September 22, 1998.
In the heart of Wall Street, the world's financial center, stood the Federal Reserve Bank of New York.
Unlike the glittering skyscrapers towering high around it, the building's overall appearance was stark and unadorned. Completed in 1924, it was a structure of historical significance.
Beneath it, carved into solid granite bedrock, lay a vault that housed the largest collection of gold bars in the world—thousands of tons in total.
Because of this, each arched window was reinforced with heavy steel frames, and armed guards in black uniforms stood at the main entrance, blocking the entry of outsiders.
From the early morning, a line of black limousines began pulling into the underground parking lot of the New York Fed.
Inside were the heads of Wall Street's major banks—J.P. Morgan, Merrill Lynch, Morgan Stanley, Goldman Sachs, Chase Manhattan, Salomon Smith Barney, Bear Stearns, and others—each arriving in response to the "invitation" of Chris Murphy, the President of the New York Federal Reserve.
When Joseph Salucci, Chairman of Goldman Sachs, stepped out of his limousine in the underground garage, a staff member from the New York Fed approached him politely.
"Your seat has been prepared in the conference room on the 10th floor. Please allow me to escort you."
Salucci gave a small nod and was just about to take his first step when another black limousine descended the ramp and came to a halt nearby.
The back door opened, and Dan Perry, Chairman of Merrill Lynch, emerged, dressed in a custom-made two-button suit.
Recognizing the familiar face, Chairman Salucci turned and extended his hand first, greeting him warmly.
"I heard you were taking a family trip to Greece. How was the vacation?"
"It was ruined, thanks to that idiot Wiseman."
Chairman Perry scowled in irritation as the two men exchanged a brief handshake.
"I heard LTCM lost more than half a billion dollars just yesterday. Is that true?"
Instead of answering, Salucci gave him a bitter smile.
"Damn it."
When Chairman Perry let out a curse at what he had just heard, Chairman Salucci spoke in a calming tone.
"Right now, the priority is to contain the situation. Let's go hear what kind of solution President Chris has prepared."
"…Fine. Let's do that."
With no real alternative at hand, Perry sighed quietly and nodded.
The two men followed the New York Fed staff member, who had been waiting silently, into the elevator and headed for the 10th-floor conference room.
It was a spacious room. Above the fireplace mantel hung an old portrait of George Washington, displayed alongside paintings of former Federal Reserve presidents. On one side stood a vintage grandfather clock.
As the two entered, they saw the other Wall Street banking heads who had arrived earlier, gathered in small clusters, speaking in hushed tones.
The expressions on their faces made it clear just how severe the LTCM crisis was—each of them looked thoroughly displeased.
And no wonder. Not only had they suffered heavy investment losses from the collapse of emerging market bonds and stock markets—Russia in particular—but the steepest drops had come in financial stocks, right at the center of the storm.
For Goldman Sachs, the stock market crash had even cast serious doubt on its upcoming IPO.
At Merrill Lynch, Perry's firm, the shares that had been trading at $108 in July had plunged to just $54—a cut in half.
It was impossible for the atmosphere to be anything but grim.
Salucci and Perry exchanged brief greetings with other familiar banking heads, sharing bits of information about the situation.
But even though they had all gathered because of the common problem of the LTCM crisis, each one fundamentally prioritized their own interests. As a result, the conversations were superficial, with the real substance deliberately withheld.
At that moment, President Chris, dressed in a navy pinstripe suit, scanned the room and spoke in a slightly raised voice.
"Since everyone is here, let's begin the meeting. Please take your seats."
The scattered participants moved to their designated spots, each marked with a nameplate.
Not only were the heads of Wall Street's investment banks present, but also the chairman of the New York Stock Exchange and representatives from major European banks. The number of attendees had swelled considerably.
Although the conference room was large, the luxurious leather chairs originally set up weren't enough, so extra seats had been hastily brought in. The mismatched chairs—different in style and size—were arranged side by side in disarray.
And so it came to be that the very people who ruled the world's financial markets were forced to squeeze in shoulder-to-shoulder, careful not to bump into one another—an almost comical spectacle.
"Ahem."
"Hm…"
Amid the sounds of people shifting uncomfortably in their mismatched chairs, President Chris cleared his throat softly before speaking in a firm, weighty voice.
"As you all know, since last August—specifically, after Russia declared a moratorium—the global bond market has been in a highly unstable state."
He calmly swept his gaze across the silent participants and continued.
"On top of that, LTCM, which has been operating through massive leveraged trades, has suffered enormous losses. If left unchecked, this could potentially trigger a worldwide financial crisis. That is why I've invited you here today."
At that moment, a representative from Germany's Deutsche Bank, seated to one side, raised his hand and interjected.
"Before anything else, shouldn't we start by disclosing exactly how large LTCM's assets are? That seems to be the first order of business."
Other participants nodded in agreement.
Since Chris had already intended to disclose the figures to gain the cooperation of those present, he did not hesitate before answering.
"With capital of $4.7 billion, they leveraged their position to purchase well over $120 billion in bonds and stocks. That is our current assessment."
