Long Island, New York, LTCM Headquarters.
A heavy atmosphere filled the office as CEO Jacob Wisemann and Arthur Engoron, head of the arbitrage department, sat on the sofa.
"Contrary to our expectations, the Russian government bond spread has widened further, resulting in a $500 million mark-to-market loss," Engoron reported, his voice troubled.
Wisemann, face set in a grim expression, responded.
"The Prime Minister's Chief of Staff unilaterally canceled the scheduled meeting, didn't he?"
"That's what I heard as well."
"Tch. That rookie, country-bumpkin Chief of Staff really made a mess," Wisemann clicked his tongue, crossing one leg on the sofa. Engoron glanced at him and said,
"This incident has heightened anxiety, leading to a rapid outflow of foreign capital from Russia. As a result, the ruble and Russian bond prices are expected to continue plummeting for some time."
"If I were in their position, I'd want to pull the money out too. The crisis could easily spread into a currency meltdown in Russia."
Leaning back against the plush leather sofa, Wisemann continued,
"In such a situation, with exchange rates soaring and invested funds literally melting away even if you stay put, investors can't help but panic."
Funds, investment banks, and brokerage firms all measured profits in dollars. When the ruble's value plunged, the corresponding losses appeared on the books.
So, while the Russian government still maintained a fixed exchange rate, the incentive to withdraw investments grew stronger by the day.
Wisemann looked at Engoron with a cold, sinking gaze.
"Do you think the worst-case scenario everyone fears—Russia defaulting on its foreign debt—will actually happen?"
Engoron leaned forward in his seat and replied,
"The Russian government's foolish actions brought on this crisis, but as I mentioned before, it won't go that far."
"So you're saying they'll intervene to prevent the crisis from spreading to Europe."
"That's right."
Emphasizing his point, Engoron continued,
"They were already discussing a $700 million IMF loan. Their unnecessary pride made things harder, but after this debacle, they've suffered enough embarrassment. Soon enough, they'll bow first and comply with the IMF's demands."
"Hmph," Wisemann snorted.
"Even with massive capital outflows, the Russian government isn't stupid enough to stubbornly dig in its heels."
"When the IMF loan is finalized, market fears will subside, and talks with the U.S. will resume."
"Exactly what I think," Wisemann said, eyes flashing, voice heavy.
"Look at it another way—this is a once-in-a-lifetime opportunity. What do you think?"
"Eh? What do you mean…?"
Engoron blinked, momentarily unable to grasp Wisemann's meaning.
"The spread has diverged far beyond the average, creating an abnormal gap. If we scoop up Russian bonds that have hit the floor right now, we can boost our returns even higher."
"You're saying we should increase our position even though we already hold well over ten billion dollars in Russian bonds?"
Engoron asked, startled. Wisemann calmly nodded.
"Even in the worst case, Russia could—like Malaysia once did—force the closure of currency exchange windows or impose restrictions to stop dollar outflows. Of course, they probably won't go that far."
"...."
"So that means prices are as low as they'll get. If we increase our bet now, profits will grow accordingly."
"That's true."
Engoron nodded cautiously.
"So, how far do you plan to increase the position?"
Wisemann tapped the armrest of the sofa with his fingers, paused for a moment, and then spoke again.
"The leverage ratio agreed with our partners was capped at twenty-five times, right?"
"That's correct."
"Then let's go full-bore up to twenty-five times."
Engoron swallowed hard without realizing it.
Using leverage up to twenty-five times essentially meant borrowing $25 for every $1 of their own capital.
It was an astonishingly high level of leverage.
However, considering that most Wall Street investment banks like Lehman Brothers, Merrill Lynch, and JP Morgan typically used leverage ratios exceeding thirty times, LTCM wasn't unusually aggressive in borrowing compared to its peers.
The difference was that, unlike other funds or banks, LTCM invested almost entirely without posting collateral, meaning the risk was significantly higher.
Even from this alone, it was clear how recklessly leverage was being used at the time without any restrictions or safety measures.
"Are you really sure about this?"
Engoron asked, his voice slightly trembling.
"You also believe that the widely widened Russian bond spreads will narrow again, don't you?"
Wisemann asked. Engoron nodded in response.
"The spread has surged due to multiple negative factors, but in theory, it should eventually regress to the mean, so yes," he said.
"Good," Wisemann said, a confident smile on his face.
"As long as Russia doesn't collapse or openly default, this is a game we're guaranteed to win. There's no reason to hesitate."
At that moment, a brief worry flashed through Engoron's mind: what if, against all odds, something went wrong?
