Golden Spoon Investment Portfolio - Chapter 455

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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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455. The Federal Reserve has drawn its sword, it seems.

Monday, September 21st, 1998.
As the opening bell approached, all of Wall Street was gripped by suffocating tension.
Over the weekend, shocking news had spread like wildfire: Jacob Wiseman’s LTCM, once revered on Wall Street like a rock star riding high for years, had lost half its assets in failed Russian sovereign debt investments.
The anxiety only deepened as Asian and European markets, which had opened first, showed signs of severe turbulence.
Traders at the New York Stock Exchange, dressed in various colored shirts, waited anxiously at their respective booths for the opening.

“I heard the British swap spread jumped to 95 basis points?”
“The U.S. Treasury bond spread is also climbing to 87 basis points in the over-the-counter market.”
“The spread between existing bonds and newly issued securities has widened by 19 basis points.”

Two traders in green shirts standing at the booth desk stiffened at their colleague’s words from the monitor.
One of them, a man with a beard extending to his sideburns, furrowed his brow and spoke.

“Just a month ago it was only 6 basis points, and now it’s tripled. No matter how much the credit crisis has grown because of those Russian bears, something doesn’t feel right about this.”

Then the man sitting in the chair glanced around cautiously and whispered in a lowered voice.

“Word from the Tokyo office is that Goldman Sachs is dumping everything connected to LTCM. Salomon’s doing the same.”
“They know the house is on fire and are trying to escape first.”
“Rats, all of them.”

Though they grumbled about the shrewd actions of the major investment banks, they themselves were now trying to liquidate all assets related to LTCM’s portfolio, which had been shrouded in mystery until now but was revealed this time.
Other traders were doing the same.
In fact, all of Wall Street was scrambling desperately to distance itself as much as possible from LTCM, which had become a time bomb.
Then, as the time came, a long bell rang out signaling the opening.
In an instant, the air in the exchange became taut as if it might burst, and immediately the roar of traders exploded.

“Merrill Lynch, 5,000 shares to sell!”
“Citibank, 20,000 shares at market price!”
“Hey, don’t push.”
“I was first!”

The two men who had been standing at the booth table moments before were now caught among the traders swarming like a school of piranhas, shouting at the top of their lungs with faces flushed red.

* * *

John Miller, chairman of P&P Partners, watched the numbers dance and plummet relentlessly downward on his monitor, feeling the blood drain from his entire body.
The Russian and emerging market bonds he had recklessly accumulated, believing them undervalued, were returning as pure catastrophe.
As if struck by a massive tsunami, the assets he had invested in were collapsing helplessly, plunging into freefall.
When Russia declared its moratorium, he had thought it merely a passing squall, but that judgment had been catastrophically wrong.
When Moody’s downgraded the credit ratings of South American nations, followed immediately by the LTCM crisis erupting, the market collapsed and P&P Partners’ accounts melted away to unbearable levels.
Miller stared blankly as the fund’s assets shrank in real time, then bit his lower lip hard and jerked his head up sharply.
He shouted urgently toward the traders moving frantically across the Trading Floor.

“I don’t care if we take losses—sell off the positions immediately! Now!”

Jonathan, the chief manager, turned his body around and looked at Miller.

“If we sell now, we’ll take a 30% loss!”
“Do it!”

Miller hesitated briefly at the staggering loss rate, but with a grim expression, he slammed his desk.

“I don’t care! We’re not in a position to wait for a rebound—sell now. Those damned LTCM bastards have the market moving in a way that suggests this crash won’t end at this level.”

Miller urged them repeatedly to hurry.

“Understood.”

Jonathan also sensed something was amiss, so he quickly responded and urged the traders to sell off their held positions and cut their losses.
Doing so would lock in losses, wiping out all the profits earned this year and potentially recording massive losses, but there was no other option.
Watching the reputation he had painstakingly built over the years crumble so pathetically in a single moment, Miller cursed under his breath.

“Damn it!”

Just then, an employee holding the phone receiver’s mouthpiece covered looked at him and spoke.

“Chairman, Goldman Sachs is calling.”
“Hell!”

Miller’s face contorted immediately.
He could roughly guess why they were calling.
But he couldn’t refuse the call, so Miller irritably stomped his feet as he walked over and took the receiver.

“John Miller speaking.”

Then a businesslike voice came through the receiver.

[I’m calling regarding the borrowed funds account that P&P Partners is currently using.]
“….”
[Your current collateral margin ratio has fallen below the agreed threshold. You’ll need to deposit additional margin to maintain the contract. We require ten million dollars by today.]

Just as expected, John Miller clutched his throbbing forehead at the demand for additional margin.

“Ugh….understood.”
[Thank you for your cooperation.]

The moment the call ended, Miller hurled the receiver straight onto the floor.

“Damn it! What is this mess!”

As stocks and bonds plummeted in tandem, margin call phones flooded not only John Miller’s P&P Partners but countless Wall Street Hedge Funds offices.

* * *

One New York Plaza Building, Manhattan.
In the elegantly appointed President’s Office, Seok-won sat in the center of the sofa with Landon Shore and Andrew on either side, along with Dan Baradan, the senior investment chief, gathered around him.

“As anticipated, rumors of LTCM’s imminent bankruptcy have swept through the market, causing both stocks and bonds to plummet significantly.”