Because leverage was a common practice, no one looked particularly shocked.
"The real problem isn't simply that prices have plunged in this downturn. Given time, the markets would eventually stabilize and recover. The truly serious issue is that LTCM didn't just invest in bonds and equities—they signed countless derivative contracts of various kinds in order to maximize returns."
"..."
"And the counterparties who provided the leverage and signed those derivative contracts… are all of you in this room."
The implication that Wall Street's own banks bore responsibility for the crisis made several participants grimace uncomfortably.
But Chris pressed on without pause.
"When recalculated at current market prices, with volatility far exceeding initial expectations, the notional value of those derivative contracts amounts to an astronomical figure—over one trillion dollars."
The room erupted in a stir.
"One trillion dollars…?"
"What on earth…"
"Unbelievable."
"How could this happen?"
Even for Wall Street's most powerful investment banks, the sum was far beyond what they could absorb. Their reaction was only natural.
Watching their faces, President Chris spoke again, his voice low and heavy.
"If LTCM collapses as it stands, every one of you will lose your counterparty and be forced to shoulder the burden directly. And if, in an attempt to cover those losses, you dump the collateral assets on the market at fire-sale prices, the already fragile system will completely collapse. I don't think I need to spell that out for you."
A heavy silence filled the room as the participants listened with hardened expressions.
"If each of you tries to save yourselves by selling off bonds, a chain reaction will be set off, spreading into a worldwide panic."
"..."
"On the other hand, if each of you makes some concessions and works together, we can avoid a catastrophic outcome."
At this, Fuller, the Chairman of Bear Stearns, frowned and asked bluntly,
"Are you suggesting we prop up LTCM to prevent its collapse, or divide up its shares and take over the fund ourselves?"
Because Bear Stearns was handling LTCM's clearing settlements, Fuller knew better than anyone the precarious state of the fund, and his displeasure was plain.
Other participants also looked unhappy, but Chris kept his expression serious and answered firmly.
"As I just said, if LTCM is allowed to fail without any countermeasures, the rushed and disorderly liquidation that follows will have severe and lasting consequences for the entire financial system."
"..."
"The turmoil and panic might subside in a day, but far more likely, the system could remain paralyzed for weeks—perhaps much longer."
Though Chris hadn't said the words directly, everyone understood he was alluding to the possibility of another Great Depression.
No one could dismiss the thought outright. As much as they wanted to believe otherwise, no one could be sure that the LTCM crisis wouldn't become the trigger.
In fact, the financial crisis that was once thought to be limited to Asia had already spread to Russia and was now showing signs of reaching not only South America but also Eastern Europe. The sense of fear and unease was inescapable.
"You all know that the yield on yesterday's Treasury auction dropped to 5.05 percent."
The fact that yields—the measure of interest—had fallen below the Fed's benchmark rate meant that demand for safe U.S. government bonds was surging to unprecedented levels.
"You understand, of course, that Treasury yields are a barometer of the market's fear."
"..."
"Like it or not, the market is already at the threshold of contraction. And this moment—right now—is the last chance to stop it from plunging over the cliff."
Though they had known it in their heads, it was now undeniable: the only way forward was to accept losses, pool their resources, and contain the crisis. The realization twisted their faces into grimaces, and groans of dismay escaped their lips.
"Ugh…"
"This is bad…"
A moment of heavy silence passed, and then, in the conference room lined with portraits in gilded frames, a fierce debate erupted.
The debate had raged from morning until late afternoon, but in the end, no consensus was reached. The first day's meeting closed unresolved, with another session scheduled for the following day.
Caught in heavy traffic, where cars inched forward like sluggish turtles, Joseph Salucci, Chairman of Goldman Sachs, slumped wearily into the plush back seat of his limousine.
Staring out the window at the bustling pedestrians, he reached into his inner pocket, pulled out his cell phone, and dialed Warren Buffett, Chairman of Berkshire Hathaway.
Ring… ring…
After the second ring, the line clicked open.
[Hello.]
"The meeting just wrapped up."
Buffett, with whom he shared a longstanding friendship, replied in his usual unhurried manner.
[How did it go?]
"As expected, President Chris wants the banks to divide up LTCM and take it over."
[That's the only way to keep the market from collapsing further.]
"They're squabbling, each trying to minimize their own losses, but everyone knows time is running out. A decision will be made within days."
[That won't do. Tomorrow I'll send Wiseman a buyout proposal. Make sure to steer the meeting's atmosphere in our favor.]
"Consider it done."
Lowering the phone, Salucci's lips curled into a broad smile.
From the start, he had secretly aligned himself with Chairman Buffett, who, together with AIG, was scheming to swallow LTCM whole at a bargain price. Playing innocent at the meetings, Salucci funneled information on the Fed's and Wall Street's maneuvers straight back to Buffett.
The plan was simple: strip away the bad assets at the expense of the other Wall Street banks, scoop out the profitable core, and split it neatly between Buffett and AIG.
Salucci's smile deepened as his eyes gleamed with unrestrained greed.