The Lone Wolf of Wall Street: Arrogance or Overconfidence?
Yoo Jae-won grumbled as he flipped through the scrapbook Chief of Staff Kim Dae-seok had delivered that morning. “What is this? Reading these articles, you’d think we’re going bankrupt tomorrow.”
The scrapbook was filled with newspaper pieces that never made it onto the NextCom news page he usually read. Today’s edition was especially heavy on economic coverage, and every single article painted Yoo Jae-won and ID Investment in the worst possible light.
The Federal Reserve’s rate cut had sent the Dow Jones Industrial Average and Nasdaq soaring. Yet the real impact of that decision was only just beginning. Lower policy rates would soon translate into cheaper borrowing costs across the board. And that, in turn, meant the subprime loan market Yoo Jae-won feared most was about to balloon even further.
“I honestly don’t understand what they’re thinking.”
After the first bubble burst, the U.S. stock market had resumed its climb and kept rising steadily for years. At the depths of the collapse, the Dow had teetered on the edge of breaking 8,000 points. Now it had smashed through 16,000. Double the previous peak. While that might sound like merely “twice as high,” the average hid a more dramatic truth. When you looked at individual stocks, many had multiplied several times over. The Nasdaq, home to most IT names, showed even greater volatility. Its low had been 1,300 points; now it approached 3,000—roughly two-and-a-half times higher. It still sat well below its old high of 4,500, but the atmosphere was nothing like the doomsday mood that had gripped the world during the crash.
Yet the hottest speculative fever of all burned in the American housing market. Silicon Valley home prices had risen fivefold in just three years. Rents had exploded too; even a modest mansion in the city now cost at least two thousand dollars a month. Nor was it limited to Silicon Valley. The same story played out in Los Angeles, New York, Chicago, Dallas—every major American city. The only exception was fading industrial towns like Detroit, though even there certain neighborhoods were beginning to see prices creep upward. The Fair Play district, where Lightning Bolt’s massive North American production plant was under construction, was one such area.
The economy was simply too good. Too much money flooded the markets. The enormous war budget originally earmarked for Iraq had been saved and redirected into domestic investment and reconstruction projects. The settlement on the old Qing Dynasty bonds had added still more liquidity. Even the preventive measures that spared the country the worst of Hurricane Katrina had been funded by this influx of cash.
Yet the Al Gore administration had been careful not to pour everything into concrete. While jump-starting the economy through public works, they had prudently parked a significant portion of the federal budget in the national treasury. That “treasury” wasn’t a physical vault deep in the Rockies or the Appalachians; it referred to special high-interest accounts contracted with major commercial banks. In the modern era, this was the safest way to hold such funds.
But in contemporary capitalist society, simply parking vast sums in banks still dramatically increased market liquidity—thanks to the reserve ratio. Banks took deposits from customers and lent to borrowers according to creditworthiness. The reserve requirement forced them to keep a fraction of deposits in cash for emergencies while allowing the rest to be lent out. The Federal government could have frozen those deposits to prevent lending, but the high-yield terms of the contracts made that impossible.
All these factors combined until the situation closely resembled the period just before the subprime mortgage crisis in Yoo Jae-won’s previous life. Back then, the enormous cost of the Iraq War had pushed the U.S. and global economy into recession. The Federal Reserve responded with successive rate cuts to inject liquidity. That money flowed straight into housing and inflated the bubble to monstrous size.
This time, however, the American economy was growing so rapidly that it was generating enormous liquidity on its own. Global speculative capital had poured in on top of that, magnifying the effect. The result was a collective sweet dream in which Yoo Jae-won’s and ID Investment’s repeated warnings fell on completely deaf ears.
Yoo Jae-won had been browsing high-grade information on Bloomberg’s paid service when the urgent ID Talk arrived from President Vincent.
“What is it?”
“Excuse me?”
Yoo Jae-won immediately opened the HTS trading platform and pulled up the futures and options window. He didn’t even need to search—the most heavily traded options contract sat right at the top.
Of course, derivative products called options could be structured in countless ways depending on the underlying asset and terms. There were so many variations that even a supercomputer would struggle to calculate all the interconnections. The cloud system running AI Gold could probably manage it, but regulations did not require every option to be publicly disclosed, so any prediction carried significant error margins.
In any case, the red-hot subprime CDO call options now flying off the shelves had been issued by Lehman Brothers. The call would be exercised if the yield on their own CDO tranches exceeded twelve percent. At a glance, it was the exact opposite of the put options ID Investment had bought.
“Wow. Looks like we taught Lehman Brothers a nice trick.”
“Still, this product feels pretty sleazy.”
The problem lay in the option’s strike level. Twelve percent on subprime CDO yields. The current yield on those very CDOs sat in the eight-percent range. Given that one-year bank CDs yielded only 3.4 percent, subprime paper already offered more than double the return. That was why investors were piling in, creating staggering liquidity.
The put options ID Investment had purchased could be exercised at five percent. Even then, profit did not begin immediately at five percent; full recovery of the three-billion-dollar principal would only occur once yields fell below three percent.
