First Snow on Wall Street

The Tonight Show featuring Yoo Jae-won of the Golden Empire aired live. The moment the broadcast ended, an enormous wave of reactions surged in. It began on the internet, and from the following day the heavy hitters started to move—the mass media and big money.

Among these aftershocks, the most concrete effect appeared in the bond trading market: mortgage-backed security prices began to rise. After the subprime financial crisis erupted, MBS had been treated like garbage, their prices in freefall. The stock market had seen sharp drops followed by rebounds and was gradually stabilizing, yet in the bond market even heavily discounted MBS found no buyers. Once it became clear that the credit rating agencies had botched their evaluations of these securities, the market descended into utter chaos. C-grade bonds barely traded at all. B-grade bonds were cut to a quarter or even an eighth of their value. A-grade bonds managed to retain half or three-quarters of their original price. Only S-grade bonds—those issued by well-known corporations with real estate collateral—could still fetch their principal plus a modest premium.

When Yoo Jae-won announced on live television that he would use every cent of his put-option profits to buy mortgage-backed securities, the bond market shifted instantly. A-grade prices climbed across the board, and even C-grade bonds that had been drifting toward the shadow banking sector began to find buyers one by one. It was extraordinary. After all, the term “third financial sector” was not an official designation; it simply meant the loan-shark market. Defaulted bonds normally flowed there, where mafia-linked collection agencies used coercion, threats, and outright violence to recover what they could. Previously only truly defaulted paper had been dumped at fire-sale prices; now even C-grade paper was treated the same way. Yet after Yoo Jae-won’s broadcast, normalization began to take hold.

A few days later, fresh headlines appeared.

The federal government’s measures were designed to back the actions Yoo Jae-won had taken on the Tonight Show. A hundred billion dollars in public funds, plus a full-percentage-point rate cut from the Fed. The money did not require printing new currency; it could be drawn directly from the federal coffers, made possible by years of budget surpluses fueled by America’s economic boom and the recovery of Qing Dynasty bonds. The administration had deliberately avoided rushing to pay down national debt, maintaining a long-term plan instead—debt-free status was not automatically desirable. All those carefully accumulated reserves had been wiped out in a single stroke by the subprime crisis. For Al Gore it was deeply frustrating, yet Yoo Jae-won saw the situation differently: if a hundred billion dollars could contain the crisis, that alone would be an achievement. There was no need to compare it with the worst-case scenario of his previous life, when every decision had compounded the disaster. Conditions now were far better than they had ever been before.

Even so, Yoo Jae-won believed the public fund and rate cut alone could not fully resolve the crisis. The market’s immediate reaction proved his point. The moment the Tonight Show and the federal announcement hit the wires, mortgage-backed security prices reversed course and rose across every credit tier. Snow fell on Wall Street for the first time that season. The flakes were heavy enough to transform Central Park into a scene from a winter fairy tale, yet residents and workers near the park had no leisure to admire the view. The epicenter of the global financial crisis lay right there on Wall Street. The old guard who had once ruled the street were enduring a brutal winter. Only a year earlier, rumors claimed that dogs walked in Central Park carried hundred-dollar bills bearing Benjamin Franklin’s portrait in their mouths—an exaggeration, of course, but one that had actually appeared in print as a metaphor for Wall Street’s prosperity. That era already felt like ancient history.

Wall Street had become a jungle where survival itself was the daily contest. Layoff storms raged; simply being fired without further repercussions counted as good fortune. The Financial Supervisory Commission, the Securities and Exchange Commission, and other quasi-judicial financial regulators descended en masse to investigate every institution. Credit-rating agencies took the heaviest blows. Evidence that Lehman Brothers had bribed them to inflate CDO ratings was so clear that executives and analysts were arrested in large numbers. Next came the banks and investment houses that had recklessly issued loans. Frozen investor sentiment accelerated the decline in financial firms’ performance; every business model they had relied upon was collapsing, so strong earnings would have been the real surprise.

The sole exception was ID Investment. The firm had already booked astronomical profits from a single CDO put-option position. That was not all. In times of crisis certain assets rise in value—precious metals such as gold, energy resources like oil and coal, and foodstuffs. ID Investment had positioned itself early in these sectors and was now reaping enormous gains. Even investors who had bought the firm’s basic fund—easy to enter and exit—could expect returns exceeding 30 percent. Because entry and exit were simple, the profit-sharing ratio was modest, so until October the yield had hovered in the low teens. Once the subprime crisis struck and gold and oil prices soared, those same investors suddenly qualified for payouts above 30 percent.

On Wall Street the phrase “standing alone in green” applied only to ID Investment. That was why Vincent Greenhill felt both bewildered and increasingly angry.

“You really thought we would accept this?”

“Ah—no, sir. A few days ago on the Tonight Show, Chairman Yoo himself stated he would use the entire $240 billion to purchase mortgage-backed securities. Since that broadcast, even C-grade MBS prices have surged.”

