As of January 1990, proven oil reserves in the Gulf region accounted for 65% of the world's total proven reserves, while supplying 43% of the daily oil demand of countries around the globe. Iraq and Kuwait alone, even after decades of extraction that followed, still ranked among the world's top ten in oil reserves.
It was easy to imagine how violently unrest in the Gulf could shake the world's crude supply.
The moment news broke on August 2 that Iraq had invaded Kuwait, international oil prices began to rocket upward. By the close of trading on Friday, August 3, the global price per barrel had surged to $27.63, a 29% jump compared to before the war erupted.
And that was only the beginning.
In Simon's memory, the Kuwait War drove international oil prices as high as $41.07.
Because of the ripple effects from Simon, that great butterfly, many things were no longer quite so certain. Even so, Simon believed this shock would still have little trouble pushing oil to the $40 peak.
New York.
Cersei Capital headquarters in Midtown Manhattan.
Even though it was Sunday, Cersei Capital's headquarters was still packed.
Aside from the final week before the war, when some shorts failed to cover in time and cost them a portion of profits, Cersei Fund Management's positioning across every type of crude-related futures contract had essentially hit its targets.
By the time war broke out on August 2, Cersei Fund Management had built an enormous long position totaling $25 billion across major Brent and WTI crude futures, as well as related contracts such as heating oil futures, unleaded gasoline futures, high sulfur fuel oil futures, and more.
Cersei Capital had started building positions in late June. The entry prices, pegged to international crude benchmarks, ranged from as low as $13 to around $20 on the day before the war.
Starting next week, Cersei Capital would begin unwinding its long contracts step by step.
In truth, that process had already begun on the very day the war erupted.
Partly because they had no choice but to take the initiative.
Simon would have preferred to wait until oil neared or reached $40 before selling, but that simply wasn't realistic.
Everyone knew futures trading was a zero-sum game. If someone made money, someone else had to lose, and the profit and loss were symmetrical.
Take Cersei Capital itself. If they'd bet the wrong way this time and built $25 billion in crude futures shorts, then once the war broke out and oil jumped from $20 to $40, a 100% surge, Cersei Capital would, in theory, owe the opposing side $25 billion under the contracts.
Yet Cersei Capital didn't even have $6 billion in its accounts.
If the longs refused to close within Cersei Capital's ability to absorb losses, Cersei Capital would have no choice but to default.
Defaults during futures trading were extremely rare, but they weren't nonexistent, especially when a sudden war caused violent oil price swings like this.
Perhaps before the war, some speculators clung to hope, scraping together more margin just to stay alive. Once the war started and that hope died, many speculators simply gave up. Some who were running nearly 20x leverage defaulted on the very day the war erupted.
But a speculator's default didn't mean the futures contract itself defaulted.
Because there were two layers of protection in between: the futures broker and the exchange.
When a speculator's account funds were insufficient to cover losses, the broker, as the guaranteeing party, would pay the difference to ensure the trade continued.
If even the broker's funds were not enough to ensure settlement, then the exchange would draw on its own reserve funds to cover the gap.
In the most severe cases, to keep the futures system from collapsing, the national government would step in.
During the 1987 crash, the S&P 500 index futures, because of the massive swing on Black Monday, triggered rescue measures at the national level. On the night of October 19, only after direct intervention from the U.S. Treasury were major American banks able to provide huge sums to the Chicago Mercantile Exchange, preventing futures defaults.
With the sudden outbreak of the Kuwait War, crude futures trading this time also pushed pressure all the way up to the exchange level.
Which meant that if it was $5 billion wagering against $5 billion, the winner would not only take the speculator-level $5 billion. They could also end up receiving a large amount of money covered by brokers and exchanges to ensure contract settlement.
Inside the conference room at Cersei Capital headquarters.
After a full day of meetings, it was already evening. The summer sunset slipped through the gaps between Manhattan's skyscrapers, spilling into this office with a sweeping view.
After sending everyone else away, Janet rose and slid into Simon's lap, humming and complaining that she was exhausted.
Smiling, Simon kneaded her shoulders and helped her relax as he said, "After this, a lot of futures brokers are probably going to shut their doors for good, huh?"
