Monday, September 21, 1998.
The entire Wall Street was wrapped in suffocating tension as the opening bell approached.
Shocking news had spread over the weekend: Jacob Wisemann's LTCM, once celebrated like a rockstar on Wall Street for years, had lost half its assets due to failed investments in Russian government bonds.
Adding to the unease, the Asian and European markets, which had opened earlier, were already showing significant turbulence.
Traders at the New York Stock Exchange, dressed in a variety of colors, waited anxiously at their booths for the market to open.
"The British swap spread jumped to 95 points?"
"And U.S. Treasury bonds are seeing spreads widen to 87 points in the over-the-counter market."
"The spread between existing bonds and newly issued ones has widened by 19 points."
Two traders in green jackets, standing at their booth desks, stiffened at their colleague's words in front of the monitors.
One of them, sporting a beard that reached his sideburns, frowned and said,
"Just a month ago, it was only six points. Now it's tripled. The credit crisis might be due to the Russian bears, but this doesn't look normal."
The other man, seated, glanced around discreetly and lowered his voice.
"Tokyo office reported that Goldman Sachs is offloading everything linked to LTCM. Salomon's doing the same."
"So they're the first to run when the fire breaks out."
"Typical rat behavior, really."
Although they grumbled about the swift moves of the major investment banks, they themselves were preparing to offload all the assets tied to LTCM's portfolio, which had remained hidden until now.
Other traders were acting the same way.
In fact, all of Wall Street was scrambling to put as much distance as possible between itself and LTCM, now a ticking time bomb.
Then the bell rang, signaling the market's opening.
Instantly, the air inside the exchange became taut, as if it might snap, and the traders' shouting erupted.
"Sell 5,000 Merrill Lynch shares!"
"Citibank, sell 20,000 at the current price!"
"Hey, don't push!"
"I was first!"
The two traders who had been standing at their booth a moment ago were now swept into the crowd of shouting traders, their voices hoarse as they yelled, veins bulging in their necks.
***
John Miller, chairman of P&P Partners, stared at the monitor as numbers danced and plummeted relentlessly downward, feeling as if all the blood had drained from his body.
His reckless buying of Russian and emerging market bonds, which he had thought undervalued, was now returning to him as sheer disaster.
It was as if a massive tsunami had struck—his invested assets were collapsing helplessly, crashing in value.
When Russia had declared a moratorium, he had assumed it was just a passing shower, but that had been a grave misjudgment.
The market collapsed after Moody's downgraded several South American countries, immediately followed by the LTCM crisis, and P&P Partners' accounts melted down to an unmanageable level.
Miller, staring blankly at the real-time shrinking fund assets, bit his lower lip hard and jerked his head up.
Then he shouted urgently at the busy traders on the floor.
"Sell off the positions immediately! I don't care about the losses! Move it!"
Jonathan, the chief manager, turned to face him.
"If we sell now, the losses will be 30%!"
"Damn it!"
Miller hesitated for a brief moment at the staggering loss rate, but then slammed his hand on the desk with a determined expression.
"It doesn't matter! We can't wait for a rebound. With those damn LTCM guys, this plunge isn't going to stop anytime soon."
He kept urging them to act quickly.
"Understood."
Jonathan, sensing the severity of the situation, quickly nodded and began directing the traders to sell their positions and cut losses.
This course of action would not only wipe out all the profits made this year but also risk a major loss. Yet there was no alternative.
Feeling the crushing despair of watching the reputation he had painstakingly built over the years crumble in an instant, Miller muttered a curse under his breath.
"Damn it!"
At that moment, an employee covered the lower part of the receiver with his hand and spoke to him.
"Chairman, Goldman Sachs is on the line."
"Damn it!"
Miller's face contorted immediately.
He had a rough idea of why they were calling.
But he couldn't ignore the call, so, stamping his foot in irritation, he walked over and took the receiver.
"This is John Miller."
A businesslike voice came through the line.
[We are calling regarding the margin account used by P&P Partners.]
"...."
[The current collateral-to-margin ratio has fallen below the agreed threshold. You will need to deposit additional funds to maintain the contract. Please transfer ten million dollars by the end of today.]
As expected, the call demanded more collateral, and Miller pressed his throbbing forehead with his hand.
"Ugh… fine."
[Thank you for your cooperation.]
As soon as the call ended, Miller threw the receiver to the floor.
"Damn it! What the hell is happening?"
With stocks and bonds plummeting together, margin call calls rained down not just on Miller's P&P Partners but on many hedge fund offices across Wall Street.
***
Manhattan, One New York Plaza Building.
In a luxuriously furnished office, Seok-won sat in the center of a sofa, surrounded by Landon, Andrew, and Dan Baradan, the senior chief of investment.
"As you expected, rumors that LTCM's bankruptcy is imminent have sent both stocks and bonds sharply lower," Landon began.
