Restart life

Chapter 383 0373 [How much can you earn by shorting Lehman Brothers?]

Lehman Brothers' current predicament can be described in one sentence: "When a wall falls, everyone pushes it down."

Its stock price has been falling since last year, and at the beginning of this year, it was only around $40. In between, it experienced a short-selling ban period of more than two months, during which the US government directly introduced policies to prohibit short selling of a number of companies.

By the time Chen Guiliang started shorting the stock, its share price had fallen to less than $8.5.

On September 9, the day major negative news broke, countless investment institutions, like sharks smelling blood, rushed to short Lehman Brothers.

The interest rate for securities lending has soared to over 20%, and even with such high interest rates, it's still impossible to get loans because brokerages themselves are shorting the market and simply won't lend their securities to others.

Huang Wenzheng's underlings made dozens of phone calls, but only managed to secure 8 shares in a whole day. Moreover, the brokerage firm raised the price on the spot, with the short selling interest rate reaching an astonishing 25%.

On September 10, the short selling rate was close to 30%.

Huang Wenzheng's underlings called until they were practically smoking, then returned with a helpless report: "Mr. Chen, it's a great pity, we can't get a single share."

Huang Wenzheng said to Chen Guiliang, "I think there's no need to raise any more funds. It's a complete waste of effort, as there are no more bonds available on the market."

"Then let's wait for the right opportunity to make our move," Chen Guiliang said.

Damn, they really didn't use up the $2500 million.

This situation is particularly distressing for those who have been reborn. They know Lehman Brothers is going bankrupt, and they have plenty of money at their disposal. But because of the temporary policies of the US government, they can't pour all their money into short selling.

It's like there's a pile of money in front of you, you can just bend down and pick it up, but someone is holding you back and preventing you from picking it up!

On that day, Lehman Brothers' closing price fell to $7.

On September 11, the short selling rate rose to 33%, but there were still no available securities in the market.

The closing price that day plummeted to $4.22.

That evening, Chen Guiliang invited Huang Wenzheng to dinner.

I have work to do tomorrow, so I didn't drink.

"Mr. Huang used to be a professor at Harvard. Why did he switch careers and come to Wall Street?" Chen Guiliang inquired.

Huang Wenzheng said, “One of my papers went through a year-long review process and was never approved. There were two reviewers at the time, one approved and one didn’t. I was very disappointed with academia, so I resigned from my teaching position and came to Wall Street.”

Chen Guiliang became increasingly curious: "What kind of paper is it? If it's not going to pass, just reject it outright. Why did the review process take a whole year?"

Huang Wenzheng briefly explained: "There are three main schools of thought in statistics: the frequentist school, the Bayesian school, and the likelihood school. The likelihood school is the most marginal and the least popular, and my advisor happens to belong to this school. In my thesis, I proposed the concept of an unbiased generalized likelihood function... Simply put, I wanted to view all three major schools of thought in statistics within a single framework..."

Chen Guiliang only half understood what he was hearing.

He roughly understood it as follows: There are three major schools of thought in the field of statistics, and an unknown disciple of the smallest school is trying to unify the three schools to some extent!

However, this understanding is superficial!

Huang Wenzheng continued speaking:

“I start from the Chinese concept of the unity of man and nature, believing that we are one with the world around us, and we should never view the world from an external, omniscient perspective. Different statistical models are just different perspectives on describing the world. All statistical models are correct from a certain point of view.”

"This understanding is exactly the opposite of the underlying understanding of statistics. When they do academic research, they happen to look at the world from an external, omniscient perspective. They believe that all statistical models are inaccurate and all statistical models are wrong. They assume that there is an external real world that is independent of us observers, and our cognition can gradually approach it, but we can never fully grasp the real world."

"This is not a matter of factional disputes. Rather, my paper negated the fundamental understanding of statistics, which is tantamount to severing the roots of statistics."

Chen Guiliang burst into laughter upon hearing this.

This academic debate is fascinating and perfectly illustrates the differences and characteristics of Eastern and Western philosophy.

Huang Wenzheng believes that one should immerse oneself in the world before observing, studying, and understanding it. Although each observation and research process and result is partial and inaccurate, it is correct from a certain perspective. He even developed a concept of function and a single framework specifically for his research.

Mainstream statistics, however, requires first detaching oneself from the real world and imagining a virtual "real" world. By studying the real world from an outsider's perspective, it gradually approaches the virtual "real" world, but can never truly reach it. This is the underlying logic of modern science.

Huang Wenzheng said, "My set of ideas could not stand in academia. So I brought it to Wall Street and used it to test whether it could make money! I used statistical models to make software and started quantitative funds on Wall Street, and it proved that it could indeed make money."

Chen Guiliang thought to himself: Of course you can make money. When you left the United States, you had already made hundreds of millions of dollars on Wall Street.

The two were getting more and more into their conversation when Huang Wenzheng's phone suddenly rang.

He made a phone call for a few minutes, then solemnly told Chen Guiliang, "I just received news. The U.S. Treasury Secretary will be meeting with Wall Street giants tomorrow to discuss how to save Lehman Brothers."

Chen Guiliang asked, "Do you think the US government will intervene?"

Huang Wenzheng said, "Regardless of whether the US government intervenes or not, we should close our positions tomorrow."

Chen Guiliang asked, "Why?"

Huang Wenzheng said, "Tomorrow's meeting will likely have only two outcomes. First, the US government and Wall Street giants will join forces to help Lehman Brothers. Lehman's stock price will rebound, so we should close our positions as soon as possible. Second, the US government and Wall Street giants will fail to reach an agreement during the meeting and will simply watch Lehman Brothers go bankrupt. In that case, we should close our positions even more quickly."

