Wall Street, Chapter 4
Will Emerson, the Vice President of Risk Management at Goldman Sachs, was staring intently at the contract he had signed last Friday. The red-haired man standing beside him, waiting for Emerson to speak, finally broke the silence.
“Should we contact Miracle Investment first?”
“Hold on. We need to get a precise handle on the total amount first.”
Emerson, still propping his chin on his hand, didn’t take his eyes off the contract. When his phone rang, he seemed almost relieved.
“Put them through.”
He quickly jotted down the numbers he heard over the phone.
“Are you sure about this?”
He tapped the paper with his pen, confirming the figures one last time before ending the call. Emerson’s face had turned pale.
He turned to the red-haired man beside him.
“Get everyone to the conference room. Now!”
The red-haired man dashed out as soon as Emerson finished speaking. Emerson checked the numbers again. The circled figure of 70 billion weighed heavily on his chest.
As Emerson entered the conference room, a dozen pairs of eyes turned to him. Without preamble, he directed a question at one of the men.
“Michael, what’s the current status of the defaults?”
“Excuse me?”
“The subprime mortgages! What’s the repayment status after the adjustable rates kicked in?”
“It’s around 3%.”
Emerson frowned at Michael’s uncertain response.
“Around? You think? I need exact numbers, not guesses. You have five minutes.”
Michael began typing furiously on his laptop.
“Last Friday, Miracle bet 2.8 billion dollars on mortgage-backed securities becoming worthless. Their plan was for 3.5 billion, but they scaled back in a few places. If they win, they’ll walk away with nearly 56 billion dollars.”
The room fell silent. Everyone had heard about Miracle’s moves over the weekend, but the total amount was news to them.
Some might have let out an expletive starting with ‘F’, but Emerson’s stern expression kept them in check. They wondered if Emerson was angry because Miracle had bet 2.8 billion while Goldman Sachs had only managed to secure 48 million.
“There have been others who thought like Miracle before, but their amounts weren’t this large, right?”
Some nodded, while others looked around, unsure.
“Miracle prioritizes stability. They avoid principal loss at all costs, so isn’t it strange they poured in 2.8 billion?”
“Emerson, we make 500 billion dollars annually from mortgage-backed securities. 2.8 billion is a lot, but relatively speaking, it’s just a drop in the bucket.”
Someone countered, and another, emboldened, offered a more optimistic view.
“At the Las Vegas Securitization Forum, they announced that the loss rate for subprime mortgage securities is only 5%.”
“Who said that?”
“It was in the keynote speech by Bruce Miller, the president of Bear Stearns…”
Emerson cut him off.
“What’s the basis for that 5%? Did you verify it?”
The optimist faltered, unable to answer, but Michael, who was checking the default status, saved him.
However, the numbers Michael found made everyone in the room feel guilty.
“Emerson, starting this year…”
“Just give me the number!”
“8%…”
Michael was the first to truly grasp the gravity of the situation. He had seen the graph of defaults rising steeply.
“At this rate, it’ll be over 9% next month. We’re looking at 10% soon.”
Michael also revealed a crucial fact that couldn’t be hidden.
“Adjustable rates are already more than four times the fixed rates. If this continues, all the mortgaged homes will be foreclosed…”
Emerson’s eyebrows twitched.
The numbers from the forum’s keynote speech were baseless. The forum was just a gathering of salesmen trying to sell more derivatives.
Rosy futures, safe investments, a money feast… weren’t they just spouting these empty phrases?
Will Emerson had risen to Vice President of Risk Management thanks to his keen insight. He was meticulous enough to spot a tiny ant hole in a massive dam and prevent it from collapsing.
But today, he felt he might need to write his resignation letter.
It wasn’t an ant hole anymore; it was a large crack, and water was leaking. The dam seemed on the verge of collapse.
It was too late to blame himself for being blinded by the glittering money feast and doing nothing.
He knew exactly what he had to do now.
He hadn’t detected the risk in advance, but he had to minimize the risk that had already arrived.
It was time to pack up and evacuate before the dam broke.
Will Emerson picked up the phone on the conference room table.
“Send up five security guards immediately.”
The sudden order left everyone in the room bewildered, but no one dared to speak. Emerson’s stern expression was not to be taken lightly.
When the guards arrived, Emerson spoke.
“While I’m gone, no one leaves this room. Put your phones on the table.”
As people hesitated, he shouted.
“Now! Or you’re fired on the spot!”
They quickly placed their phones on the table.
Emerson instructed the guards.
“Turn off all the phones and disable them. Do the same with the laptops. Disconnect the phone lines, and make sure no one leaves the room. It won’t take long.”
As the guards began collecting the phones, Will Emerson sprinted towards the chairman’s office at Goldman Sachs.
The conference room had become an isolated island, completely cut off from the outside world.
