[U.S. G-7, IMF Discuss Loan Support After Russia Pledges Government Reforms]
[White House: No Additional Financial Aid Without Economic Reform Commitments]
["No More Reckless Moral Hazard," IMF Chief Dismisses Expectations of Russian Bailout]
[Financial Markets Shaken as Hopes for Additional Russian Bailout Collapse]
What had seemed like a minor storm in a teacup—the Russian moratorium declaration—turned out to be a massive hurricane, sending shockwaves through Wall Street and financial markets around the world.
Riiiiing! Riiiiing!
"Damn it! What kind of lightning strike is this, out of nowhere?"
"You're planning to sell everything? I can place the order, but I can't guarantee it will go through."
The trading floor was already chaotic during market hours, but today, panic reigned. Traders shouted over each other, all desperate to sell their shares first.
"Shit! There's not a single buy order. How am I supposed to sell anything?"
One trader, speaking on the phone with a client, slammed the receiver down as if he wanted to smash it, venting his frustration.
When he glanced up at the large market board, he saw the Dow Jones Industrial Average plunge more than 200 points at a glance, and despair filled his eyes.
"Goddamn it. How far is this going to drop?"
He scratched his head with one hand and grabbed the phone again as it rang loudly, adding to the chaos.
Markets weren't just falling in Europe—they were crashing across Turkey and South America. Terrified investors dumped shares not only in emerging markets but also in relatively safe U.S. stocks.
The fear was that the fallout from the Russian moratorium could spread anywhere, so they decided to sell off any asset that carried even the slightest risk.
To make matters worse, Russian government bond prices collapsed. Many hedge funds using leverage were forced to liquidate holdings to meet margin calls, driving stock indices even lower.
And then, individual investors, startled by the market plunge, joined the selling frenzy, creating a vicious cycle where each drop triggered further declines.
At the same time.
The trading floor of Eldorado Fund, located in One New York Plaza in Manhattan, remained calm, in stark contrast to the turmoil sweeping across Wall Street.
Having already secured their positions and paused routine trades, the floor almost seemed leisurely.
"The Dow has dropped 280 points!"
[DJI: 8,243.22 (–290.13)]
Seok-won, dressed in a navy pinstripe suit with a white pocket square, stood with both hands in his pockets. He turned his head at the shout from Mason, now a senior trader.
"Given that the selling pressure shows no signs of easing, it looks like we'll break 8,200 points in the afternoon session."
Landon and Andrew descended onto the trading floor together, flanking Seok-won.
"That seems likely," Andrew replied, his gaze fixed with admiration on the giant market board, now awash in a sea of red.
"If this continues as you said, it will rank among the top five biggest drops in Dow history," Andrew added.
Landon, rubbing his hands together with a smile, chimed in.
"Now we realize that Russia's moratorium isn't a storm in a teacup—it's a massive hurricane sweeping everything away. The plunge will continue for a while."
Seok-won spoke with a calm, composed expression.
"You can clearly see hedge funds and Wall Street investors hit by Russian bond losses dumping stocks to cover their positions, creating a death spiral. As you said, a rebound won't be easy."
Andrew's eyes sparkled behind his glasses, and Landon responded.
"Just as you predicted, while stocks and emerging market bonds—including Russia's—are crashing, U.S. and German government bonds are soaring through the roof."
"Isn't that human nature? When fear strikes, people flee to safety first."
"Exactly," Landon said, nodding and letting out a low chuckle in agreement with Seok-won.
"Since we placed long-short bets in advance, the wider the spread between the two, the higher our profits. It's hard not to smile at that," he added.
Seok-won let out a small, amused smile in response.
As Russia's moratorium loomed, Eldorado Fund had maximized leverage and gone all-in on aggressive long-short bets.
Their strategy was simple: short stocks across countries, sell Russian and other emerging market bonds, and simultaneously buy U.S. and German government bonds.
In other words, they placed bets wherever there was money to be made, aiming to maximize profits.
Andrew, his face full of anticipation, suddenly expressed a curiosity.
"The stock markets are crashing worldwide—Europe, South America, Turkey, and the U.S. all falling together—but it's surprising that Asian markets aren't dropping as sharply. Well, except for Japan, of course."
Seok-won pursed his lips and replied with a bitter undertone.
"It's not that they're holding up well. It's more accurate to say they've already been beaten down by the foreign exchange crisis since last year and have nowhere left to fall."
"So that's why you said not to short other Asian countries, except Japan," Landon said, finally realizing the reasoning.
"There's not much to gain anyway, so why bother getting involved?"
"That's true."
At that moment, Andrew steered the brief side conversation back on track.
"Right now, everyone's panic-selling, but once fear subsides, the market should calm down, won't it?"
"Of course, but this is just the trailer," Seok-won replied.
"You mean the LTCM problem could blow up if things get any worse," Landon interjected sharply.
"They're also shorting," Seok-won continued, "but their positions are completely opposite to ours. That means the more we profit, the more LTCM loses."
Seok-won turned to Landon and asked,
"You mentioned LTCM's total capital was around $4.7 billion, right?"
"That's correct."
"Using 25 times leverage, the funds they're moving in the market are roughly $117.5 billion," Seok-won continued, his expression carrying weight.
"What do you think will happen if the spread keeps widening, they blow through all their capital, and have nothing left to hold?"
Hearing this, Landon and Andrew unconsciously swallowed hard.