Andrew, seated across from Landon Shore, added to his remarks.

“Terrified by the prospect that LTCM, facing bankruptcy, will dump its assets at fire-sale prices and crater the market, Wall Street investment banks and funds have rushed into panic selling, driving prices down even further.”
“With LTCM holding over one hundred billion dollars in positions, if they truly begin liquidating assets, they’ll obliterate prices across stocks and bonds alike. It’s enough to terrify anyone.”

Dan, the senior chief manager, interjected as Seok-won sat with one leg crossed.

“Stock volatility hit 38% in a single day, and the options market experienced near-catastrophic movements. Funds that bought emerging markets including Russia while shorting U.S. Treasuries must have suffered staggering losses.”
“I’d wager margin call phones have been ringing off the hook at Wall Street fund offices.”

As Andrew spoke with knowing certainty, Seok-won smiled faintly.

“Indeed.”

Then Landon Shore set down his coffee cup and spoke.

“According to information I gathered before coming here, LTCM also received margin calls. They borrowed over 470 million dollars from twenty banks, including Chase Manhattan, and deposited it with Bear Stearns, their settlement bank.”
“They must be aware of LTCM’s situation. Yet the banks extended additional loans in such massive amounts?”

Seok-won asked with a puzzled expression.

“Yes.”

Landon Shore shrugged as if he’d anticipated such a reaction.

“It appears they had established a living loan agreement with twenty-four banks, including Chase Manhattan. LTCM leveraged that arrangement to request emergency financing, and the banks accepted.”

Seok-won shook his head after hearing the explanation.

“Regardless, this won’t allow LTCM—already driven to the brink—to recover. It merely buys them time to survive the immediate crisis. It’s foolish.”
“With so much debt already on their books, the banks couldn’t easily refuse LTCM’s demands.”

At Dan’s clarification, Seok-won snorted.

“So the saying is true—when you owe the bank a little, the bank owns you; when you owe the bank a lot, you own the bank. This is exactly that situation.”
“In any case, one thing this situation makes abundantly clear is that LTCM’s losses are catastrophic.”

Seok-won nodded in agreement with Landon Shore’s assessment.
Then Andrew carefully opened his mouth and shifted the conversation.

“But there’s something unusual happening.”
“What is it?”

Andrew leaned forward slightly, speaking with deliberate caution.

“LTCM dumped massive quantities of five-year equity options to recover their losses. And AIG simultaneously unleashed a massive volume of identical options.”
“…!”
“It’s as though they’re deliberately driving LTCM over the cliff, even while taking losses themselves.”

Seok-won’s eyes gleamed as he spoke.

“So AIG is working like a hyena to devour LTCM.”
“Nothing’s certain yet, but their actions suggest exactly that.”

Landon Shore, listening to the exchange, nodded as if the theory held merit.

“The Russian situation remains unpredictable, and the risk is still substantial. However, once the crisis passes, won’t sovereign bond prices recover? If we simply have the stamina to weather this squall, we can scoop up LTCM’s assets at fire-sale prices and reap quite handsome profits later.”
“That would be the case.”

Seok-won crossed his arms and recalled memories from before his regression.

‘Now that I think about it, Gavin Phillips, the chairman of Berkshire Hathaway known as the Sage of Omaha, conspired with the chairman of AIG, with whom he had long-standing ties, to acquire the battered LTCM at a bargain price.’

Watching how wolves salivated and swarmed from all directions the moment anyone showed the slightest weakness, he was reminded once again that this world was a realm of survival of the fittest.
Seok-won tapped the armrest of the sofa lightly with his fingertips, organized his thoughts briefly, then lifted his head and issued his instructions.

“The Dow closed at 7983.62 today.”
“Yes, sir.”
“Continue to monitor the situation closely, but maintain our current positions as they are.”
“Understood.”

As the meeting concluded, there came a knock, and Daisy entered wearing a refined business suit, her long black hair flowing, and bowed respectfully.

“I apologize for the interruption. I have an urgent message to convey.”

Daisy approached quickly and handed a note to Landon Shore, then bowed again and exited.
Landon Shore unfolded the note with a puzzled expression, and upon reading its contents, his eyes widened in surprise as he spoke.

“Chris Murphy, the president of the New York Federal Reserve, has summoned all the heads of major Wall Street banks—Bear Stearns, Goldman Sachs, JP Morgan, Merrill Lynch, and others—for tomorrow to discuss the LTCM issue.”

While Andrew and Dan wore expressions of shock, Seok-won stroked his cleanly shaved chin with one hand as if he had anticipated this.

“So the Federal Reserve has finally drawn its sword to prevent the market from collapsing.”
“Then shouldn’t we liquidate our positions immediately?”

Dan asked urgently.
If the LTCM problem, the most significant adverse factor, were resolved through Federal Reserve intervention, there was a substantial possibility that the plummeting asset prices would rebound.
However, Seok-won replied with a composed demeanor.

“Even with the Federal Reserve’s involvement, the amount that needs to be resolved is enormous, and the conflicting interests of the various Wall Street banks are so intricately entangled that they won’t reach an agreement easily. Rather, if the conclusion is delayed and discord leaks out, expectations will turn to disappointment and cause further damage to the market. There’s no need to rush.”
“Ah….”
“I see.”

The three men nodded their heads in understanding.

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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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