The Bears Come Home
"Oh, you're just in time. I'll transfer the call."
September 2007.
Having wrapped up our schedule in the States, Han Jae-yi and I had thrown ourselves into life back in Korea.
I spent my mornings and afternoons back at school, resuming my interrupted studies, and clocked in at the office whenever the US market opened. Han Jae-yi was in her final semester, so she practically lived at the office.
"Danny, take this."
The moment I walked in, Han Jae-yi handed me the phone.
Back in the future I'd left behind, video calls were held around the clock and messaging apps made it effortless to talk to someone on the other side of the world. Not in this era. The world's first smartphone had only just launched two months earlier, and messaging apps were not even a thing yet. The only way to reach Danny in the United States was an international phone call.
"Danny."
"You sound dead on your feet, man."
Danny Kim's voice through the receiver made it clear he found my current situation hilarious.
"Sitting across from me in New York, you were a full-on market player. The second you cross back into Korea, poof — you're a college kid again."
Listening to him, I could see how an outsider might find my double life absurd. Honestly, at first the split existence had thrown me too. But after a few years since my return, it had become second nature.
"Anyway, I didn't call to bust your chops. I found our counterparty."
Danny had been in the US hunting for a financial institution willing to sell us credit default swaps on Bear Stearns, Lehman, and the rest.
"Who is it?"
"Goldman."
That was a relief. So many investment banks were teetering on the edge of bankruptcy in this era that if we'd bought the product from a second-tier house, we could have lost every dollar with no one left to honor the contract. Goldman Sachs, though, was the world's largest investment bank — and even in the future I came from, it was one of the few that survived without collapsing.
"You've earned your pay, Danny. Buying Bear Stearns CDS couldn't have been easy."
"Nah, it was actually a cakewalk."
"Easy?"
Only a short while ago, France's largest bank had frozen redemptions on three of its funds, and in Britain, a mortgage lender had been driven into a full-blown bank run. And he was calling it easy?
"The ECB and the Fed already flooded the system with emergency liquidity, and they cut rates 50 basis points just the other day. Right now there's this belief spreading through Wall Street that even if things go sideways, the government will step in and bail Bear Stearns out. That's what the desk guys are trading on."
The Fed had just cut rates by 50 basis points — half a percentage point — for the first time in four years. The stock market was soaring as if possessed. It hadn't just broken its previous high; money was pouring into the market on a massive scale.
"The guy at Goldman taking our position is an old colleague from Salomon, actually. He was trying to talk me out of it. So what's it gonna be? Are we still doing this?"
The moral bankruptcy of the financiers of this era went beyond anything I'd read in books or imagined. A single conviction — the government will bail us out — and they were doing whatever it took to pocket profits today.
"Yes. Our plan hasn't changed. We go exactly as planned."
"Good. Then release the funds sitting in Reborn Capital. I'll buy the CDS and split the rest into put options."
"Understood. Thanks for everything, Danny."
Hanging up, I turned to Han Jae-yi.
"How does the market look?"
"Another record high. Honestly, at this point I don't even know what's real anymore."
She frowned as she spoke.
"You've seen the news, right? Bad headlines are coming out every single day. We keep hearing that the smaller banks don't have liquidity — and yet the stock market sets a new high daily."
"It'll keep climbing through next month. So don't get too wrapped up in the tape — just focus on backing up our thesis."
"Got it."
"Also, Danny Kim will be sending over the account details. He's found our counterparty. Please approve the funds."
Han Jae-yi nodded, and I took my seat.
She looked worried, but a rising market actually worked in our favor. The deeper everyone drowned in optimism, the cheaper the CDS premiums became — and the more we could buy.
When the people laughing now finally start to cry, that's when we'll be the ones smiling.
October 24, 2007.
Manhattan, New York.
Hundreds of investors and analysts had packed into the grand auditorium at Merrill Lynch headquarters. It was the third-quarter earnings announcement. A routine quarterly event — but today, the air crackled with anticipation.
"I got chills when the Dow broke 14,000."
"The S&P's at an all-time high too. The Fed cutting rates was a masterstroke."
"So Goldilocks was real after all. Not overheated, not freezing — the temperature is just right."
Optimistic chatter rippled through every corner of the hall. The Dow Jones Industrial Average had hit a record 14,164 points, and the S&P 500 had peaked alongside it. The Fed was intervening aggressively, cushioning the shock of the housing collapse.
The market was still Goldilocks. So everyone believed.
"Looks like it's starting."
Every head in the crowded room turned toward the center of the stage. The lights dimmed, and the Merrill Lynch logo glowed onto the screen.
The expectations of the people gathered here were, in truth, simple. Rates were down, indices were at historic highs — surely the investment banks' profits must be staggering. Merrill Lynch was one of the largest brokerages in the world, and in this market, there was no way it wasn't printing money.
A man stepped onto the stage. Gray hair, a face etched with deep lines. The CEO of Merrill Lynch.
"Good morning. I am Mark Lenon, Chairman and CEO of Merrill Lynch. It is my pleasure to present our third-quarter results today."
With that courteous greeting, the earnings presentation began. Numbers began appearing on the screen one by one.
"First, our third-quarter revenue."
The moment the figure was revealed, gasps of admiration broke out across the auditorium. Revenue had blown past market estimates — up fifteen percent from the same quarter the year before. The reaction was disbelief: everyone believed in the Goldilocks scenario, but who expected this?
"That's Merrill Lynch for you."
