The Return of the Ruined Chaebol's Third-Generation Heir - Chapter 63

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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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The Regression of a Fallen Chaebol Heir — Episode 63
September 2008.
IndyMac and Freddie Mac have been nationalized.
That single sentence is how Danny’s call began.
Six months since Bear Stearns collapsed.
Much had transpired in the interim.
The market had caught its breath for a moment, but the Subprime Mortgage Crisis was far from over.
IndyMac Bank had gone under, and housing prices continued their freefall. Investment banks across Wall Street announced losses day after day, and Lehman Brothers’ stock had plummeted more than eighty percent from its peak. Then yesterday, the U.S. government announced it would nationalize IndyMac and Freddie Mac.
“It’s all unfolding just as Danny predicted, sir.”
Danny had mentioned information obtained from a former colleague weeks ago—that Freddie Mac would be rescued by the federal government.
“And it’s rather remarkable, isn’t it? Nationalization in America, the very heart of capitalism.”
-It couldn’t be any other way. IndyMac and Freddie Mac aren’t banks—they’re government-sponsored enterprises.
The firms the government had chosen to save were not investment banks.
When investment banks like Bear Stearns, sold off for a pittance, or Lehman Brothers, soon to implode, extended mortgages to customers, Freddie Mac stepped in to purchase those mortgage bonds.
The banks then took the cash from selling those bonds to Freddie Mac and issued new loans, generating profits.
Of the roughly twelve trillion dollars in American mortgages outstanding, these two companies held half—six trillion dollars.
If they failed, the American housing market would collapse, and mortgage transactions would cease entirely.
That’s why the government spared no effort to save them.
-But the executives will likely pay a price for this.
“It must have been serious, then.”
-From what I’m hearing around the industry, these firms were supposed to deal exclusively in prime mortgages—loans to creditworthy borrowers. But when investment banks started eating into their market share, they began issuing loans without even verifying income.
NINJA loans.
No Income, No Job, No Asset.
Lending money to people with no income, no employment, no assets whatsoever.
These loans were built on a single belief: that housing prices would climb forever. When that belief shattered, the rot surfaced.
“Thinking about the housing market, the U.S. government really did have to save them.”
-But there’s a bigger reason than that.
I listened intently to Danny’s explanation.
-It could spark a diplomatic crisis.
“A diplomatic crisis?”
-As I mentioned, those two firms are government-sponsored enterprises. Which means the bonds they issue are essentially guaranteed by the U.S. government itself.
“…….”
-The People’s Bank of China, the Bank of Japan, even South Korea’s National Pension Service—they’re all holding huge amounts of bonds from these companies.
They purchased them to boost their foreign exchange reserves as a side effect.
Since the U.S. government backs them, these bonds are as good as dollars.
-The plan announced with the nationalization was: liquidate all equity, guarantee bondholders one hundred percent. You know why that is?
“They were appeasing foreign governments.”
-Exactly. The state seized the company. Shareholders’ equity stakes became worthless.
Nationalization in capitalist America.
But they judged it better than the alternative—a diplomatic meltdown.
-Anyway, that’s the state of America right now. What are we going to do with our idle cash?
I paused at Danny’s question.
We still held the one hundred thirty-five million dollars we’d extracted from Bear Stearns in cash.
“What’s the current return on our positions?”
-Lehman CDS is up two hundred fifty percent since March, Merrill Lynch is up one hundred eighty percent, AIG about two hundred percent.
We were already pulling substantial profits from our existing positions.
But it wasn’t time yet.
“This is the moment. The mortgage market can’t hold out much longer.”
-Good. So we’re putting all the cash we pulled from Bear Stearns into Lehman?
I fell silent for a moment.
In one week, Lehman Brothers would file for bankruptcy.
An investment bank with one hundred fifty-eight years of history would vanish in a single night.
That day was coming.
“Yes. Deploy all of it into Lehman CDS.”
Lehman Brothers’ situation was dire.
The stock had cratered more than ninety percent from its peak, and the third quarter was projected to post a loss of three point nine billion dollars.
The CEO kept insisting to investors that they had sufficient capital, but the market didn’t believe him.
Talk of credit downgrades swirled, and counterparties began declining to deal with Lehman one by one.
History was repeating Bear Stearns’ downfall.
-You think it’ll work out?
Danny pressed me on it.
-I’m hearing rumors that Barclays and the Industrial Bank of Korea are considering acquiring Lehman. The board members are negotiating in the United Kingdom and South Korea respectively.
I smiled inwardly.
In my previous life, South Korea’s state-run Industrial Bank of Korea had come within reach of acquiring Lehman Brothers.
Had the acquisition gone through, history might have taken a different path.
But in the end, there was disagreement over per-share pricing, and the deal fell through.
The same would happen with Barclays.
Lehman’s executives were more interested in maximizing their own payouts after a sale than in saving the company itself.
Greed scuttled the negotiations.
That was ultimately why Lehman collapsed.
“It’ll work out fine. Both deals will fall apart.”
-……You’re that confident?
“Yes. Just wait a week.”
-All right, I’m putting my faith in you again on this one, Kang.

