The Century's Guillotine Match
The century's guillotine match between Lehman Brothers and ID Investment. The fraudulence of subprime mortgage loans and related derivatives revealed in The Wolf of Wall Street. Although not directly connected to the subprime mortgage loans, media credibility had already plummeted because of the Michael Jackson incident. Michael Jackson, acquitted thanks to evidence that surfaced late, had been a clear victim of every kind of media fake news. The idea that no media outlet could be trusted spread in an instant. It was unfortunate that even Time Warner Nextcom's outlets were lumped together and branded as cult-like, but since they had stayed silent until Yoo Jae-won intervened, the criticism was justified.
Anyway, in this climate, Montgomery Bank had already gone bankrupt, and now rumors that New Century Financial was next made even the optimists realize something serious was happening. New Century Financial could not survive even a week once the bankruptcy rumors began circulating. In the end, it filed for bankruptcy in court after only five days.
Just as the news storm triggered by New Century Financial was reaching its peak, another announcement landed like a finishing blow.
The White House statement followed immediately. That proved to be the decisive blow.
"Oh, excellent. Al Gore really is different."
"Indeed. He must have been preparing for this."
Tiffany, seated beside Yoo Jae-won in the living room watching television, nodded at his words. Although Yoo Jae-won had received the news slightly earlier through ID Talk, seeing it on television felt different. Yet something in Tiffany's tone gave him a faint sense of dissonance. They had now been living together for nearly fifteen years. He could read her thoughts from a single glance, so he knew he had not misheard.
"Hmm? You seem a little lukewarm about it. Isn't this the best possible response?"
Unable to contain his curiosity, Yoo Jae-won asked first.
"Well, to be honest, it feels too fast."
"Too fast is the problem? A preemptive measure should be expected, shouldn't it?"
"Preemptive or not, you still need public consensus. It feels like the White House is moving too quickly on its own, as if they know something dangerous the rest of us don't."
When Tiffany said "the rest of us," Yoo Jae-won felt a slight unease. His own case was a second life entirely, and Tiffany's background was far from ordinary either. Still, measured against the coming subprime crisis, Tiffany's information level was not much different from that of ordinary people. It was therefore understandable that she would sense something larger behind the White House's actions.
"Wouldn't that be even better, then?"
Yoo Jae-won had already witnessed exactly what would happen during the subprime mortgage crisis. That was why he had gone so far as to produce an overtly cautionary film to minimize the damage.
"I don't know. But one thing is certain. The stock market is about to go crazy."
Tiffany nodded with conviction. It did not take long to confirm whether she was right. The White House announcement came while the market was still active. After President Al Gore finished speaking, the indices briefly ticked upward before a massive wave of sell orders flooded in, reversing the trend. By the close, both the Dow Jones and Nasdaq had dropped a twin -3 percent.
This was only the beginning. Investor sentiment shifted from optimism to pessimism in an instant. When Yoo Jae-won had taken direct action through ID Investment and released the film, Wall Street had shown little movement. There had been some noticeable change in public psychology, however. Quite a few people had sold their holdings or refinanced high-interest loans into lower-rate products. Those willing to take risks for greater returns had begun betting on declines in derivatives. If even some people could prepare for the crisis, Yoo Jae-won considered it a good outcome.
In the actual investment market, however, little had changed. On the contrary, Lehman Brothers had dramatically increased its subprime mortgage investments, as though determined not to lose to Yoo Jae-won. Upon closer inspection, their decision had its own logic. For them, the put option that was a foregone conclusion to Yoo Jae-won represented a one-in-a-million possibility. If it were triggered, the resulting losses would be unimaginable. They calculated that pouring more money into subprime mortgage investments and simply surviving until October 31 would still be profitable. After all, the expected losses were less than one-tenth the cost of maintaining the yield on A-class CDOs. The derivatives market built on CDOs was measured in trillions, while the CDOs themselves were only hundreds of billions of dollars, and the A-class portion was smaller still. In chart form, it was a perfect inverted pyramid.
In a sense, Lehman Brothers were simply identifying and reinforcing their own vulnerabilities. Yet the White House announcement that followed shortly after their strategic decision poured cold water on everything.
"If the White House is stepping in, the problem must be serious!"
The weight carried by the name of the President was on an entirely different level. Public perception shifted decisively. Doubt turned into suspicion. The greatest driver of the stock market had always been fundamentals, and those fundamentals had effectively vanished with New Century Financial's bankruptcy and the White House announcement.
More than anything, what Yoo Jae-won had overlooked was the American tendency, unlike Koreans, to view government intervention negatively.
The decline continued the next day. The Nasdaq fell more sharply than the Dow Jones. Unlike the Dow, which consisted of traditional companies with solid revenue models, the Nasdaq was packed with IT firms highly sensitive to economic conditions. Its shareholder base was also younger and more trend-driven.
