“He must be quite confident then.”

Establishing a hedge fund independently for the first time while pulling off such audacity—I found it genuinely impressive.

‘That level of confidence must be what led him to pull off that massive scandal that shook all of Wall Street.’

Just from the fund management terms he proposed, I could see how much confidence Jacob Wiseman had.

“After all, he was the ace of Salomon Brothers, which is counted among the top firms on Wall Street, so he must have the confidence to make the fund succeed.”
“That’s true, but I think he’s also putting in a safety pin to survive in a cleverly volatile market.”
“What do you mean by that?”

I adjusted the phone in my hand and answered.

“With a closed-end fund, even if the market conditions are poor and losses occur, investors can’t demand redemptions. So he can operate the fund stably until maturity.”

Landon Shore let out a low exclamation upon hearing this.

“Ah! Now that you mention it, that makes sense.”
“It would be advantageous for operating the fund, but it’s an unfavorable condition for investors, so it will be difficult for them to readily put up their money.”

Landon Shore chimed in, agreeing with the same thought.

“That’s probably it. Moreover, Jacob Wiseman was sanctioned by the SEC not long ago, so investors will be even more anxious.”

The SEC was the abbreviation for the Securities and Exchange Commission.

[It seems they’re facing considerable difficulty raising investment capital, contrary to their initial expectations.]
“So that’s why they’ve come to us with an investment proposal.”
[That is correct.]

But once Long-Term Capital Management posts those remarkable returns in its first year, investors will come crawling with their money, desperate to entrust it to the fund.

‘Of course, it won’t last more than a few years before it all comes crashing down in spectacular failure.’

Had I not known the outcome, I would have been tempted to invest myself—the returns Long-Term Capital Management would generate over the coming years were truly staggering.

‘Perhaps that’s precisely why they grew greedy and marched toward their own destruction.’

If Wall Street hadn’t inflated leverage to an unbearable degree driven by arrogance and greed, even investment failures and bankruptcies wouldn’t have escalated into events that shook all of Wall Street.

[They’ve sent an invitation to an investment briefing in New York. What would you like to do?]

Seokwon cleared his mind and asked.

“How much capital are they looking to raise?”
[There’s no upper limit, but the condition is to invest at least ten million dollars.]
“So they’re filtering out the small players and only taking the big money.”
[That appears to be why capital raising has been so difficult.]
“No matter how renowned Wiseman’s reputation is, with no track record yet, it won’t be easy for investors to commit that kind of capital.”
[Precisely.]

Seokwon paused to gather his thoughts before asking.

“When is the investment briefing scheduled?”
[One week from now.]
“I’ll attend and listen to what they have to say, then decide how to proceed.”
[You’re planning to go in person?]
“Yes.”

I wanted to meet Jacob Wiseman in person—the man who could make or break all of Wall Street.

[Understood. I’ll make the arrangements accordingly.]
“I’ll see you in a week.”

After ending the call and setting down the phone, I recalled a past incident with Manager Oh.

As the subprime mortgage crisis erupted across the Pacific in the United States, casting a shadow over the entire securities district of Yeouido, Manager Oh arrived at the Shoe Repair Shop with a weary expression and settled into an empty chair with the ease of familiarity.
Seokwon, who had been listening to the radio alone due to the lack of customers, greeted him warmly, genuinely pleased to see Manager Oh after several days.

“Welcome.”

As I placed a pair of three-striped slippers in front of him, Manager Oh removed his shoes and changed into them, his gaze sweeping across the cramped interior of the shop.

“Why are there so few customers?”
“You’re my first customer today, sir.”

I spoke casually as I picked up the shoes and placed them on the repair stand.
Manager Oh glanced at his wristwatch and clicked his tongue disapprovingly.

“Past noon and I’m your first customer? How are you supposed to make a living like this?”

Though his tone carried a note of reproach, I understood well enough that it masked genuine concern.
I skillfully brushed away the dust clinging to the shoes with a shoe brush as I replied.