"What does that put net income at? Gotta be over two billion."
"Three, more like. With revenue like that?"
Investors tapped away at their calculators, buoyed by expectation. Revenue like that had to mean net profits beyond imagining.
Then—
The CEO's expression stiffened, just slightly, as he stood before the screen. Before advancing to the next slide, he paused, as if steadying his breath.
"Next... our third-quarter net result."
The slide changed. A number appeared.
Net Loss — $2.24 Billion
Approximately 2.08 trillion KRW
The auditorium froze. A loss? Revenue was that strong — and they posted a loss? A low murmur began to spread through the hall.
The CEO continued in a flat, measured voice.
"The principal cause of the loss is the write-down of subprime mortgage-related assets. The write-down was initially estimated at 4.5 billion dollars—"
His voice broke off for a moment.
"The actual write-down came to 8.4 billion dollars."
Eight point four billion. Nearly double the estimate. The air in the hall turned to ice.
"Furthermore, the scale of write-downs may increase further in the coming quarter."
It gets worse from here?It's already eight point four billion? The investors' faces drained white. Some were already pulling out their phones, firing off frantic texts.
The CEO stopped speaking for a moment and swept his gaze across the auditorium. Then, slowly, he opened his mouth.
"And... there is one more thing I must tell you."
The hall went silent. Every eye fixed on his lips.
"Taking responsibility for this situation, I will resign as Chairman and CEO of Merrill Lynch, effective today."
For an instant, time itself seemed to stop.
"He's resigning?"
"The CEO is stepping down?"
Mark Lenon was the self-made legend who had built Merrill Lynch into what it was. And he was resigning?
Before the shock could even settle, a man in the front row bolted to his feet. Without a word, he strode swiftly toward the exit. The man seated beside him caught on at once — and rose too. Then another. And another. One after another, people kicked back their chairs and bolted, each of them desperate to sell their shares before anyone else.
Because a single second's delay meant getting burned.
"Move. Come on — let's go."
A bottleneck formed at the exit in seconds, people shoving and elbowing to get out first. The auditorium descended into chaos. From the stage, the CEO watched it all unfold, his face utterly devoid of emotion.
"The Dow climbed again today."
"How far?"
"Past 14,100. Another record high."
It was an ordinary night. Han Jae-yi and I were in the office talking markets, in the thick of the US trading session — our busiest stretch of the day.
"The S&P 500's near 1,550 too. It's been nothing but up since the Fed cut rates."
For weeks now the stock market had risen without a single pause, thanks to the Fed's aggressive intervention.
"Oh, and Moody's downgraded another pair of European banks yesterday. UBS and Deutsche Bank."
"And the market still climbs."
"Yeah. Even bad news gets shrugged off within half a day. It's enough to make you think it really is Goldilocks."
Something strange was threaded through Han Jae-yi's voice.
"We've been in our CDS positions for over a month now. You know how much the Dow has gained since then?"
"I know."
"Five hundred points. Five hundred. While we sit here paying CDS premiums, the market just keeps climbing."
She let out a long sigh.
"I believe in us — believe in you, Seon-woo — but lately I can't look at this market with a straight face."
"That's understandable. It goes up, and up. I'd be lying if I said I wasn't anxious too."
I understood exactly what she meant. We had bet on a collapse, and the market was setting record highs every single day. FOMO. That nagging itch — shouldn't we be riding this wave too? — was shaking her. And for my part, the fear that the future might be shifting under my feet had been gnawing at me these past few days.
"Just hold on a little longer. It's coming."
Each time the doubt crept in, I reassured her — and myself.
"...Okay."
Han Jae-yi nodded and turned her eyes back to the screens.
Then—
Ring-ring-ring—
The office phone rang. At this hour, a call to the office could only mean one thing. It was almost certainly Danny in the States. I got up and picked up the receiver.
"Hello?"
"CEO Kang, it's Danny. Have you checked the market?"
His voice was urgent. Nothing like his usual easy drawl.
"The market?"
"Yeah. It's crashing right now. The stock market."
Crashing? Han Jae-yi had told me not two minutes ago that we'd hit another record high. I set down the phone and walked straight to Han Jae-yi's desk, where the Bloomberg terminal sat. Green and red figures crowded the black screen. The moment I pulled up the Dow, I saw it: an index that had been climbing past 14,000 just that morning was now in free fall. The green numbers were turning red, one after another.
"What in the..."
I searched the terminal for breaking news. The headlines surfaced immediately.
Only now did I understand what was happening. Merrill Lynch — one of the four names we had bought CDS against, the four banks we had bet would collapse.
"What is it?"
Han Jae-yi came over. She must have read something in my expression, because tension crept across her face too.
"Merrill Lynch just announced their third-quarter results. A two point two billion dollar loss."
"Two point two billion?"
"Subprime write-downs came in at eight point four billion — double the estimate. The CEO resigned on the spot."
Han Jae-yi's eyes went wide. Barely minutes ago, she'd been worrying that the market's climb meant we were wrong. But she knew exactly what this meant.
"Then we..."
"Yes."
I nodded.
"It's here. From this moment, it begins."
Han Jae-yi said nothing, staring at the terminal. The red numbers kept sinking lower and lower.
The moment we had waited for had finally arrived.
The girl from the fairy tale — Goldilocks — had fled, and the three bears had come home to the house they'd left empty.
And now, someone would have to pay for the porridge that had been stolen, spoonful by secret spoonful.