August 19, 1998, Wednesday.
Long Island, New York, LTCM Headquarters.
Bright sunlight poured through the wide floor-to-ceiling windows into the spacious private office.
Jacob Wiseman, the CEO, sat in the center seat of a leather sofa. On either side of him were Arthur Engoron, his face drawn tight, and François, a partner-level chief trader.
François, like Engoron, had once been part of the arbitrage team that Wiseman had led at Salomon Brothers. Having worked together for years, the three shared a bond strong enough that a glance was often enough to convey what they meant.
Amid the heavy atmosphere, the three men kept their eyes fixed on the television running in the corner.
On the screen, a well-known Wall Street securities analyst was answering the host's questions.
"It's quite a shock, but in a way, Russia's declaration of a moratorium was something inevitable."
"Are you saying Wall Street had already anticipated this crisis?"
Wearing a finely tailored suit, the analyst shrugged and replied.
"Since May, Russia had been staggering from heavy capital outflows. Even after the IMF and World Bank significantly increased their loans, the situation hardly improved. Still, I don't believe Russia's moratorium will cause any serious damage."
"Why is that?"
"Because the Russian government bonds now under suspension amount to about forty billion dollars. In terms of overall debt, that figure isn't enough to shake the global markets."
Then, speaking with full confidence, he added:
"Asian markets vulnerable to the moratorium have been rattled, but when you see the Dow Jones rising nearly 150 points, the bigger picture is clear."
"I see."
Click.
With the press of a remote, Wiseman turned off the television and looked at the two men seated beside him.
"What do you two think?"
François was the first to answer, pushing up the rim of his gold-framed glasses with a finger. His tone was calm, but his words came out firm.
"Our mistake was not anticipating that Russia, cornered as it was, might declare a moratorium. But I also agree the situation won't deteriorate any further."
Engoron added his thoughts, his expression serious.
"Just as we saw in Mexico and Asia, Washington will step in through the IMF and the World Bank with emergency aid to resolve the problem."
"Yes, that's likely."
Wiseman nodded slightly. He shared the same view.
Still, an uneasy feeling lingered in the back of his mind.
"If we liquidate our Russian positions now, the losses would be significant, wouldn't they?"
Receiving his gaze, Engoron's face stiffened.
"I'd need to run the numbers to be precise, but we'd be looking at least an additional three hundred million dollars in losses."
"Hm."
Wiseman's face twisted immediately at the reply.
Even maintaining an average return of twenty-five percent wasn't enough to satisfy investors. To suddenly post losses on that scale would topple everything they had built so far like a house of cards.
But those losses aren't realized yet.
As with any investment, until positions were closed and cashed out, even billions in losses remained nothing more than figures on paper.
Engoron, sensing Wiseman's line of thought, cautiously asked while studying his expression.
"Do you intend to liquidate the positions?"
François also fixed his eyes on Wiseman, his gaze unyielding. Wiseman leaned back in his chair, masking his unease.
"Unless the situation gets worse, we'll leave things as they are."
Relief washed over Engoron's face.
"You're right. Cutting our positions now would mean losses that are far too great."
"I agree. Even if we sell, now isn't the right time."
François nodded in agreement with Engoron's words.
Wiseman lit a cigarette, took a slow drag, and then asked in a steady voice,
"What about the banks that lent us the funds?"
As he had noted earlier, the current losses were only on paper. Even in the worst case, as long as the Russian government didn't default, the principal on the bonds could still be recovered.
What's more, since they had bought the Russian bonds at a steep discount—though still higher than current prices—there was even a chance of making a profit if things turned around.
The real issue was whether the banks that had provided massive leveraged loans would be willing to wait until the bonds recovered in value.
"Other than a few calls from counterparties like Bear Stearns and Merrill Lynch checking in to see if everything's fine, there's been no attempt to recall loans or demand additional margin."
"That's at least some relief."
With leverage set at twenty-five times while putting up almost no collateral, even the slightest move by the banks—whether recalling funds or demanding margin—would throw them into immediate crisis.
Wiseman let out a quiet sigh of relief and flicked the cigarette between his fingers.
"Keep monitoring the markets, and reassure the banks. Tell them we've taken a small hit, but the fund's overall operations remain solid."
"Yes."
"Understood."
Engoron and François answered in unison.
Just then, a knock sounded at the door, and a female staff member stepped in.
"Mr. Dan Feri is on the line. How should I handle it?"
Wiseman frowned slightly.
"Put him through."
The staff member gave a polite nod and left. Wiseman gestured lightly to the two men beside him.
"You two may leave now."
"Yes, sir."
Since the important matters had already been discussed, Engoron and François rose from the sofa without objection.
As soon as they stepped out and the door closed behind them, the phone on the side table rang.
"Whew…"
Wiseman crushed his half-smoked cigarette into the ashtray, reached to the side, and picked up the handset.
Relaxing his stiff expression, he deliberately spoke in a bright voice.
"Dan! What a surprise."