"Should we close our positions if the stock price continues to fall?" Chen Guiliang didn't understand.

Huang Wenzheng explained, “Tomorrow is Friday, and the market will be closed the day after. Regardless of how the talks go, Lehman Brothers will make a final attempt to save itself, releasing news of the finance ministers' meeting to boost its stock price. Therefore, Lehman's stock price will fluctuate tomorrow, and trading will be very active, making it the best time for us to close our positions. If the finance ministers' meeting breaks down, Lehman's stock will crash when the market reopens on Monday. At that time, market liquidity may dry up, making it difficult for us to place orders when closing our positions.”

Chen Guiliang said, "You're a professional, do as you say."

...September 12th.

Lehman Brothers' stock price plummeted at the opening bell.

But just as Huang Wenzheng predicted, Lehman Brothers began to save itself and released positive news from the finance ministers' meeting.

Lehman Brothers' stock price rose to $4.85 at one point, up 15% from yesterday's close.

However, the stock price fell again in the afternoon.

The closing price for the day was $3.65!

Thanks to Huang Wenzheng's intervention, Chen Guiliang exited the market safely, regardless of whether the stock price would continue to fall.

After deducting various costs such as securities lending interest, transaction fees, and Huang Wenzheng's commission, Chen Guiliang's net profit was US$518 million.

After several days of hard work, this is all I've earned.

Damn it, those novel protagonists made hundreds of millions of dollars by shorting Lehman Brothers.

There are two main reasons why Chen Guiliang earns so little:
First, the temporary policy of the US government required that securities be borrowed before short selling. The amount of securities you could borrow determined the amount you were eligible to short sell, which meant that Chen Guiliang could not use all of his prepared $2500 million for short selling.

Secondly, Lehman Brothers' situation was so dire that there were many short sellers, constantly driving up the interest rates on securities lending. One-third of Chen Guiliang's gross profit was used to pay the interest on his securities lending.

"It's a pleasure to cooperate with you!" Chen Guiliang shook hands.

Huang Wenzheng asked, "Mr. Chen, if you don't need this money urgently, you can entrust it to me to manage. Since its establishment, my team has consistently maintained an annual return rate of over 10%."

"What about this year?" Chen Guiliang asked.

Huang Wenzheng was somewhat embarrassed: "This year is an exception, but we didn't lose money. My statistical model is not perfect yet, and it's not suitable for the current drastic fluctuations. I'll contact Mr. Chen again after I improve the model."

“Okay, I’ll wait,” Chen Guiliang said. “Mr. Huang, you can call me whenever you return to China, and we can get together then.”

"It's a word."

The two sides shook hands and said goodbye.

Once in the taxi, Yang Shuo, who had been acting as his bodyguard, exclaimed as if in a dream, "You really earned over 500 million US dollars in just a few days?"

Chen Guiliang cautioned, "Don't touch that stuff. When you have spare money in the future, I can guide you in investing, but whatever you do, don't go and buy stocks on your own."

“I understand. I don’t know anything about it, so I can only buy things randomly,” Yang Shuo said.

Chen Guiliang did not return to China immediately, but stayed in the United States to continue his work.

The original plan was for ByteDance to increase its capital and expand its shareholding, with Game Science injecting capital, and then ByteDance would use the money to fulfill the repurchase agreement.

However, Carlyle Capital, the lead investor in ByteDance's Series B round, suddenly proposed changing its capital increase and share expansion plan. They intend to sell all of their shares to Game Science because... Carlyle Capital is also on the verge of collapse!
Because the U.S. Treasury Secretary and Wall Street giants failed to reach an agreement, the U.S. government announced that it would abandon the bailout of Lehman Brothers.

This news had been brewing for two whole days over the weekend.

On Monday, as soon as the market opened, Lehman Brothers' stock price collapsed instantly, and the company immediately filed for bankruptcy.

This thing has a chain reaction, and a global economic crisis is about to strike!
Carlyle Capital, with a leverage ratio as high as 32 and $166 billion in debt, is scrambling to raise funds. Although their stake in ByteDance is not large, every little bit helps, and they are practically begging to sell their shares to Youke.

Comparing ByteDance's valuation at the time of Carlyle's venture capital investment to its current stock price, Carlyle lost a significant amount on this investment, essentially giving Chen Guiliang free money for development.

But they were lucky; at least they were able to get some money back.

In most cases nowadays, investors can only hold onto the shares of the invested companies but cannot liquidate them.

They should also thank Chen Guiliang!
Of course, ByteDance's capital increase and share expansion plan must continue, and the original repurchase agreement must be fulfilled.

After a series of busy operations until early October, including ByteDance's capital increase and share expansion, the acquisition of shares held by Carlyle, and the first phase of its share repurchase plan, ByteDance's equity structure has become as follows:

Chen Guiliang 46.35%.

Guo Feng 4.04%.

The employee stock option pool is 9.60%.

Game Science 3.37%.

The remaining shares are held by other investors and in the secondary market.

This is just the first phase of the buyback program. There will be a second and third phase if ByteDance's stock price continues to fall.

Moreover, the next repurchase will not be considered as fulfilling the agreement; it will simply be Chen Guiliang's attempt to buy back the shares at a low price.

In a few months, buy back more shares at a lower price. Once the economic crisis ends and ByteDance's stock price recovers, issue more shares at a higher price to raise funds.

Chen Guiliang now directly or indirectly controls 63.36% of the voting rights of the aforementioned shares.

He won't have to go through so much trouble to do what he wants in the future!

(End of this chapter)