Watching the tension on their faces, Seok-won spoke in a low, heavy tone.
"In the worst-case scenario, the borrowed funds inflated by leverage could completely vanish."
"…!"
"Well, even if they cut losses belatedly, there won't be much money left to save anyway."
Seok-won kept his hands in his pockets and wore a crooked smile.
"No matter how big a Wall Street investment bank is, if they lose this much money at once, they'd stagger."
The smile quickly disappeared from both of their faces.
"Do you think LTCM would really hold their positions until it comes to that?"
Andrew, snapping back to focus, tried to deny it, his voice trembling with unease.
If Seok-won's prediction came true and they really lost the full $117.5 billion in one blow, it wouldn't just shake Wall Street—it could potentially trigger an economic depression.
Landon, pale-faced, stared at him as Seok-won spoke in an even, calm tone.
"I'd like to think they'd fold, but considering how they've grown the fund with high returns until now, they won't easily lock in such a huge loss. Doing so would demolish their reputation like a sandcastle in an instant."
The two said nothing, their expressions heavy.
"Of course, not all their positions are in Russian bonds, but in a situation where every market is plunging like this, that won't be much consolation. And even if they tried to cut losses now, it would already be too late."
Seok-won's low voice carried across the floor as he gazed at the giant market board, where red tickers multiplied as the losses deepened.
"Soon enough, the fact that LTCM is sitting on an enormous ticking time bomb will come to light. That will be the climax of this crash."
The thought of the shock that the LTCM "bomb" would unleash made the two shudder, their faces twisting in horror.
At the same time, they looked at Seok-won with a mix of awe and respect, realizing he had anticipated all of this and carefully orchestrated the positions in advance.
***
September 1, 1998.
Jacob Wisemann sat in a conference room with the firm's partner-level key staff.
The room was impressive, with a massive floor-to-ceiling glass window overlooking the downtown skyline. Yet, the atmosphere was heavy, and everyone's expressions were stiff and tense.
Wisemann scanned the gathered group with bloodshot eyes.
Normally impeccably dressed and exuding confidence, he now looked so worn out that some might not have recognized him.
He seemed exhausted, as if he hadn't slept properly, and his body radiated fatigue. Occasionally, his eyes flickered with a restless anxiety, as if something were chasing him.
In a slightly hoarse voice, Wisemann spoke first.
"How much have we lost up to yesterday?"
Engoron, meeting his gaze, answered weakly, his face showing clear signs of weariness.
"…Just over $1.9 billion."
"Hm. So we've lost about 45% of our total capital," Wisemann muttered.
Engoron hastily added, almost defensively,
"Some losses came from widening spreads on the government bonds we invested in, but we also lost a substantial amount when the MCI-WorldCom merger failed unexpectedly."
Francois, who had led the merger arbitrage trades, furrowed his brow and snapped.
"Are you pinning the current losses on me?"
"The losses happened because the stock didn't rise as expected! That's true!"
"If we're counting that way, your team's decision to go all-in on Russian bonds and blow hundreds of millions makes your responsibility far greater than mine!"
"What?"
Engoron and Francois raised their voices, as if they were about to grab each other by the collar and start fighting.
Wisemann, unable to tolerate the scene any longer, lifted his eyebrows and slammed his palm down on the conference table in front of him.
"Enough! Now is not the time for us to fight among ourselves!"
Startled by the harsh shout, Engoron and Francois flinched. They glared at each other once, then fell silent.
Wisemann, wearing an irritated expression, ran one hand through his hair and asked,
"Have we heard anything from Gavin Phillips, chairman of Berkshire Hathaway?"
An executive on his left responded with a dark expression.
"No. I think we'll have to give up on that."
"Ugh…"
Unlike the plummeting Russian bonds, investment poured into safe assets like U.S. and German government bonds, driving their prices up and widening the spread between the two asset classes over time.
For LTCM, holding positions buying Russian bonds and selling U.S. and German bonds, it was a nightmare.
As the spread widened and losses quickly ate away at their capital, Wisemann urgently sought investors to inject funds into the fund.
Just a year ago, they had struggled to return money to reluctant investors, pushing them out of the fund. Now the situation had completely reversed.
Francois, with a resigned expression, let out a sigh.
"I think word is starting to spread on Wall Street that we got badly burned investing in Russian bonds."
Glancing nervously, Engoron added the grim news.
"Judging by the constant calls from Merrill Lynch and other trading banks, it seems it's becoming increasingly difficult to hide our losses."
Wisemann, also receiving continual calls from Dan Perry and other bank CEOs, realized they had reached the limit.
A heavy silence filled the room as everyone looked at him. Wisemann closed his eyes for a moment, saying nothing, before finally opening them again.
"Let's end today's meeting here. Everyone, you can leave."
Hearing Wisemann's drained tone, which offered no decisions or solutions, the attendees slowly rose and exited the conference room, their shoulders slumped.
A little later, left alone in the spacious room, Wisemann let out a long, heavy sigh.
"There really is no other way now."
Wisemann finally admitted that he had been backed into a corner.
"How did it come to this?"
No matter how he reviewed it, his plan had seemed flawless.
After all, LTCM had been thriving, delivering remarkable results.
"So I thought it would soar all the way to the sky…"
Wisemann closed his eyes tightly, then, with heavy steps, returned to his office and began drafting letters to the banks that had lent the fund money.
TL/n -
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