The House of Cards

"Bear Stearns is going to collapse soon. And that could set off a chain reaction of financial firm bankruptcies."

I nodded along as I listened to Danny Kim.

First, I needed to test just how much this man actually knew.

"Have you heard of subprime mortgages?"

Danny Kim picked up a napkin from the table.

"It's a type of real estate loan, made to borrowers with bad credit. Now, the banks that hand out those loans can't just sit on them, right? It's dangerous. These are low-credit borrowers — you never know when they'll stop paying."

"I suppose so."

"So the banks bundled the loans up and turned them ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠into securities. MBS — mortgage-backed securities. You take a bunch of loans, wrap them into one package, and sell it to investors. Then whatever doesn't sell well gets gathered up and cooked one more time. That's the CDO."

Collateralized Debt Obligation — CDO.

Wall Street hailed it as the pinnacle of financial engineering.

Banks issued the loans, then designed derivatives to hedge against the risk of non-repayment. That was the mortgage-backed security, the MBS.

Bonds backed by high-credit borrowers sold like hotcakes. The problem was the leftovers that wouldn't sell — the loans to subprime borrowers.

The banks bundled that toxic inventory together and processed it again. That was the true nature of the CDO Danny had just named.

"So what did the geniuses of Wall Street do?"

Danny Kim drew several circles on the napkin.

"They gathered all this garbage together and cooked it up again. Gave it a fancy name, too. CDO — collateralized debt obligation. They repackaged the trash into a shiny new security, paid the credit rating agencies, got a AAA rating slapped on it, and sold it."

"You collect garbage and somehow get a AAA out of it?"

Han Jae-yi cut in.

"That's the magic of financial engineering."

Danny Kim smirked.

"They stapled diversification theory onto it. One subprime borrower has a high chance of defaulting, but gather a thousand of them together and the odds that all of them default are low, right? So the risk is 'diversified'? That's how they dressed it up."

"But isn't that logic sound?"

I deliberately pushed back.

"Derivatives are supposed to work like insurance against risk, aren't they? You slice risk into tiny pieces, spread it across thousands of investors, and if an accident happens, everyone just walks away with a scratch."

Danny Kim ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠shrugged.

"That kind of thinking is what created the reality we're living in. Let me tell you something interesting."

‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠Danny Kim looked back and forth between me and Han Jae-yi.

"Of the drivers who died in speeding accidents on American highways last year — most of them were wearing their seatbelts."

"......"

"You've got your seatbelt on, so it's fine to speed, right? That was the psychology. And the exact same psychology is driving the derivatives market right now."

Danny Kim kept talking, scribbling something on the napkin.

"Subprime mortgages — I don't know why, but every time I hear that phrase, I can't stop laughing. Why would a bank lend money to someone with terrible credit?"

"......"

"Because banks make money issuing loans, and they want to make more. They figure that as long as they hedge with derivatives, there's no risk of losing their shirt. It's exactly the same as — I've got my seatbelt on, so I can speed."

Danny was walking straight to the heart of the matter.

I laughed inwardly.

I had played the fool and asked naive questions because I needed a window into Danny's thinking.

If Danny Kim had failed to grasp the essence of this crisis and seen it as nothing more than a money-making opportunity, I'd planned to take his money and walk away.

But Danny was articulating the fundamental problem beautifully.

I wanted him. Not just for this project — he looked more than capable of representing our investments in the United States.

"And here's the problem with these derivatives."

Danny Kim lowered his voice.

"Everyone's sitting down at a hundred-million-dollar gambling table with only a hundred bucks in their pocket."

Leverage.

Borrowing to invest.

Danny was pointing directly at the flaw.

"Because derivatives let you max out leverage with just a small margin deposit, ten-to-one leverage is the baseline for everyone at the table. CDO prices have already dropped fifteen percent, and everyone's still calm. Why?"

"On paper, the assets are still alive."

Han Jae-yi fielded it.

"Bingo."

Danny Kim snapped his fingers and pointed at her.

"Even though there's not a soul in the market willing to buy, everyone's books are lying — your principal is perfectly safe, sir, nothing to see here."

Danny Kim looked between me and Han Jae-yi again.

For the first time, the playful smirk on his face gave way to something serious.

"Home prices keep falling, and delinquency rates have climbed to fourteen percent. Do you know what that means?"