But not just Engoron—any trader or economist at LTCM would immediately dismiss such thoughts. The Black-Scholes model, which they followed almost religiously, left no room for such unexpected variables.
"They say only the brave win the beauty. Perhaps this is a chance sent from above."
Wisemann's unwavering gaze reflected his absolute confidence in success.
Engoron, already enticed by the enormous potential profits if the bet succeeded, pushed aside any thought of risk and nodded in agreement.
"As you say, I'll increase the position."
"Good."
Wisemann nodded and added a few minor instructions.
Once the discussion ended and Engoron left, Wisemann, now alone, sank into the leather sofa, his eyes flashing with greed.
"If this bet succeeds, I can push our returns back up in one shot."
Though the fund had grown massively, Wisemann, consumed with the task of rescuing the declining returns, did not entertain the slightest thought that the bet might fail.
***
As usual, Seok-won arrived at the office and handed his jacket to Na Seongmi, who had recently been promoted to manager, saying,
"By the way, send a flower basket to the VIP room at Saseong Hospital today."
Na Seongmi smiled knowingly.
"You mean for the young madam who gave birth yesterday?"
"That's right."
The expected due date had passed without any sign of labor, and the family had been worried.
Then, labor suddenly began yesterday, and in the early hours of today, she delivered a healthy baby boy naturally.
Since this was the first grandchild in the family, Chairman Park Tae-hong and Madam Jo Deokrye were, of course, overjoyed.
Seok-won sat at his spacious L-shaped desk and said,
"Check with the hospital and make sure the flowers won't trigger any allergies or harm the mother, then send them."
"Understood. Is there anything else you need?"
"Could you bring me a cup of hot coffee?"
"Yes. I'll get it ready right away."
Na Seongmi hung the jacket in the closet, bowed slightly, and left.
Once the door closed, Seok-won habitually picked up the neatly arranged reports on his desk.
The reports summarized all the important events that had occurred overnight in the European and New York markets, along with various economic indicators.
Approval documents from each department that needed to be processed in the morning were also placed neatly on one side.
While sipping the coffee Na Seongmi had brought, Seok-won carefully reviewed the reports. Then, the vibration of the phone placed nearby buzzed.
He checked the name on the display and answered immediately.
[Boss, it's me.]
Hearing the familiar voice of Landon, Seok-won leaned back in his chair and said,
"I was just about to call you, so this works out well."
[Do you have instructions for me, boss?]
"Tell me the matter first."
[Over the past two weeks, more than $1.5 billion has been withdrawn, bringing Russia's foreign reserves down to $14 billion.]
Seok-won's eyes sparkled as he held the phone to his ear.
"The pace of foreign currency depletion is quite fast."
[The Russian central bank raised the market interest rate from 30% to 50% and released $1 billion in foreign currency over three days to calm the market, but the unease hasn't eased.]
"Unlike expectations that they'd back down and reach a smooth agreement with the IMF, Russia is continuing to assert its pride. The market's worries can only grow stronger."
[On top of that, international oil prices show little sign of rebounding, which leads investors to question Russia's repayment ability.]
The report Seok-won was reviewing had the same note.
"International oil is hovering at $11 per barrel."
[Yes. Some experts predict it could fall to $10 per barrel in the second half of the year, compounded by the Asian currency crisis and economic downturn.]
Oil and natural gas accounted for nearly half of Russia's total exports, making them critical revenue sources.
Yet, prices that traded at around $17 per barrel last year had plummeted 35% at once, worsening Russia's already fragile financial situation.
"If international oil falls further as experts predict, Russia's fiscal deficit will spike sharply."
[And in this situation, they're still engaging in power plays not only with the IMF but also the United States. It's like playing with fire in a powder keg, and only the Russian bears don't seem to realize it.]
Landon said, sounding exasperated.
"Thanks to that, our short positions should be profitable."
[That's correct.]
Landon asked with a small smile.
[Russian bond prices have already collapsed, and the returns are considerable. What should we do?]
"There's still more to gain, so keep holding."
[Understood.]
Seok-won answered without hesitation, and Landon followed without a word.
"And I need you to make a quick trip to Moscow for me."
[To Moscow?]
Landon's voice carried genuine surprise at the sudden request.
"Yes. There's something I need you to pick up while you're there."
[What is it?]
"Gold."
[Excuse me?]
Landon couldn't hide his astonishment at the unexpected answer.
Sensing Landon's confusion over the phone, Seok-won's lips curved into a faint but sharp smile.
"Go to Moscow and bring back all the gold bars stored in the Russian central bank's vaults."
[…!]