America's No. 1 financial conglomerate

Chapter 612 Shorting Wall Street

The Russian debt default has created a stark contrast in the US financial industry, with some experiencing extreme gains and others extreme losses.

On one hand, the futures and foreign exchange markets are in a state of utter despair.

On the other hand, major US stock indices are rising continuously, as if chased by dogs.

In the top-floor conference room of Lehman Brothers headquarters, Richard Fuld's gaze was fixed on the electronic screen in front of him.

"The Russian Ministry of Finance officially announced the suspension of sovereign debt repayments and the termination of intervention measures in the foreign exchange market, which caused an uproar in global capital markets."

His solemn voice echoed throughout the conference room: "This decision has now triggered severe turmoil in global financial markets, with signs of tightening liquidity appearing in major trading markets such as London, Tokyo, and Frankfurt."

On the electronic screen, real-time data is being refreshed at an astonishing rate.

"This is just a short-term adjustment, and the market will correct itself," said Mark Schneider, head of investment banking, in a relaxed tone. "Russia's debt is only equivalent to Venezuela's GDP and accounts for less than 0.3% of the global sovereign debt market, which is not enough to cause systemic risk."

"The rise in the three major U.S. stock indexes fully demonstrates that the fundamentals of the U.S. economy remain strong."

"That's right, the technology sector has performed particularly well," added the head of equity trading. "Microsoft's stock rose 3.2%, Intel's rose 5.7%, and Cisco surged 7.1%. Funds are flowing steadily into high-quality assets."

Production reflects market confidence.

This is one of the two major viewpoints that have emerged in the market after the Russian debt default.

"Bullshit," Richard Fuld muttered under his breath. He wasn't that optimistic. "You're only seeing the numbers on the surface, ignoring the undercurrents in the market."

He pointed to the electronic screen, which displayed a chart of emerging market currency trends: "The Brazilian real has fallen below 1.9 against the US dollar, the Mexican peso has depreciated by 3.2%, and the South Korean won, Thai baht, and South African rand have all fallen in tandem. This is not ordinary market volatility, but a panic-driven flight of global capital."

His gaze swept over the executives present, his tone growing increasingly stern. "Do you think Russia's debt default is an isolated incident?"

"Isn't that a bit too naive?"

"Major global financial institutions are closely connected through complex derivatives trading, cross-border lending, ETF investment and other means."

Who can guarantee that the financial institutions holding Russian debt haven't amplified risk through leverage? And who can be certain that these institutions don't have hidden, undisclosed risk exposures in their off-balance-sheet activities?

If it were only a Russian debt default, the impact could indeed be minimized.

But he knows very well what the global financial capital is like. Nobody knows how much money is involved, how many illegal transactions are hidden, or how many time bombs are buried.

If these risks explode, the chain reaction will immediately spread, affecting every corner of the global financial system, and no one can escape it.

To live a life of self-cultivation.

"But the US stock market is indeed rising, so how do you explain that?" Mark Schneider retorted, unconvinced. "Isn't the market performance enough to explain things?"

"Explain the problem?" Fuld sneered.

"Look at the performance of the energy sector. ExxonMobil's stock price plummeted by 6.13%, Chevron fell by 5.8%, and ConocoPhillips dropped by 7.2%. The entire energy sector averaged a 6.5% decline. Energy is the lifeblood of industry; is this collective plunge in energy stocks a sign of a strong economy?"

"Not to mention the bond market, the yield on 30-year U.S. Treasury bonds is falling."

"What does this mean?"

"This means that funds are rushing to so-called safe-haven assets like a flock of startled birds."

"There are no truly safe assets in the market right now."

Fuld pulled up data on US stock fund flows: "The rise in the S&P 500 was mainly driven by defensive sectors. 3M shares rose 3.5%, Coca-Cola rose 4.8%, and Johnson & Johnson rose 3.3%."

"The rise in these stocks is not due to the company's performance growth, but rather a safe-haven choice for global capital amid panic. It's like when a ship is sinking, people rush to squeeze onto lifeboats without considering whether the lifeboat has holes or can withstand such a heavy load."

"The rise of tech stocks against the trend is also a result of funds seeking safe haven. However, this inflow of funds based on panic is extremely fragile. Once market sentiment changes, it could trigger a large-scale capital flight at any time."