By contrast, the call options Lehman Brothers was now selling could only be exercised if yields climbed above twelve percent. The term “sleazy” came to mind unbidden. Eight percent was already an enormous return for subprime CDOs. Requiring another four full percentage points before the call paid out felt downright predatory.
From this one could infer Lehman’s view of the subprime market. They clearly believed the sector would continue performing well, yet not well enough to reach twelve percent. That was why they were happily flooding the market with these calls.
With the Fed having cut rates, rising home prices were virtually guaranteed. That meant further expansion of the subprime market and therefore exploding expected returns on call options. So everyone was buying them without hesitation the moment they appeared.
Eventually put options had emerged too. Unlike the wildly popular calls, far more people were selling puts, so their prices were collapsing. The put option order book, plunging like a waterfall, seemed to mock ID Investment.
The clients who had entrusted money to ID Investment were growing anxious. Everyone else was betting on continued rises, yet ID Investment alone had bet on a fall. Those worried that this investment would damage their returns were pulling their capital. Even though seventy percent of the funds used to buy the puts had come from Yoo Jae-won’s personal fortune, the reaction was extremely sensitive.
“Of course we should honor redemption requests. However, do not purchase any call options. The situation has not changed enough to warrant revising our judgment.”
On the monitor, President Vincent nodded immediately at Yoo Jae-won’s words. Even from Vincent’s perspective, this was not a misjudgment by Yoo Jae-won or ID Investment; the investment market itself had simply gone insane.
“Hmm.”
After ending the ID Talk video meeting with Vincent, Yoo Jae-won fell into brief thought. It was clear the U.S. economy had entered an overheated phase, and the global economy was booming along with it. The world’s largest consumer market was spending money without regard for tomorrow, so every country selling goods and services to America was enjoying its own windfall.
“If we’re not careful, the aftermath could be even worse than in my previous life.”
There was no need to quote the proverb about high mountains having deep valleys. The fact that call options Lehman Brothers itself considered unrealistic were selling like hotcakes proved something was fundamentally wrong. Yoo Jae-won found the media that encouraged such behavior even more distasteful than the people mindlessly buying the calls.
A Google search for economic news produced a deluge of articles. On the surface they expressed concern for ID Investment and Yoo Jae-won after their massive put purchases, yet the subtext dripped with mockery. Even more numerous were pieces claiming the housing market remained rock-solid and that now was the time to buy before prices rose further. Others appeared to criticize rising home prices, but when examined closely they displayed graphs and every conceivable indicator showing annual double-digit gains, ultimately encouraging investment.
“How can I land a solid blow against these people?”
Looking at the current market frenzy, simply holding on until next October already seemed difficult. Even if he issued strong warnings to the Al Gore administration and used personal channels to contact President Gore directly, the most he could hope for was slightly reducing the scale of the damage.
The same applied to Yoo Jae-won himself. The current ID Group could easily withstand a crisis on the scale of Korea’s past foreign-exchange crisis. In fact, he could manage it with his personal fortune alone without mobilizing the entire group. But the subprime crisis was on another level entirely. Hundreds of billions of dollars flowed into subprime investments or linked derivatives every single day. The cumulative total had already reached the trillions—in U.S. dollars, not Korean won.
When the crash finally came, these same voices would undoubtedly flip 180 degrees and spout the complete opposite narrative.
“I need to overhaul the news page first.”
NextCom’s news page boasted a comfortable daily view count exceeding one hundred million. It was the most convenient place for people in North America and those interested in the region to get their information.
“We should add a history function.”
The archive function that stored every past record had been running for some time. The history function Yoo Jae-won had in mind would display, in a side panel, how the same reporter had covered an identical issue in the past. If readers could clearly see how journalists changed their tone like reeds in the wind, it would provide an effective defense against the flood of fake news that would inevitably appear later.
Yet even that seemed insufficient. A more direct measure was needed.
After long consideration, Yoo Jae-won closed his eyes, entered the Memory Palace, and emerged again.
“Adam McKay.”
The name he had retrieved from the Memory Palace belonged to one man.
“Please arrange a dinner meeting with Mr. Adam McKay.”
“The film director Adam McKay, sir?”
“Yes!”
Yoo Jae-won immediately instructed Chief of Staff Kim Dae-seok to set up the meeting. Adam McKay had once been a writer for Saturday Night Live. Together with his SNL colleague Will Ferrell, he had created several successful comedy films. Kim Dae-seok was momentarily puzzled why his chairman suddenly wanted to meet a comedy director, but since it was Yoo Jae-won’s order he carried it out faithfully.
The reason Yoo Jae-won had pulled Adam McKay’s name from the Memory Palace was simple: in the original timeline, this man had directed and written the film The Big Short. That movie had depicted the subprime mortgage crisis from beginning to end, explaining its complex mechanics in an accessible way. Released around 2015, it had served as a retrospective on past mistakes.
But what if The Big Short appeared in early 2006 and functioned as a prophecy instead?
The story would change completely.