Since this surge had reached the exchange level, the middlemen would naturally be hit as well. Brokers often had to pour in massive funds just to ensure settlement. By comparison, the profits from the longs would not flow back to brokers in any meaningful way. They would only receive the commission they were owed.
"Probably a few hundred of them," Janet said lazily, eyes half-lidded. "Besides the big brokers backed by parent companies like Goldman, Morgan, and Citi, most of the small and mid-sized independent brokers are basically going to go under."
Very few speculators could work directly with an exchange. Usually, they needed a futures broker to connect them and provide the guarantee.
There were many kinds of futures brokers. Larger ones were typically futures brokerage divisions attached to major investment banks. But across North America and around the world, in every country, every city, there were countless small and mid-sized futures brokers.
In Simon's memory, this one massive wave drove innumerable futures brokers worldwide into bankruptcy, and the entire industry wouldn't recover for many years.
And it also triggered another consequence: a sharp contraction in crude futures trading.
For a long time afterward, there would hardly be any shorts left in the market. Because of that, Cersei Capital would no longer be able to build positions on such a scale, and could only shift its attention to other fields.
With the war's outbreak, stock markets around the world plunged hard.
Over August 2 and August 3 alone, the S&P 500 fell from a high of 371 down to 356 by Friday's close. After that, until the Gulf War fully erupted, the S&P 500 would likely slide to around 300. To focus on crude futures, Cersei Capital hadn't bothered building short positions in S&P 500 futures.
Entering now, there was no way to accomplish much either.
According to plan, Cersei Fund Management would finish unwinding completely next week. But because the futures market had fallen into a slump, even though their cash reserves had surged, it would be difficult to execute large-scale trades afterward.
The weekend passed in a blink. Once the market reopened, oil prices continued to soar.
The Gulf situation remained turbulent and unpredictable.
On August 7, the Bush administration officially approved Operation "Desert Shield," and federal troops began deploying to Saudi Arabia to resist a possible Iraqi invasion.
However, the moment "Desert Shield" began, an anti-war wave erupted inside the United States. Whether in the media or among the public, people were deeply worried that the Bush administration would drag the country into another long and grinding "Vietnam War."
The direct standoff between U.S. troops in Saudi Arabia and Iraqi forces also meant America's earlier promise not to intervene in the dispute between Iraq and Kuwait had become empty words.
Meanwhile, across the five trading days from August 6 to August 10, Cersei Capital also completed the closing of its long positions at high speed.
The reason more than $20 billion in long contracts could be settled so quickly was simple. Whether it was the short speculators, the futures brokers, or the exchanges, they were even more desperate than Cersei Capital. With international oil prices still climbing, every day of delay meant another notch of loss.
On August 11, when Cersei Fund Management finished consolidating all financial settlements, the hedge fund's net asset value had risen from $3.5 billion to $12.63721 billion. In less than eight months, Cersei Fund Management had achieved an investment return of over 260%.
Although Simon had only put in $1 billion of the original $3.5 billion principal, and the fund's performance fee was fixed at 20%, with 30% of that 20% allocated to Cersei Fund Management's other partners, even so, calculating purely from the current net asset value of $12.637 billion, the profit and fees Simon would receive on top of his $1 billion principal still amounted to $3.367 billion.
Over the remaining few months of the second half of the year, even if Cersei Capital's returns were zero, once the year-end settlement and distribution came through, the total cash Simon had stockpiled overseas would approach $8 billion.
With a sum that enormous, even accounting for capital gains tax considerations when transferring money back home, Simon could essentially complete the acquisition of MCA through his own funds.
Moreover, although Simon could only receive one-third of Cersei Fund Management's profits this time, the profit-sharing structure greatly helped dissolve certain hidden risks created by his rapid rise over the past few years.
And though the more than $9 billion in profits looked like a huge amount had been handed out, aside from the Johnston family, which had contributed $500 million in principal and took a sizable slice, the remaining Australian and American investors, spread out across many hands, each received returns that were basically not even one-tenth of Simon's.
Simon himself was still the one who profited far more than anyone else.