The man answering ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠nervously was Michael Armstrong, CEO of Citibank. The meeting was taking place in Vincent Greenhill’s office on the top floor of the ID Investment Building, which offered a sweeping view of Central Park. The subject was the settlement of the put options. The $40.6 billion payout was large enough to bring Citibank’s CEO personally to ID Investment’s inner sanctum. What made the situation even more attractive to Citibank was that the payment would not be in cash but in the very mortgage-backed securities that had become toxic. Consequently, Citibank had assembled $40.6 billion worth of MBS it was eager to unload.

Vincent Greenhill examined the securities Citibank had brought and felt disappointment give way to fury.

“Chairman Yoo ordered the purchase of mortgage-backed securities for the greater good—so the financial crisis could be resolved as quickly as possible, benefiting everyone. And now your bank tries to exploit his goodwill in this manner?”

The problem lay in the quality of the bonds. Not a single S-grade security with unquestionable credit rating was included. Roughly 30 percent were A-grade, yet even those carried suspicions of rating manipulation. The majority—about 60 percent—were B-grade, and 10 percent were C-grade. Worse still was the valuation. The total face value came to $45 billion, while the amount Citibank owed was only $40.6 billion—a mere 10 percent premium.

“That is why I can only regard this proposal as a joke,” Vincent Greenhill said sharply.

The arithmetic was absurd. B-grade MBS were already discounted between 30 and 50 percent because default rates had skyrocketed. A newly originated mortgage bond required twenty years of reliable repayment before it could trade at par plus premium. Michael Armstrong was attempting to settle both the put-option obligation and the toxic assets with only a 10 percent haircut—as though he considered Yoo Jae-won an easy mark.

“Well, you see… the market price of mortgage bonds has risen, so naturally our asking price has adjusted accordingly…”

Despite his best efforts, Michael Armstrong struggled to form a coherent defense against Vincent’s fierce reaction. Negotiation was always like this: start with an outrageous offer and then haggle toward a compromise. He had planned exactly that. Vincent ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠Greenhill, however, was having none of it.

“Naturally? It seems Citibank is not prepared to negotiate with us at all. I agreed to meet you first because you appeared more reasonable than AIG, but I am sorely disappointed.”

Vincent’s tone was merciless. It was true that among America’s major banks Citibank was in relatively better shape. During the 2005 housing boom its net profit had exceeded $20 billion. Its subprime exposure, while serious, was not yet fatal—unlike Bank of America, which teetered on the brink of collapse without a bailout. Banks whose credit ratings had imploded were suffering bank runs that only deepened their distress. Citibank’s greatest immediate threat was the $40.6 billion put-option settlement. If that single issue could be resolved, rapid normalization would follow. That was why the meeting with Wall Street’s new superstar, Vincent Greenhill, had been ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠arranged so quickly. Perhaps that very speed had bred overconfidence.

“I won’t see you out. Good day.”

Vincent Greenhill issued the dismissal to Michael Armstrong, whose proposal was too preposterous to warrant further discussion.

“Mr. Greenhill!”

“The only reason I am stopping here is because it is you, CEO Armstrong. Had there been even a hint of embezzlement or breach of fiduciary duty like Lehman’s executives, you would be speaking with prosecutors, not me. At least your reputation for integrity has preserved your position—for now.”

Meanwhile, the person the media and internet had branded the chief architect of the subprime crisis was Aaron Fuld, Lehman Brothers’ CFO. He had issued massive quantities of CDOs and ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠their derivatives. Aaron Fuld felt the accusations were unfair, yet revelations about his personal conduct only intensified public outrage: cocaine, prostitution, illegal gambling—evidence of a life lived to excess. The final blow came when it emerged that after watching The Wolf of Wall Street he had personally bought an enormous volume of put options—$30 million worth, representing 80 percent of his liquid assets. When Black Monday struck, those puts paid off handsomely. The greater scandal was that he had bet so aggressively with his own money while publicly assuring Lehman’s board that everything was fine. Aaron Fuld had become the living symbol of Wall Street’s moral hazard, and Michael Armstrong now found himself tarred with the same brush.

The moment news spread that the MBS deal with ID Investment had collapsed, panic returned to the markets that had only just begun to calm, triggering another steep decline. The earlier rally had been driven by the promise of Yoo Jae-won’s $240 billion; when Citibank’s CEO’s greed derailed the transaction, momentum vanished and prices fell once more.

At that same moment, someone else felt relief that the Citibank deal had failed.

“You actually negotiated with Citibank’s Michael? Even if the money was won through gambling, it is still money—why throw it into the gutter?”

It was Frederick Taylor II. Normally he would have had Alfred place the call, but this time he dialed directly. Since 9/11 his health had deteriorated sharply, and he now spent increasing amounts of time in the hospital. He was there even now, yet Yoo Jae-won’s recent moves had evidently shocked him enough to pick up the phone himself.

“Aigoo, the gutter, you say.”

The words were rough, but the concern behind them was genuine. Yoo Jae-won could not brush the remark aside and began explaining the larger picture he had been preparing.