Andrew, sitting across from him, added, "Fearing that LTCM, on the brink of collapse, would dump its assets at rock-bottom prices and crash the market, Wall Street investment banks and funds panicked and started selling first, pushing the market even lower."
"LTCM holds positions worth well over $100 billion. If they really start liquidating, they could crush prices across both stocks and bonds. It's understandable that people are scared."
Seok-won, sitting with one leg crossed, spoke calmly, when Dan, the senior chief manager, interjected.
"Today, stock volatility reached 38%, and the options market behaved almost catastrophically. Funds that bought emerging markets, including Russia, and sold U.S. Treasuries likely suffered huge losses."
"Chances are, margin call calls must have poured into the offices of Wall Street funds," Andrew added, as if confirming the obvious, prompting a faint smile from Seok-won.
"Most likely," Seok-won replied.
At that moment, Landon set down his coffee after taking a sip.
"From the information I got before coming in, it seems LTCM also faced margin calls. They secured over $470 million in emergency loans from twenty banks, including Chase Manhattan, and deposited it with their clearing bank, Bear Stearns."
"Banks must know LTCM's situation well. They actually provided that much additional credit?" Seok-won asked, a look of disbelief on his face.
"Yes," Landon said, shrugging as if he expected such a reaction.
"It seems LTCM had previously entered into a 'living will' agreement with 24 banks, including Chase Manhattan. They used that as leverage to request an emergency loan, which the banks approved."
Seok-won shook his head in disbelief after hearing the explanation.
"Even so, that won't resurrect LTCM from the brink. It'll only help them get through the immediate crisis. Purely a foolish move," Seok-won said.
"Given how much debt they already have, it wouldn't have been easy to deny LTCM's request," Dan added.
Seok-won snorted at the explanation.
"So that saying is true—when the borrowed amount is huge, the creditor can't help but tread carefully. Fits perfectly."
"Anyway, one thing this clearly shows is the scale of LTCM's losses," Landon remarked.
Seok-won nodded in agreement.
At that moment, Andrew cautiously spoke, changing the topic.
"There's something unusual going on."
"What is it?"
Leaning slightly forward, Andrew spoke with measured caution.
"LTCM tried to recoup losses by selling off large amounts of five-year stock options. At the same time, AIG dumped the same options in massive quantities."
"...!"
"It's as if they're deliberately driving LTCM off the cliff, even while taking losses themselves."
Seok-won's eyes glinted.
"You're saying AIG is working like hyenas, trying to devour LTCM."
"It's not confirmed yet, but their actions suggest so," Andrew replied.
Landon, listening, nodded appreciatively.
"The Russian situation is still risky, but once the crisis passes, Treasury prices should recover. So, if you have the stamina to weather the storm, you could pick up LTCM's assets at bargain prices and make a substantial profit later."
"Indeed," Seok-won said, crossing his arms and recalling memories from before the regression.
'Come to think of it, Warren Buffett, called the Sage of Omaha, conspired with the longtime AIG chairman to scoop up the battered LTCM at rock-bottom prices.'
Seeing how even a hint of weakness draws wolves from all directions, ready to pounce, reminded him once again that this world survives only by the strong.
Tapping the armrest of the sofa lightly with his fingertips, Seok-won gathered his thoughts, then lifted his head and issued instructions.
"Today, the Dow closed at 7,983.62."
"That's correct."
"Let's continue monitoring the situation closely and hold our positions for now."
"Understood."
As the meeting wrapped up, a knock came at the door. Daisy, with long black hair and dressed in a sleek suit, entered and bowed politely.
"Excuse me for interrupting. I have an urgent message to deliver."
She walked briskly to Landon, handed him a note, nodded once more, and left.
Landon opened the note with a puzzled expression. After reading it, his eyes widened, and he looked at Seok-won.
"Federal Reserve Bank of New York President Chris Murphy has summoned the heads of major Wall Street banks—including Bear Stearns, Goldman Sachs, JP Morgan, and Merrill Lynch—for tomorrow to discuss the LTCM issue."
Andrew and Dan exchanged surprised glances. Seok-won, however, touched his smoothly shaved chin with one hand, as if he had expected this.
"Finally, it seems the Fed is stepping in to prevent the market from collapsing."
"Then shouldn't we rush to liquidate our positions?" Dan asked urgently.
He was concerned because if the Fed resolved the LTCM crisis, there was a strong chance that the plummeted asset prices would rebound.
Seok-won, however, responded with calm confidence.
"Even with the Fed stepping in, the amounts involved are enormous, and the individual interests of the Wall Street banks are intricately entangled. Reaching an agreement won't be easy. In fact, if the conclusion is delayed and discord leaks out, expectations will turn into disappointment, hitting the market even harder. There's no need to rush."
"Ah…"
"I see."
The three nodded, understanding his reasoning.
TL/n -
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