“You know the atmosphere in the alley hasn’t been good these past couple of days.”
“Right. With the index completely tanking, people aren’t exactly in the mood to get their shoes shined.”

As he muttered knowingly, I glanced up briefly to study Manager Oh’s face.

“Are you doing alright, sir?”

I was concerned, as stock prices had plummeted due to the subprime mortgage crisis, and everyone around me was in distress.
Manager Oh habitually pulled out a cigarette and placed it between his lips, then shrugged his shoulders with a swagger.

“I sensed something was off early on, so I liquidated all my positions in time and managed to dodge the downpour.”
“That’s fortunate.”

Manager Oh was indeed resourceful as always.
When I genuinely sighed in relief, Manager Oh chuckled softly, then flicked his lighter and lit his cigarette.

“The saying that humans are creatures of forgetfulness seems to ring true, doesn’t it?”
“What do you mean, sir?”
“Ever heard of Long-Term Capital Management?”
“No.”

Manager Oh exhaled a plume of white smoke as he began his explanation.

“There was a Wall Street hedge fund called Long-Term Capital Management that specialized in bond trading.”

As Manager Oh launched into one of his characteristic stories without warning, I perked up my ears while polishing the shoes with meticulous care.

“It was 1998, so that’s exactly ten years ago now. Anyway, a similar situation unfolded back then. When Long-Term Capital Management suffered massive losses and faced bankruptcy, the heads of major Wall Street investment banks—JP Morgan, Goldman Sachs, Salomon Brothers—all lined up at the Federal Reserve for an emergency meeting.”
“All those titans gathered just because one hedge fund was going under?”
“Normally, of course not. But the scale of the default was astronomical.”
“How much are we talking about?”

Manager Oh held the cigarette between his lips and playfully spread all ten fingers wide.

“One hundred billion dollars.”

Upon hearing the figure, I stopped polishing and my jaw dropped.

“Did you say one hundred billion dollars?”
“That’s right. It’s the kind of sum that makes even the heaviest hitters scramble.”
“Wow. That’s something.”

It was an astronomical figure that could have turned Wall Street upside down then, just as it would now.
I widened my eyes in disbelief and asked.

“How could a single hedge fund even manage that much capital?”

Manager Oh took a long drag on his cigarette, his expression turning bitter.

“If it had all been their own capital, there wouldn’t have been such a fuss.”
“You mean they used leverage?”
“Exactly. They kept buying bonds using the bonds they’d purchased as collateral, repeatedly amplifying their leverage infinitely.”
“But the banks aren’t stupid either. They wouldn’t just let that slide without setting limits.”
“That’s what happens when greed blinds you. This subprime mortgage crisis that just erupted is exactly the same thing.”

Only then did I finally understand why Manager Oh had said at the beginning that humans are creatures of forgetfulness.

“Back then, if Long-Term Capital Management had simply collapsed and the banks that invested in it dumped their bonds indiscriminately, the market would have crumbled entirely, triggering a global financial panic. That’s why the Federal Reserve was forced to step in and prop it up.”
“It’s exactly like what’s happening now.”
“After the Long-Term Capital Management shock, the stock market was decimated and everyone was gripped by panic. But do you know what happened afterward?”
“What happened?”

Seokwon asked, his eyes alight with curiosity.

“Despite the grim outlook, the market recovered quickly, and before long the dot-com bubble began to surge, sending the stock market soaring.”
“Now that you mention it, it does overlap with the dot-com bubble period.”

Manager Oh chuckled at Seokwon, whose eyes widened in surprise.

“Remember this: opportunity always comes hand in hand with crisis.”

As Manager Oh’s face gradually faded away, I returned to reality.
Without fully realizing it, a knowing smile—one that bore an uncanny resemblance to Manager Oh’s—had settled at the corners of my mouth.

“That’s right. Opportunity always comes with crisis.”

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This chapter was translated by Lunox Novels. To support us and help keep this series going, visit our website: LunoxScans.com
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