GL Chemical (7)
I never imagined that I’d end up giving a presentation to a room full of CEOs when I’d once been nothing more than a rookie at a securities firm.
Life really did have a way of surprising you, if you lived long enough.
That didn’t mean I was nervous, though.
If anything, it was the securities firm executives who looked uneasy, their expressions saying they had no idea why I’d dragged them here or what I was about to tell them.
I went straight to the point.
“The first thing I want to talk about is short selling.”
Short selling could be divided into two broad categories.
One was naked short selling, and the other was covered short selling.
With naked short selling, you could sell shares you didn’t actually have. Covered short selling, on the other hand, required you to borrow shares from somewhere before you sold them.
Because naked short selling carried such obvious risks and side effects, most countries allowed only covered short selling.
So how did short selling actually work?
To buy stocks, you logged into the Korea Exchange server through an HTS, then purchased shares that someone else had already listed for sale.
So it was easy to assume short selling would work the same way, just through the same kind of system as ordinary stock trading, but in reality it was handled through phone calls, emails, and messenger apps.
You’d ask, “Can I borrow 100 shares of Yusung Electronics?” and if they said okay, you’d take that as good enough, borrow them in practice, and sell immediately.
In other words, the ledger was essentially being written by hand.
It sounded absurd in the twenty-first century, but it was true.
And if that was the case, how could anyone tell whether someone had borrowed shares first and then sold them, or sold first and borrowed later to cover the amount?
No one could tell.
That was why trouble sometimes exploded.
Back when Yusung Securities was supposed to pay 1,000 won in stock dividends to employee shareholders, somehow 1,000 shares were issued instead. A staggering 110 trillion won’s worth of nonexistent stock suddenly appeared in the market, and some employees cashed out by selling shares that did not exist.
Because short selling wasn’t computerized, if someone wanted to, they could sell stock they had never even borrowed.
So why didn’t they computerize short selling the same way they did ordinary stock trading?
The industry claimed it simply wasn’t realistic.
For example, when short selling for hedging purposes, hundreds of different names might be sold at once, and that could temporarily overload the server.
Even hearing that much was enough to tell it was bullshit.
In this age of digital everything, why wouldn’t it be possible? Almost every country in the world had already computerized short selling. The only ones that hadn’t were Korea and Taiwan.
Obviously, it wasn’t that they couldn’t do it. It was that they didn’t want to.
That made business easier for them.
Once it was computerized, you’d have to secure the shares first before you could short them.
But with the current manual system, you could short first and worry about borrowing the shares later, just making the numbers balance afterward.
It was convenient for both the lender and the borrower.
“Recently, individual investors’ complaints about short selling have been growing louder by the day. That’s because while short sellers are raking in enormous profits by pushing stock prices down, retail investors are suffering massive losses.”
My words left the securities firm CEOs looking stunned.
After all, the ones who had recently made a killing from short selling were Continue Capital.
Heo Min-woong, who had been listening quietly, asked, “So you’re saying short selling is the problem?”
I shook my head.
“Short selling itself isn’t the problem. The problem is lending out the shares sitting in customer accounts.”
Short selling brought in more profit than ordinary stock trading because the fees were higher.
But to lend out shares, you needed shares in the first place. That was why securities firms worked hard to secure as many as possible.
So when individual investors opened accounts, the firms would casually tuck a clause into the terms saying lending was permitted.
That way, they could pull shares from customer accounts whenever they needed them.
Most retail investors had no idea their shares were being used for short selling, because when they checked their account records, the shares were still there and trading worked just fine.
“I recommend that, starting now, you make it a firm policy never to lend out shares belonging to individual investors who haven’t signed a separate securities lending agreement.”
Sung Yoon-ah spoke up.
“Then everyone would say no.”
“They would, yes.”
Who would happily lend out their stock just so someone else could use it to drive the price down?
In practical terms, what I was saying was no different from telling them not to use retail investors’ shares for short selling.
“Second, I expect all of you will participate in the GL Entech offering, but I strongly recommend taking as small an allocation as possible.”
This was a company with a market cap of 80 trillion won going public. If you were an institution, you had no choice but to participate in the offering.
Heo Min-woong nodded for no real reason at all. “Yeah. A lot of people think the IPO price is a bit high. GL Group’s image hasn’t been great lately, either.”
That was the kind of comment you could hear or ignore.
What mattered started now.
“Third, I recommend you suspend any issuance of options based on the index for the time being. For options that have already been issued, you should hedge them without fail—either by buying the opposite option or by purchasing the underlying asset.”
Everyone wore the same expression: they didn’t understand.
Questions were written all over their faces.
They wouldn’t know why I was saying any of this yet. They would understand eventually. Time would take care of that.
“Whether you follow my advice today or not is entirely up to you. I won’t be taking questions. That’s all.”
* * *
Amid all the controversy, GL Entech was listed on the stock market.