"The White House appears quite flustered, sir."
Yoo Jae-won had a stock-market monitoring program open on one side of his monitor while receiving a report from Levin Willis, head of the information team.
"I imagine so. They took a preemptive step, only to receive this kind of market reaction."
Yoo Jae-won nodded at the information chief's words. He did not believe President Al Gore's announcement had been wrong. On the contrary, he highly valued the speed with which the measure had been taken. Still, he fully understood why people had panicked and sold at the sight of the White House acting. He even viewed the heavy selling positively. At current valuations, reminiscent of the second IT bubble, many investors would still profit even after a 10 or 20 percent drop. It was unfortunate for those who had bought at the very top, but they were a minority.
"Keep monitoring the situation."
"Of course, Mr. Chairman."
Yoo Jae-won ended the video meeting with Levin. Thanks to the report, he now understood the White House's internal situation, yet his concerns only grew. If the market's violent reaction caused them to shrink back from making the right decisions, the consequences would be severe. The events ahead would generate far greater shockwaves than anything seen so far. There was a real risk that the current experience might prevent them from taking correct action when the time came.
Meanwhile, the media poured gasoline on the fire.
True to its reputation as the birthplace of fake news, recent high-click articles made it seem as though New Century Financial's bankruptcy was the White House's fault. According to the reports, if left to the market, a new acquirer would naturally appear and resolve everything through market logic. Yet the coverage was not entirely pro-market.
A quick glance revealed articles sensationalizing the moral hazard and bonus feasts of New Century Financial's executives. It was true that the company had distributed hundreds of millions, even tens of millions of dollars in second-quarter bonuses. But the same feast had occurred at nearly every Wall Street firm that had invested heavily in subprime-related products. Lehman Brothers, the most problematic of them all, had handed out bonuses in the hundreds of millions.
"They can't even get one side of the story straight. What is this?"
The media presented extreme reactions simultaneously, and netizens and the general public responded like reeds swayed by those articles. Nextcom's history feature demonstrated that it was the media coverage itself that moved like reeds, but no visible change had appeared yet.
"At times like this, the White House needs to hold the center."
Yoo Jae-won's worries deepened. This was no mere exaggeration. Until recently, the Federal Reserve had been toying with the idea of raising interest rates. To achieve a soft landing for the housing market, the stock market, and the broader financial system, it was necessary to withdraw some of the excess dollars that had flooded the economy. Yet the Federal Reserve had been frightened by the stock market crash. Raising rates now would only accelerate the decline and send shockwaves into the housing market. A crash during the soft-landing process was natural, but the well-educated members of the Federal Reserve could not accept it. Especially not Chairman Greenspan, who was seeking to restore his reputation.
The White House was the one institution capable of applying pressure to the hesitant Federal Reserve, yet its continued silence suggested it was deeply unsettled. Yoo Jae-won could do nothing to help President Al Gore. Enemies of Yoo Jae-won and the ID Group were multiplying in real time—people blaming their own investment failures on him and the group. They believed everything would have been fine if left alone, and that he had stirred up a stable market by creating the CDO put option and the film. It was an entirely irrational judgment, but emotion had overtaken reason. Calling President Al Gore now would be delicate.
"Well, I suppose I should just focus on what I can do."
On the other hand, Yoo Jae-won had been preparing for the subprime crisis since the end of the previous year. He had put countermeasures in place not only for himself but for the entire ID Group. Beyond ID Investment, subsidiaries with large stock holdings had taken steps to offset losses in a declining market. With that settled, Yoo Jae-won turned his attention back to the computer. Before receiving the information chief's report, his monitor had been filled with an extremely complex source code originating from his own mind—an optimization code to enhance the intelligence of AI Gold.
In terms of software, performance had already been pushed to its limit. Adding better hardware would be far more effective. In practice, whenever a next-generation CPU or GPU was released, the ID Group's cloud system was always the first to adopt it. Since the latest hardware was already in place, the only remaining option was a software-level measure. Moreover, in the follow-up plan Yoo Jae-won had drawn up for the subprime mortgage crisis, AI Gold would play a major role.
Yoo Jae-won took a sip of coffee and focused on his work once more. Even as he concentrated in his study, the runaway train heading toward catastrophe did not stop. HSBC, Britain's largest bank and also the ID Group's primary banking partner, announced a record loss of $8.9 billion. It was a clear harbinger of the coming catastrophe. While this alone plunged Wall Street's financial firms into despair, the true terror had only just begun. A series of second-quarter earnings announcements from giant financial institutions—AIG, Citibank, Merrill Lynch, and Bank of America—had already been scheduled.