* * *
September 14, 2008. Afternoon.
A conference room in the Federal Reserve Building New York. It was Sunday, but this room had assembled heavyweight figures.
The Treasury Secretary, the Federal Reserve President of New York.
And the CEOs and chairmen of Wall Street’s premier investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup, and others.
The very heart of American finance had gathered in one room.
“…….”
The atmosphere was heavy.
Through Friday, Barclays and Bank of America had been exploring acquiring Lehman.
But Saturday night, Bank of America abruptly pivoted to acquiring Merrill Lynch instead.
Only Barclays remained.
And Barclays’ negotiations had yet to reach a conclusion.
“I’ll be direct.”
The Treasury Secretary spoke, and the room fell silent.
“With Bear Stearns, the government stepped in. The Federal Reserve extended emergency funding to JP Morgan and took on the bad assets.”
The Treasury Secretary’s gaze swept slowly across the table.
“But this time, there will be none of that. The government and the Federal Reserve will contribute nothing.”
Silence fell over the room, and several CEOs’ faces hardened.
“If Lehman collapses, you won’t emerge unscathed. You all know the scale of derivatives exposure you have with Lehman.”
The Treasury Secretary nodded to an aide beside him.
The aide circled the room, distributing documents one by one.
“That’s Lehman’s actual balance sheet.”
The CEOs opened the documents.
With each page they turned, their expressions shifted.
Total assets: six hundred thirty-nine billion dollars.
Real estate-related assets: eighty-five billion dollars.
Level 3 Assets alone—assets for which no market price can be determined—forty-one billion dollars.
Leverage Ratio relative to equity: over thirty times.
“This is…….”
The numbers alone might not have conveyed the gravity.
But everyone seated at this table understood exactly what those numbers meant.
Forty-one billion dollars in Level 3 Assets—roughly forty-five trillion won in Korean currency.
That these assets couldn’t be priced on the market meant they couldn’t be sold.
And assets that couldn’t be sold were essentially worthless paper.
“We cannot acquire them.”
The CEO of Goldman Sachs spoke first, his voice resolute.
He had the most to say about this Subprime Mortgage Crisis.
Goldman Sachs had exited subprime mortgage products early and had actually profited by betting on decline.
“The same applies to us.”
The CEO of Morgan Stanley, the second-largest firm, also backed away hastily.
“Who would acquire them after seeing these books? Forty-one billion in Level 3 Assets alone. No one knows what they’re actually worth.”
“What if we form a consortium and hive off the bad assets separately?”
The Federal Reserve President of New York suggested a proposal.
“Create a special-purpose vehicle like we did with Bear Stearns…….”
“That’s because the Federal Reserve put up a guarantee back then.”
Another investment bank chairman interjected.
“This time you’re asking us to do it with our own money, with no guarantee. That’s impossible.”
The argument continued.
No one was willing to absorb Lehman’s liabilities.
“I understand Lehman is currently in acquisition talks with Barclays.”
One CEO spoke up.
“Shouldn’t we wait to see what comes of that?”
The Treasury Secretary considered for a moment, then nodded.
The others agreed as well.
That was their only hope at this point.
“Mr. Secretary.”
Just then.
The conference room door burst open, and an aide rushed in.
Approaching the Treasury Secretary, the aide whispered something in his ear.
“It’s the British Treasury Secretary.”
The Treasury Secretary’s eyes narrowed.
He nodded and accepted the phone.
“Tony, it’s me.”
-Henry, I’m afraid we have no intention of importing America’s cancer into the United Kingdom.
“……What do you mean?”
-If Barclays takes on Lehman’s bad assets, it will destabilize the entire British financial system. Our authorities will block any Barclays acquisition of Lehman. That’s all.
Click.
The line went dead.
The Treasury Secretary hurled the phone onto the table.
He drew ragged breaths and surveyed the room.
“Barclays will not be acquiring Lehman.”
The room fell silent like cold water had been dumped on it.
Barclays was the one ship that could save Lehman—and everyone in this room.
That ship had sailed away.
The Treasury Secretary closed his eyes for a moment.
A decision had to be made.
“Bring me the phone again.”
The aide handed him the phone.
The Treasury Secretary dialed and pressed the receiver to his ear.
After several rings, the other party picked up.
“It’s me. Lehman is to prepare for bankruptcy.”
-……What do you mean?
The voice on the other end was Lehman Brothers’ CEO.
Desperation colored his tone.
-The negotiations are still ongoing. Barclays…….
“There is no Barclays. The British government blocked it.”
-If the Federal Reserve could extend some emergency credit, we can survive. We just need immediate liquidity…….
“The Federal Reserve won’t do it.”
-There must be other buyers. We can’t give up just yet…….
“There is no money to save Lehman—not in the government, not in the Federal Reserve, not on Wall Street.”
The Treasury Secretary’s voice was unforgiving.
-Secretary, please…….
“File for bankruptcy before midnight tonight.”
The Treasury Secretary spoke those words and hung up.
The conference room was enveloped in an eerie silence.
An empire that had endured for one hundred fifty-eight years had just come to an end with a single phone call.

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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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