Normally, when a new stock was listed, the company representatives would come to the exchange in person, beat the ceremonial drum, and fire off confetti cannons, but that whole ritual was skipped this time.
A company worth 80 trillion won had entered the market, and yet all it did was inflate the KOSPI’s total market cap. The index itself didn’t move.
The offering price was 100,000 won.
It opened at 133,000 won, then climbed another 20 percent to touch 160,000 won. But as the afternoon session went on, it drifted back down and settled at 120,000 won.
Still, that was 20 percent above the offering price.
And the thing I’d been worried about came true.
Institutions, foreigners, pension funds—everyone dumped large-cap stocks and piled into GL Entech instead. While GL Entech rose, most of the top 100 stocks fell.
As expected, the company that suffered the most was GL Chemical.
Even while GL Entech was firing off its celebration, GL Chemical kept sliding and sank to 430,000 won. Its market cap, once above 70 trillion won, had shrunk to just 30 trillion.
* * *
In the article’s body, it said that although suspicions had still not been cleared up over allegations that the president had approved a physical split-off for the National Pension Fund after receiving illicit requests from chaebol groups, the ruling New Korea Party was maintaining a complete silence on the issue. Im Chang-sik, leader of the opposition Our Korea Party, had floated a self-regulation proposal from corporations, but many people doubted whether it would do anything at all.
The only voice in politics speaking up for shareholders was Namgoong Seok of the Our People Party.
He came down hard on the listing.
* * *
Despite all the bad conditions, the GL Group had successfully completed the GL Entech listing. But no one saw it as a victory for the group itself.
The clear winner was Continue Capital.
In business circles, Han Miru’s name came up again, just as it had during the Hanjeong Group collapse.
“Han Miru again?”
“He didn’t just tear apart the Hanjeong Group—now he’s gone after GL Group too.”
“What the hell do he and the chaebols have against each other?”
This wasn’t just a problem for GL Group.
By openly announcing short sales and turning what should have been a quiet listing into a public spectacle, they had made the entire country aware that listing a subsidiary could drag down the parent company’s stock price.
Continue Capital walked away with an astronomical profit of roughly 1 trillion won from a single investment, while companies preparing physical spin-offs or affiliate listings suddenly found themselves on high alert.
The next company waiting to go public was Daeyeon Winner, a subsidiary of Daeyeon Car Group.
After watching GL Chemical’s stock plunge into the abyss, Daeyeon Car’s minority shareholders warned that they might file a class action if Daeyeon Winner went ahead with its listing.
For the time being, Daeyeon Car Group postponed the IPO, saying it would watch how things developed.
Daeyeon Winner was 51 percent owned by Daeyeon Car, while Chairman Jang Hisu’s third son, Jang Yu-seon, held 38 percent and the other brothers held the remaining 11 percent.
If the listing was scrapped, Jang Yu-seon might not receive his share at all.
Remembering Han Miru from earlier that day, he seethed with frustration.
“If it weren’t for that bastard!”
The situation was the same for the other conglomerates as well.
LK Group, Daeyeon Heavy Industries Group, Tapioca Group, and GJ Group all simultaneously postponed their listing procedures and went back to reevaluate everything.
* * *
I took a call from David.
[So GL Entech went public after all.]
“That’s good news for us.”
Short selling wasn’t about getting in. It was about getting out.
After all, I had sold first and driven the price down. But to close the position, I had to buy back exactly what I’d dumped into the market. That was when the risk of the price surging was highest.
Buying back shares to close a short position was called a short cover, and if you handled it badly, you could end up with a catastrophic loss instead of a profit.
If GL Entech’s listing had been delayed, it would have been hard to find the right time to escape.
But because they went ahead right on schedule, institutions dumped GL Chemical en masse and bought GL Entech, and thanks to that, we were able to buy back the shares easily and get out cleanly.
The amount of money we had poured into this investment was 1 trillion won.
It wasn’t all shorted at 1 million won, of course, and because we kept selling as the stock dropped, the total return came to just under 1 trillion won—around 960 billion won.
Money had been copied, more or less.
Usually in cases like this, the short sellers would be the ones getting cursed at, but this time GL Group was taking more heat than Continue Capital.
As the saying went, the sister-in-law who stopped the scolding mother-in-law was often more annoying than the one doing the scolding.
From our point of view, that was clearly a good thing.
[You’ve worked hard.]
I could tell from the voice alone, without even seeing his face, that he was grinning ear to ear.
Making money was always fun.
“We’re not done yet.”
[Not done?]
“GL Entech’s listing isn’t the end. It’s the beginning.”
David sounded startled.
[The beginning? What do you mean?]
I explained the plan ahead to him, and when he heard the whole thing, he was shocked.
[You were thinking that far ahead from the very beginning?]
“Not from the very beginning. I thought of it midway through. So? Do you think it’s possible?”
He considered it for a moment before answering.
[I think it’s entirely possible.]
I nodded.
“Then let’s move on it right away.”
* * *