"The CDOs crash."

"Correct. And you think the only funds holding those CDOs are Bear Stearns' subsidiaries? They're not. Merrill Lynch, Lehman, Morgan Stanley, Goldman Sachs. Every house you can count on your fingers is holding them."

I watched Danny Kim quietly.

Good. Up to this point, everything matched the future I knew, and his explanation was excellent.

More than anything, I now understood exactly what was in his heart.

"So?"

I asked.

"So what is it you want, Mr. Kim? Listening to you talk, you sound less like someone out to invest and more like someone who's actually heartbroken by what's going on."

A smirk crept across my face.

"You sound less like a man trying to make money off this opportunity than a man who simply doesn't like the game being played."

Danny Kim said nothing, only looked at me.

His tone and manner came off like a fast-talking hustler, but judging by my long experience, there was something deeper underneath.

At length, he spoke.

"You're saying I don't look like a guy who just wants to short this thing and cash in."

"You've been oddly probing at me for a while now. So — what is it you want?"

"Me?"

I thought for a moment before answering.

"If we can't change this situation, then I'll take the money."

Since coming back to this life, I'd thought about a great many things.

Was it right to profit while others bled? The moral questions had always made me hesitate.

"Here's what I think. My hesitating changes nothing. Someone, in the end, is going to make money off a situation like this. So it should be me. Take that money, seize the power that comes with it."

Out of all that agonizing, that was the conclusion I'd reached.

Acquire power — so that the next time something like this happened, I could hammer down the people who created the situation, and save someone.

"You seem to be hesitating too, Mr. Kim."

I picked up the napkin. The very napkin Danny had been doodling on so earnestly as he explained.

In one corner, I wrote the phone number of my lodging.

"If you want to take power with me — and change what happens the next time something like this occurs — call me."

I set the napkin down on the table.

"I'll be waiting."

I rose from my seat and headed out of the banquet hall with Han Jae-yi.

Behind me, I could feel Danny's gaze on my back.

* * *

It was past ten at night when I got back to the hotel.

"Yes, yes. I received the email. I'll review it once I'm done with things here and come in."

I hung up, and Han Jae-yi, seated on the sofa, asked.

"Was that Director Jeong?"

"Yeah. I asked him to pull together everything he could find on Danny Kim on the way back, and he sent it over by email within the hour."

"You're something else, but so is Director Jeong. The man doesn't seem to have a single blind spot."

A wry laugh escaped me at her remark.

I opened my laptop and checked the email from Jung Tae-sung.

The more I read, the wider my eyes grew.

"Danny Kim is more impressive than I expected."

"Why?"

Han Jae-yi came over and peered at the laptop screen.

"He graduated from Harvard's economics program and went straight into the derivatives trading team at Salomon Brothers."

"Salomon Brothers? Never heard of it."

"Senior, what did Danny Kim say the problematic derivatives were earlier?"

"CDO."

"And what's the underlying asset of a CDO?"

"MBS."

"Salomon Brothers invented that."

"What?"

Han Jae-yi's eyes went round.

Salomon Brothers.

The legendary investment bank of Wall Street.

Where giants like Goldman Sachs and JPMorgan were collectives of elite bankers, Salomon Brothers was called a street gang.

In an era when making money from stocks was considered the natural order of things, they carved out entirely new markets — minting enormous profits from bonds and derivatives.

MBS and CDO — the instruments now shaking the entire world.

Their origin point was Salomon Brothers.

"Danny Kim became part-lead of the derivatives team in just his second year, and made team head in seven."

"Even for America, is that possible?"

"Salomon Brothers is exactly that kind of company. Make money and you're king; fail to make money and you're fired on the spot. Results over pedigree, results over skin color, results over everything."

Han Jae-yi tilted her head.

"The way you talk about it, it sounds amazing. So why do I have no memory of ever hearing the name?"

"Because it's gone now."

"Gone?"

1991. The US Treasury bond bidding scandal.

Salomon Brothers was caught illegally cornering the market during Treasury auctions. The US government showed no mercy.

The empire that had once ranked first in trading profits collapsed just like that.

"Danny Kim kept his seat even when the company was acquired by someone else. His ability had been recognized."

"Is he still there?"

"No."

I scrolled down the screen.

