Chapter 44
Chapter 44
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Translator: MadScientist
Chapter: 44
Chapter Title: The End of the 80s (3)
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"The Soviet Union is going to collapse. In two years."
The reaction to my prediction was pretty intense.
"...The Soviet Union? No way, that can't happen."
"What on earth are you planning this time, Miss?"
"Wait, so what's this CDS thing...?"
I nodded quietly, putting on a serious expression.
"To be precise... two years after Eastern Europe collapses. The Soviet Union is already backed into a corner economically and politically... Once Eastern Europe falls, it won't last two years."
On December 26, 1991, the Soviet Union would officially disband. It was March 1989 now, so a little over two years and some change remained.
The directors exchanged glances, their faces full of confusion.
They trusted me, so they believed what I said, but the future I described was something they couldn't accept.
If I hadn't predicted Black Monday correctly, they probably would have dismissed it outright. The Soviet Union collapsing was on that level.
The only nation called a superpower alongside the United States... the idea that it wouldn't survive past '91 was unimaginable from this point in time.
"Um, Miss. So what exactly is CDS?"
Choi the director pushed up his glasses and fixed his gaze on me.
"Credit Default Swap. From now on, we're going to trade the credit of companies and countries. There are plenty of bonds at risk of default now, right? That means there's demand."
Credit Default Swap—CDS for short—is a derivative that trades the risk of bond default itself. There are many credit derivatives, but... the most basic one is CDS.
Think of it simply as insurance. If a company goes bust and its corporate bonds turn to worthless paper, the CDS seller pays out if you've bought it.
Originally, CDS was first developed and traded by JP Morgan in 1994. It only took off after the ISDA—International Swaps and Derivatives Association—fully standardized it in 1997.
In other words, it would normally take three years for CDS to be created and gain traction. That's why I was pushing to establish it right after founding Daeha Investment Bank.
"I see what you mean. If it's you, Miss... you'll keep short positions until then and buy up CDS in bulk when the Soviet Union collapses."
The directors who were starting to follow my thinking nodded with faint smiles.
Yoo Ha-yeon, what did we expect?
Something like that, probably.
"Yep! You're quick on the uptake—our directors really are sharp, as expected."
The idiots who couldn't keep in line had all been fired and replaced from below, so it was only natural.
Even people who'd been section chiefs or department heads a few years ago had risen up. No one dismissed me as a kid anymore, and their loyalty was rock-solid.
I grinned and popped a candy from the glass table into my mouth.
-Crunch.
A sweet sensation lingered on my tongue.
"For now, let's issue CDS under the investment bank's name. A new Eastern investment bank bringing out something unusual should be understandable."
-Thud.
I passed around my neatly printed portfolio. A basic CDS structure, carefully designed to avoid any legal issues.
Or more accurately, there weren't really any regulations or agencies to enforce them yet.
"...As always, impeccably clean work. To think you pulled this off without any field experience."
Seo the director, who'd come over from Daeha Securities after working with Executive Director Ha Joo-seong, expressed his admiration. Having rolled in the trenches, he had a keen eye.
His only flaw was his height—you had to look up at him. But judging by how he'd been sidelined until I arrived despite being in Ha Joo-seong's line, his political instincts weren't great.
For me, who hated watching underlings play politics, that was a plus.
"We'll need to hustle. Alpha Fund will help a lot, but popularizing a new product won't be easy."
"...Even at the cost of losses?"
I nodded.
"Yeah. Even I can't predict the future perfectly, so let's hedge by selling CDS on Eastern European bonds alongside shorting the bonds themselves. They should offset each other."
Alpha Fund would handle the profits here, so Daeha Investment Bank just needed to avoid burning through its own capital. What mattered was influence.
An investment bank that pioneered CDS—one that later fueled the Great Recession—would have prestige enough.
"Wouldn't scaling up CDS be tricky? The risk is way higher than shorting bonds."
If more companies or countries actually went bankrupt, the insurance payouts would balloon. Unlike plain options, the conditions were more extreme.