"It's been a while."
Dan Feri, the CEO of Merrill Lynch, made a polite greeting, his tone probing.
"With those Russian bears making such a mess, the markets are in an uproar. I just wanted to check whether your firm is holding up."
As expected, the call was simply to gauge how much damage LTCM had taken from Russia's moratorium.
Easily seeing through the intent, Wiseman responded with an even more relaxed tone.
"We've taken a minor hit from the unexpected shock, but losses like that are part and parcel of investing, wouldn't you agree?"
"Well, that's true."
"On the contrary, if the IMF steps in more decisively after this, Russia's situation might improve compared to before."
"Ha, better that than leaving it to those vodka-swilling bears."
"Exactly. Which is why picking up Russian bonds at rock-bottom prices could turn out to be a fine investment."
His calm, unhurried demeanor eased Dan Feri's concerns.
"If Russia's economy really does recover as you say, the profits could be considerable. But things don't look very promising to me. Best to sit this one out."
"Of course, we should watch the situation a little longer."
Relieved that his bluff had worked, Wiseman smoothly shifted the subject.
"The weather's been beautiful lately. How about we get out on the course together next week?"
"I'd like to, but unfortunately I'm headed off on summer vacation with the family. Won't be possible this time."
"I see. That can't be helped. Where are you going?"
"To Greece."
"The Mediterranean's calm seas are perfect for yachting."
"That's exactly the plan. We'll be sailing around the Greek islands. My wife and daughters will probably drive me crazy demanding photos all day long."
Dan Feri chuckled, sounding weary at the thought.
"Let's save golf for another time."
"Agreed."
After a bit more small talk, Wiseman hung up the phone and let out a long sigh without realizing it.
"At least I bought us some time."
The only reason he had been able to mislead Merrill Lynch's CEO with just a few words was that LTCM's portfolio remained opaque to the banks that had provided leverage, hidden behind the excuse of business confidentiality.
It was absurd, but thanks to LTCM's stellar track record, the firm had dealt with the banks from a position of strength, not weakness.
"For now we've dodged the issue, but if this drags on, it won't be long before everyone realizes just how deep our positions in Russian bonds really are."
Wiseman bit down hard on his lower lip, his face tightening with unease.
***
Because of the time difference, Seok-won woke up a little later than usual. After a refreshing shower, he stepped out of the bedroom, feeling the thick carpet under his feet.
In the living room, Han Ji-sung, already dressed in a suit, rose quickly and bowed politely.
"You're awake, sir."
"Did you sleep well?"
Seok-won gave a slight nod in acknowledgment, then walked over to the table set by the large terrace window, where sunlight streamed in brightly.
The table, covered with a white cloth, had already been laid with cutlery.
As soon as Seok-won sat down, a hotel staff member in uniform, who had been standing quietly nearby like a shadow, approached and carefully poured steaming coffee from a silver pot into his cup.
Inhaling the rich aroma of roasted beans, Seok-won picked up that day's Wall Street Journal from the side of the table. The hotel staff asked politely,
"Shall I prepare your meal now, sir?"
Scanning the paper with one eye, Seok-won gave a small nod.
A moment later, the staff returned with a warm omelet and French toast, setting them gently on the table.
After sipping his coffee, Seok-won cut a piece of the sugar-dusted French toast and brought it to his mouth. That was when Han Ji-sung stepped closer and said quietly,
"Mr. Landon is on the line."
"Hand it here."
Seok-won wiped his hand on a napkin, took the phone, and raised it to his ear.
"Landon? It's me."
Landon's slightly excited voice came through the receiver.
"Boss, your prediction hit the mark exactly."
Setting the newspaper aside, Seok-won immediately asked,
"Has there been any reaction from Washington?"
"Not an official announcement yet, but both the U.S. and the IMF have decided against providing any additional support beyond what they had already promised."
Seok-won's eyes lit up.
"So the complacent belief that they'd always step in to fix things when a crisis hit has collapsed. The shock to the markets will be huge."
"That's right. Honestly, if it weren't for what you told me, I would have assumed, like everyone else, that the U.S. and IMF would bail Russia out again."
"They always have, so it was only natural to think so."
Seok-won shrugged as he spoke, and Landon chuckled in response.
"But not you, Boss. Thanks to your insight, we've hit the jackpot—big time."
Seok-won held the phone with a satisfied expression.
"Let's wait and see."
"Just as you said earlier, once word spreads that the U.S. and IMF have said 'no,' the markets will panic. The outcome is practically guaranteed."
Without denying it, Seok-won smiled broadly.
"When the selloff begins, the financial sector—especially those directly exposed to Russian bonds—will take the hardest hit."
"I agree. Take Goldman Sachs, for example. They were planning to go public next month, but this has completely upended those plans."
Landon laughed loudly over the phone.
It was only natural. They were holding the largest short positions in financial stocks, so the collapse of share prices at firms like Goldman Sachs and other major Wall Street banks would flow directly into profits for Eldorado Fund.