"He left three years ago. What he's been doing since isn't clear — even Director Jeong apparently had trouble tracking it down."

Interesting.

A veteran of the very house where derivatives were born.

And that man was now prophesying the fall of the entire derivatives market.

"From the look on your face, you want him."

Han Jae-yi said.

"Think he'll call?"

"Hard to say."

I shrugged.

"I'd like him to. But if he doesn't, we'll just do it ourselves."

A small laugh slipped out.

"Actually, I think you could handle it too, senior."

At my words, Han Jae-yi wore a brief look of surprise — then the corners of her mouth lifted.

"Fine. I'll work hard, then."

Han Jae-yi rose from her seat.

"This is no time to be lounging around. I'm going to go dig through some research."

I watched her back as she headed toward her room.

She had changed, unmistakably, from the girl I'd first met two years ago.

The anxiety in her eyes was gone, replaced by confidence.

She's growing up well.

Smiling, I turned my ‍‍‌‌⁠​​⁠‌​​‍​​‍​‌​⁠‍‌‍⁠⁠‌⁠‌‍‌‍‌‌‌‍⁠​‌​‌​‌‍‌‌‌⁠‍​​‌‍⁠‌‌⁠⁠eyes back to the laptop screen.

I began reading Danny Kim's profile again from the very beginning.

* * *

Same hour. A Manhattan apartment.

Danny Kim stood at the window, phone pressed to his ear, staring out.

"So? What's this Kang Seon-woo guy's deal? Just anyone doesn't get into our little circle, you know."

The answer came back through the receiver.

— You know Sunjin Group, right? Third-generation son of that family.

"......What?"

— Sunjin Group. One of Korea's top five chaebols. Well, they've pretty much been divorced from the auto business, so they've dropped out of the top twenty by ranking, but yeah — he's the son of that house.

Danny Kim pulled the phone from his ear and stared blankly into space.

That college kid from the banquet hall?

When the guy started throwing around figures in the millions, he'd written him off as a blowhard. He'd been real all along.

— Why? Did the kid scam you or something?

"......No. Never mind. Thanks."

He hung up and sank into the sofa.

On the table, the crumpled napkin caught his eye.

The phone number written in the corner.

If you want to take power — and change what happens the next time something like this occurs —

Danny rose from his seat and walked to the window.

The Manhattan skyline spread out below him. Tens of thousands of lights — and every single one of them belonged to someone who kept Wall Street turning.

"Change the situation......"

A self-mocking laugh slipped out of him.

Two years ago came back to him. That year, the credit ratings of America's automakers had fallen to junk status.

The bond market had convulsed, and the funds holding those bonds blew up.

The sales team lied to the clients.

Too big to fail. Cars are the emblem of American industry. Perfectly safe.

Then one of the funds collapsed.

A loss of forty percent. The morning after the news broke, word came that a client had taken his own life.

Danny pressed his forehead against the glass. The cold glass touched his skin.

A man in his sixties. He'd put his entire retirement savings — a lifetime of work — into that fund.

Before ending his life, he had come to the office, begging them to save him. And the company, insisting to the very end that the product was safe, gave him one answer and one answer only.

The responsibility for an investment rests with the investor alone.

Danny walked out of the company after that day.

Without a word.

Hey, Danny. It's not like you sold it to him. Why are you carrying this?

Fair point.

He hadn't sold the product himself.

But he'd worked at the same firm. He'd known exactly how the machine worked — and he'd kept his mouth shut.

From that day on, he'd wanted to expose this rotten system.

He'd believed someone, somewhere, would listen.

'Short-selling addict bastard.''Do something about your hot air, man.''Same old routine, every single time. For real.'

The words his friends had thrown at him at today's banquet still rang in his ears.

Even the friends who'd hung on his every word back when he was on top of the world now laughed his warnings off.

Danny pulled himself away from the window and walked back to the table.

He picked up the napkin.

He stared at the phone number for a long time.

If you want to make those people regret it, come to me.

Regret.

Yes. He did want them to regret it.

The bastards who brushed off his words. The clever bastards of Wall Street who knew the danger and sold it anyway.

But that wasn't all of it.

He didn't want to watch someone else die the next time around.

If only this time he could raise a warning.

If only something could be changed.

Danny stood there for a long while. Then he picked up the phone.