After staying in New York another week, Simon and Janet returned to Los Angeles together.
Cersei Fund Management's team received its next-stage directive: hunt freely. The couple no longer needed to keep their eyes glued to everything.
Holding 30% of Cersei Fund Management, the team's six partners all had a strong chance of receiving dividends over $100 million this year. Even ordinary employees could look forward to a massive bonus, so the entire team was brimming with ambition.
By the time they returned to Los Angeles, it was already Monday, August 13.
North America's summer season was nearing its end, and it hadn't been hit too hard by the war's outbreak.
On July 27, The Hand That Rocks the Cradle, a Daenerys Entertainment and Disney collaboration, opened in North American theaters on 1,632 screens. In its first seven days, from July 27 to August 2, it brought in $21.18 million. It didn't match "Sleeping with the Enemy," but it still hit the hot-selling tier, averaging over $10,000 per screen.
In its second week, from August 3 to August 9, The Hand That Rocks the Cradle dropped 23% and pulled in another $16.33 million.
Two weeks total: $37.51 million. Compared to an $11 million production budget and a $6 million marketing spend, the film had already begun turning a profit in just half a month. However, it would be difficult for The Hand That Rocks the Cradle to break $100 million domestically. Its North American run was expected to land around $80 million.
Even if it fell short of expectations, a low-cost thriller made for $11 million pulling $80 million in North America alone was still more than enough to satisfy both Disney and Daenerys.
On August 10, Hellraiser 3, produced by Daenerys Entertainment's New World Pictures, opened.
This franchise horror film, released at the tail end of the summer season, opened on 1,329 screens and earned $6.13 million in its first week. Not impressive, but not a failure either. Its total North American box office was still expected to fall between $15 million and $20 million, with Daenerys Entertainment positioned for solid profits.
However, because two consecutive sequels had failed to make any meaningful breakthrough, New World planned to release subsequent installments directly through VHS and cable platforms. That would save costs on one hand, and on the other, free up release slots for other New World productions.
Daenerys Entertainment's summer opener, Ghost, had reached $149 million in cumulative box office by August 9 after eleven weeks in theaters. Its weekly gross was still holding around $7 million. With its steady legs, the total continued its march toward the $200 million milestone.
Sleeping with the Enemy, co-produced with Fox, was in its eighth week with a cumulative box office of $93.81 million, with $100 million just around the corner and a chance to climb even higher.
The Ninja Turtles, in theaters for only five weeks, had reached $103.53 million in North America by August 9, crossing $100 million ahead of Sleeping with the Enemy. However, because of its continued steep drops, its weekly box office had already slipped under $5 million, with less than $20 million in remaining upside.
Even without counting the massive funds stockpiled overseas, Daenerys Entertainment alone had brought Simon more than $500 million in net profit in the first half of the year. To avoid letting huge sums of cash sit in his hands and steadily lose value, while keeping the MCA acquisition in view, Simon began thinking more seriously about investments in other directions.
In the end, that was roughly how the rich kept getting richer.
Of course, the MCA acquisition remained the core priority in Simon's plans.
The Kuwait War triggered a global stock selloff, and MCA was no exception.
In just one week, from August 6 to August 10, MCA's stock dropped 9%, with the share price sliding back below $40. By the time the new week began on August 13, MCA opened at $39.25. Even the positive news that Matsushita intended to acquire MCA couldn't stop that fall.
As for Matsushita's bid for MCA, ever since Michael Ovitz's Tokyo trip had been accidentally exposed, the deal had never been made public, but in many people's eyes it was no longer a secret. News of Michael Ovitz privately meeting with MCA board members had also surfaced recently.
However, with Japan's economic bubble bursting, Japanese corporate giants generally needed to ensure their own operations wouldn't be damaged by the crisis, so they slowed their overseas expansion.
Sony's experience over the past year, constantly paying "tuition" in Hollywood after acquiring Columbia Pictures, had also made Matsushita wary.
Although Matsushita had amassed more than $12 billion in overseas cash through years of accumulation, enough to easily complete the MCA acquisition, industry observers generally predicted Matsushita would take a conservative approach this time, and would not spend as freely as Sony had.