» The Youngest Son of Sunyang
The Youngest Son of a Chaebol Family - Chapter 280
[280]Hotbed of Intrigue, Wall Street 1
In truth, the business of banking is exceedingly simple. It merely involves collecting a fee, named the "deposit-loan margin" (the difference between loan and deposit interest rates), from those who deposit money and those who borrow it.
With its simple tasks, executed flawlessly according to manuals, stable salaries, and guaranteed retirement, old-fashioned bankers were once seen almost like civil servants. However, they couldn't shed their stuffy image.
Yet, in every field, there exist individuals whose dazzling ingenuity cannot be hidden.
Even in the seemingly mundane banking sector, geniuses lay concealed, and their brilliance focused on how to make immense fortunes in a single stroke.
In the early 1980s, while South Korea was still struggling to escape the characteristics of a developing nation, experiencing a new military coup and conducting indirect "gymnasium elections," three geniuses in the United States, the epitome of capitalism, put their heads together and conceived an extraordinary money-making scheme.
Louis Ranieri, head of the bond department at the investment bank Salomon Brothers; Larry Fink, founder of the asset management firm BlackRock; and David Maxwell, CEO of the Federal National Mortgage Association, created—no, *invented*—an ingenious product called MBS (Mortgage-Backed Security), or mortgage-backed bonds.
Before this, mortgage lending was a simple affair: loaning money against a house and steadily collecting principal and interest over ten or twenty years. While stable, from the bank's perspective, it was a yawn-inducing task of tying up substantial capital for a long period, only to receive a trickle of small payments in return. Moreover, it was a business that locked up large sums of money.
These three geniuses, however, looked at mortgage loans not from the bank's perspective, but from the product's.
Mortgage loans, though individually small, generate stable returns over the long term.
They realized this perfectly matched the stable investment products desired by retired seniors, those relying on financial income, and high-net-worth individuals most averse to principal loss. Thus, they transformed mortgage loans into the MBS product.
In truth, the impetus for their idea was interest rates.
When the Federal Reserve raised interest rates in 1979, the financial sector suffered "money arteriosclerosis," and the mortgage market began to falter.
Because in an era of high interest rates, no one would borrow to buy a house.
Politicians, however, always side with the wealthy, ensuring through legislation that they never incur losses.
On September 30, 1981, the U.S. Congress passed a clever bill to protect its beloved financial industry.
The bill allowed financial institutions to defer taxes if they restructured their housing loans, and moreover, it stipulated that all losses incurred in this process would be compensated from the national treasury.
It became a system where money would pour in simply by selling off loan receivables, thus ushering in the era of bond securitization.
Now, banks began to lend vast sums against homes, collect their fees, and then pass those bonds onto others.
Concerns about principal recovery vanished, and loan funds were no longer tied up for extended periods.
Banks placed mortgage lending at the forefront, devoting all their energy to a do-or-die sales effort.
Salomon Brothers, an investment bank, divided these bonds by risk, repackaged them, and sold them, earning enormous brokerage fees.
They even worked a magic trick: mixing one safe loan with three or four risky ones still earned them an AAA credit rating, resulting in net profits exceeding $200 million in 1983 alone.
People in the financial world no longer spent their weekends golfing. They reveled in yacht parties on luxurious vessels and flew their private jets to Venice for a taste of delicious pizza.
Their lavish parties, too, were nearing an end, and I intended to appear just as the party concluded, ready to present the bill.
Of course, the bankers wouldn't pay the party's cost. The American people would bear that expense.
Rachel Arieff, CEO of Miracle Investment's New York branch, found her initial pleasure at their long-awaited meeting quickly replaced by a grave expression.
"So, you're saying we should leave it up to the investors to decide?"
"Yes. My judgment can't always be infallible. We'll simply withdraw funds from investors who believe MBS carry high risk, while leaving those who continue to see them as stable."
"And for those who withdraw their investments?"
"Tell them that, too, is their choice. There are stable government bonds and Hollywood funds available."
"And you're betting on mortgage-backed securities to plummet?"
"Yes. If any investors wish to follow my lead and bet, that, too, will be their choice."
"I doubt any investors will follow you, though."
"What about you, Rachel? Where will you bet?"
Rachel Arieff furrowed her brow.
"I know MBS are high-risk. But I don't think there will be a collapse. It'll be a soft landing."
"Because a collapse means the downfall of American finance?"
"Exactly. The federal government will prop it up by any means necessary to prevent a crash. The downfall of Wall Street would sink not only America but the entire global economy."
At this moment, the notion of the American economy collapsing is as absurd as suggesting the United States would instantly transform from a capitalist nation into a socialist one.
"So, Rachel, you'll sustain?"
"No, waiting. Withdraw everything and hold it for now. I'll observe further before making the next investment."
"Then let's send emails to our clients, with clear risk classifications."
"What risk rating do you think your investment has?"
Betting everything on the collapse of the American economy was absurd, but the fact that *I*—the one who had never once been wrong in my predictions—was behind this investment, seemed to genuinely pique her curiosity.
She didn't use words like 'certainty' or 'assurance.'
"Fifty-fifty, as always. Isn't that the truth?"