"Right, CDS premiums are in basis points. When the Eastern Europe crisis hits, we'll sell at sky-high premiums... but demand will keep rising steadily. People buy insurance when the odds of a claim go up."
"So supply will grow naturally. We're just opening the floodgates..."
Seeing it as a solid financial product, the directors' faces lit up.
"We could even jack up premiums to gouging levels."
"Let's start selling to U.S. companies first, not Eastern Europe. Build some track record there, then when Eastern Europe crumbles like you said, Miss, loop in Alpha Fund for a big score."
"What do you think, Director Choi? I say we go straight for Eastern Europe. Communist countries have borrowed tons from the West already anyway. Aside from Romania, none have paid back their foreign debt—and now they're starting to worry about breaking even."
"Ah, so approach Eastern Europe from the get-go...? National bonds wouldn't be a bad start. Money tied up there isn't moving due to risk management, but if we take on the risk for them, they'll love it."
I smiled proudly at the directors debating lively ideas.
See? Korea doesn't lack talent. They just needed the right environment and experience... These were all smart people.
Of course, lack of experience was hard to fix under normal circumstances, but that was why I was here.
"Alright, let's make some calls. Director Seo, you first—pick a suitable company and draw up a portfolio. Thinking 500 bp for the premium."
I flashed a crinkly-eyed smile and clapped my hands. The candy's sweetness still danced on my tongue.
"Isn't that too high? Only companies on the brink of bankruptcy would bite."
Seo the director voiced concern, knowing 500 bp was absurd. It meant paying 5% of the bond's face value annually in premiums.
Normally, 500 bp was junk bond territory. It hit over 1,000 bp right before Lehman collapsed, AIG got bailed out, or Greece faced default.
But it was fine now. Gouging before a proper market formed was par for the course.
"Haha, no worries. There are banks and funds desperate for risk management somewhere. We're their only option right now. Competition will pop up soon enough later."
"...You did this on purpose? Gouge to force competitors into the market."
"Exactly. More competitors mean we can offload shorts later and switch to buys when the Soviet Union falls."
The downside of derivatives was you needed a counterparty to buy. Stocks were similar, but this market was too narrow right now.
"Understood. It'll take time—gotta review Alpha Fund's data first. Tokyo or the U.S. side...?"
I grinned and praised the pondering Director Seo.
"Quick on the uptake, nice. Our Daeha Securities—no, Daeha Investment Bank directors are the best."
This time, I'd set the plan and let the directors handle execution.
I couldn't do everything forever. A great leader wasn't the best at fieldwork—they were best at directing those who were.
Watching my company run smoothly filled me with deep satisfaction.
◇◇◇◆◇◇◇ Preparations to close out the 80s were proceeding steadily and smoothly, step by step.
The department store, built with stable methods after grilling the construction firm, had opened. Alpha Fund posted steady returns investing in Japanese stocks and U.S. companies.
And... getting approval to sell CDS was tough, but high premiums got us government okay somehow.
Just one deal, and the regulations are endless.
Fewer takers than expected, so we ended up contracting with a Japanese securities firm we'd saddled with debt before.
Notional amount payable on default: 10 billion won. Our premium: 500 million won. Not thrilling, but compared to JP Morgan's original 40 bp, it was decent.
As if on cue (it was), Alpha Fund—which was killing it in the U.S.—declared it would trade credit itself. Wall Street buzzed with analyses and interest in the new instrument.
Eastern Europe's turmoil amplified it.
On May 2, Hungary began dismantling the Iron Curtain with Austria...
On June 4, Poland's lower house elections saw the communists crushed. They clung to first place via allocated seats but won zero in the free vote.
Meanwhile, that same June 4... China's last democratization push broke at Beijing's Tiananmen.
Exciting, yet regrettable.
Sure, I'd fleeced the hyped-up free world for big gains... but a democratic China would've had so much more to exploit. What a market.
I sighed, watching history's wheel turn.
This is why I hate dictators.
...Precisely, dictators who oppose me. Anyway.
Still, Russia seemed intervenable—what luck.
I do have refined tastes, after all, and don't care for black tea.