“John, it’s an emergency.”
“Sit down first. Have a glass of water.”
John Rogers, the chairman of Goldman Sachs, tried to calm the breathless Will Emerson.
“It’s about Miracle, isn’t it?”
“Yes, but the real problem lies elsewhere…”
Rogers raised a hand, pointing to the TV, silencing Emerson.
“Watch that first.”
CNN was broadcasting breaking news.
“New Century Financial, the second-largest subprime lender, filed for bankruptcy protection in a Delaware court on the 2nd. The company announced it would cut 54% of its workforce, about 3,200 employees, and sell off subsidiaries as part of its restructuring.
The company has been struggling as subprime mortgage interest rates rose and home prices fell, leading to increased defaults. Last year, they provided nearly 60 billion dollars in loans, but they halted lending last month.
Additionally, CIT Group and Greenwich Capital have agreed to provide 150 million dollars in funding, but the stock has already fallen 97% compared to last year.”
Will Emerson closed his eyes tightly.
Damn it!
It had already happened.
“Do you know who New Century’s largest creditor is?”
Emerson nodded. It was Goldman Sachs. And every major financial institution in the top ten globally was also a key creditor.
“Miracle signed a billion-dollar swap contract?”
“Yes.”
“Is Rachel just incredibly intuitive, or is she a meticulous mathematician? She got in and out just a day before.”
“John, Miracle’s billion dollars is nothing. We need to offload our CDOs (Collateralized Debt Obligations) quickly.”
Unlike the anxious vice president, Rogers remained calm.
“If we start unloading CDOs, do you think others will just watch? All mortgage-backed securities will flood the market in an instant.”
“But we can’t just sit back and watch, can we?”
“Will.”
“Yes.”
“Do you know why Miracle only contracted a billion dollars?”
Emerson was frustrated by the chairman’s seemingly irrelevant question.
“A billion dollars isn’t a small amount.”
“Not really. You said the total was 60 billion dollars, right?”
“56 billion.”
“Even at 56 billion, it’s less than 2%. Miracle accurately assessed our payment capacity. We’ve already entered into quite a few credit default swap contracts.”
“How much exactly…?”
“25 billion dollars.”
Emerson realized that the chairman’s calmness stemmed from resignation, and he understood that there was nothing he, as the Vice President of Risk Management, could do.
Watching the dazed Emerson, Rogers chuckled.
“Don’t worry too much. 10 billion of that is ours.”
“What? What do you mean…?”
“We took out insurance just in case. You know Gary Trust, the company we spun off?”
“Yes, it’s an independent investment team made up of top talent…”
“Right, we entered into a credit default swap with them. Our subsidiary essentially earned 10 billion dollars, so we’ll have some breathing room.”
Emerson was speechless.
The parent company was touting the booming housing market, while the subsidiary was betting on its collapse.
What would Goldman Sachs’ shareholders think if they knew? It was clearly a betrayal of corporate ethics.
If Emerson had known that 10 million of the 10 billion was a personal contract by John Rogers, he would have been in despair.
John Rogers patted the sofa and stood up.
“Even though it’s late, we should make the first move, right? Let’s instruct everyone to offload those scraps of paper as quickly as possible. And you, make sure this doesn’t leak out.”
We might be able to manage things internally, but outside, it’s already too late.
Other companies aren’t fools. They’ll analyze why Miracle swept through and come to the same conclusion we did.
Wall Street’s already been hit with a bomb.
All we can do is delay the moment individual investors find out.
As always, the biggest losers are the ordinary investors, aren’t they?
“Goldman Sachs is the fastest. They’re scrambling to unload their shares.”
Rachel, exhausted from a day of endless calls, took a moment to sip her coffee.
“By tomorrow, everyone will be dumping. And there’ll be some foolish enough to buy.”
“Now it’s just a matter of time before everyone realizes U.S. mortgage-backed securities are unrecoverable.”
The shadow on Rachel’s face refused to lift.
“Howard, from what I’ve gathered, mortgage-backed securities are just the tip of the iceberg.”
“You’re talking about derivatives, right?”
“Yeah. Do you know how massive the synthetic derivatives market is, with things like complex CDOs, squared CDOs, and double CDOs?”
“Yes, it’s over twenty times larger.”
Rachel shook her head as she watched me speak so calmly.
“Why? Should I be panicking because I can hear the world economy collapsing?”
“No, it’s just… the world economy is crumbling, and you’ve made a fortune. Yet you seem unfazed.”
“The joy and regret cancel each other out. We’ve made $56 billion, but the collapse of the American dream will leave millions of decent people homeless. I can’t celebrate forever.”
Honestly, making money isn’t the real thrill. The true satisfaction comes from knowing this economic crisis will be the bullet that takes down Vice Chairman Jin Dong-gi.