"All in on 50%? Your entire fortune?"
"Not my entire fortune, but my assets in America, yes. And I'm still young. Even if I lose everything, I have the time and money to start over."
Rachel still sighed.
"Just the movement of your money alone will put Wall Street on edge, you know? I doubt such a massive sum has ever been moved in a single transaction in Wall Street's history."
"Only half."
"Huh?"
"I'll only distribute half of my assets on Wall Street."
A smile spread across Rachel's face.
"Fifty percent probability, so you're betting only half? Isn't that a bit too by-the-book?"
"What are you talking about? I just said Wall Street would be on edge, didn't I? So, I'm only releasing half to keep them from getting *too* nervous. The other half should be deployed in London. Surely, you don't think Wall Street represents the entirety of global finance, do you?"
"The City?"
The City is a common name for the City of London, the smallest administrative district of London. It is the historical heart of London, the core of its financial industry, and an autonomous jurisdiction enjoying unique self-governance.
Over 5,000 financial institutions are concentrated here, including the Bank of England, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, and HSBC. While The City's area precisely matches that of Yeouido, the sheer volume of money moving through it is on an entirely different scale.
"Yes. They should be able to absorb half there. They'll all be thrilled, thinking some sucker has appeared."
Rachel's eyes wavered.
Because she realized that if Wall Street were to plummet, I might be the one pulling the trigger.
After all, it would be like dropping a multi-billion dollar bomb all at once.
* * *
The first order of business was to retrieve the money invested in mortgage-backed securities.
If we pulled it all out at once, Wall Street would stir. So, we gradually shifted products, carefully selling off the mortgage-backed securities in a way that wouldn't appear out of the ordinary.
As it was a popular product, there was no significant issue in liquidating the sell orders.
"All the MBS have been disposed of. What will you do with this money now?"
"Betting. Going all-in on the idea that mortgage bonds will all turn into scrap paper!"
"When can we expect the results of that bet?"
Rachel still wore an expression of disbelief.
"Next year."
The speed of it made her even more incredulous. If I had said ten years, she might have nodded. Ten years would provide time to manage even if bad debts began to emerge, but next year, it would be impossible.
Impossible was just another word for an exceedingly slim probability.
"Volumes really started pouring out in 2005. For two years, the interest rates were fixed at around 2%, but starting this year, variable rates apply. American citizens don't have the capacity to pay interest rates of 10% or more."
"These are stable people, stable enough to own homes. While things might get precarious, it'll be hard for them to collapse all at once, won't it?"
"Who said they were stable? Subprime, as in, literally below prime grade, at a 'candidate' level. The problem is that people with no financial capacity hold three or four houses each. Even with just three houses, the interest they have to pay jumps to 30%."
Rachel, who had always pursued stable investments, failed to grasp the greedy essence of Wall Street.
Those bastards, desperate to grab whatever money was right in front of them, didn't care if it led to ruin, or if the risk was high or low; they'd approve a mortgage loan for anyone who took a number and showed up at the counter.
"Alright, I'll grant you that. So, how will you place this bet?"
"Credit Default Swap (CDS)."
A Credit Default Swap is a type of insurance against default.
For example, if you hold 100 million won in Apple bonds, and Apple goes bankrupt, those 100 million won bonds become worthless. To avoid such a risk, you buy insurance. The insurance mechanism is simple.
If a default occurs within 10 years, the insurer pays the full 100 million won, in exchange for an annual premium of 200,000 won. The premium is low because Apple is a very sound company, with virtually no chance of defaulting within 10 years.
No risk means a low premium.
Naturally, if a company has low credit and is not financially sound, the insurance premium increases.
What's amusing here is that the greedy individuals of Wall Street transformed this insurance into a gamble.
Even someone who doesn't own a single 10-won Apple bond can buy this insurance. Anyone can pay 200,000 won annually and receive 100 million won if Apple defaults within 10 years.
You can bet on whether Apple will go bankrupt or not, without owning any of its stocks or bonds. The annual premium becomes your betting chip, and if you win, you earn 100 million won.
Rachel shook her head.
"Credit Default Swaps for financial products haven't been issued yet. Howard, you're trying to buy a product that doesn't even exist right now."
The futility of the conclusion made Rachel sigh.
"We'll create it then. The financial folks who believe mortgage-backed securities are safe will welcome me with open arms, thinking my premium payments are free money. Pricing the premium might be tricky, but I don't see any other problems."
"Who would be the financial institutions willing to listen to such an absurd proposition?"
"Goldman Sachs, Deutsche Bank, Morgan Stanley, Barclays Capital, Merrill Lynch, Citigroup, Bank of America, Credit Suisse, J.P. Morgan, UBS. There are countless others."
"Why exclude Bear Stearns and Lehman Brothers? They're also top-tier groups."
As the names of these colossal financial institutions dominating Wall Street flowed from my mouth, Rachel spoke with a sarcastic tone, as if dumbfounded.
"Ah, those two companies will fall into insolvency. Even if we sign Credit Default Swap contracts with them, we won't be able to collect because they won't have the money."
When I definitively stated that these colossal financial entities, which could almost be said to embody America itself, would collapse next year, Rachel's jaw dropped.