The meeting room was silent. The relaxation on many people's faces had disappeared, replaced by solemnity and unease.

Just then, Fuld's secretary, Humphries, rushed into the conference room, pale-faced, clutching the phone tightly in his hand.

"SS, emergency."

"A large number of institutional and high-net-worth individual clients have requested the redemption of all their investment funds, totaling more than $100 billion. They have stated that they would rather deposit their funds in banks and earn only 0.5% interest on demand deposits than remain in the capital markets."

As soon as Humphries finished speaking, a collective gasp filled the conference room.

A $100 billion redemption request would be a huge burden for any financial institution, let alone this being just the beginning.

Fuld, however, appeared unusually calm, as if he had expected this outcome.

Given the uncertainty of the global financial situation, some clients will likely withdraw their funds and wait and see.

At this point, smart people know that the competition isn't about who can make more money, but about who can survive.

But this is like a domino effect, which can have a chain reaction.

Customer redemptions meant that Lehman Brothers had to sell its stocks, bonds, and other assets to meet the redemption demands.

Large-scale asset sell-offs can lead to a drop in market prices, which in turn can trigger panic among customers, resulting in more redemption requests.

This is a vicious cycle; once it starts, it's very difficult to stop.

Moreover, this is not a problem faced by Lehman Brothers alone, but a crisis facing the entire Wall Street and even the entire US financial industry.

Now it's a matter of whether the east wind prevails over the west wind, with the pressure of safe-haven funds fleeing overwhelming the market.

It remains to be seen whether the West Wind is gaining the upper hand over the East Wind, and whether the Federal Reserve and major financial institutions can turn the tide and work together to stabilize the situation.

The need for interest rate cuts in the US economy is now inevitable.

Only by lowering interest rates and releasing a large amount of liquidity can we coordinate with safe-haven funds, support stock market stability, and attract retail and institutional funds back to the market.

Retail investors and various funds account for more than 60% of the total market capitalization of the US stock market. If these funds cannot be retained in the US market, the US stock market will inevitably collapse.

He thought of the phone call from the New York Federal Reserve earlier; barring any unforeseen circumstances, they would be discussing this matter tonight.

However, fate doesn't seem to be giving Wall Street much time.

The conference room door was suddenly flung open, and the public relations director rushed in, looking flustered. "Breaking news! MGM..."

CNBS has just reported that Sumitomo Bank of Japan, having suffered huge losses from its large holdings of Russian bonds, is urgently selling off its portfolio of US stocks, with the proceeds expected to exceed $110 billion.

"What?" Many people exclaimed in surprise.

Richard Fuld immediately looked at the real-time stock market quotes on the screen in front of him.

This news was like a bomb, instantly detonating the market.

The Dow Jones Industrial Average plummeted 200 points in the blink of an eye, turning from gains to losses. The S&P 500 and Nasdaq fared no better, with their charts also turning sharply downward.

"What's going on?" Richard Fuld suddenly shouted.

On the electronic screen, the trading volume data surged dramatically, with red sell orders flooding in like a tidal wave, instantly swallowing up the buying power.

The problem is, this is the financial sector.

The stock price, which was already falling, has now fallen even more, and the key issue is that this decline is abnormal.

"It's over, the panic selling has begun." Someone's face was pale and their voice trembled. "It must be the sell-off by Sumitomo Bank that triggered the chain reaction. The market is worried that other financial institutions holding Russian debt are also facing huge losses."

Fuld clenched his fists, his knuckles turning white, his eyes filled with anxiety.

That's one possibility, but he doesn't think that's the reason.

This wave of negative news had already begun more than an hour earlier when Russia announced its default on its debt.

Just as he was pondering the reason, Humphries' phone rang urgently again.

He hurriedly answered the phone, and after listening to a few words, his face turned ashen, and his body began to tremble uncontrollably.

"W--what's wrong?" Fold noticed his condition, and an ominous premonition welled up in his heart.

Humphries hung up the phone, his lips trembling, his voice choked with tears, "It's—it's news from the stock exchange—someone is massively dumping financial stocks—"

"Who?" Fuld placed his hands on the conference table, his eyes sharp as knives.

"Hmm—Ernst Asset Management—" Humphries swallowed hard and said with difficulty, "They are frantically selling off shares of major Wall Street banks while simultaneously buying a large number of put options on the S&P Financial Index and the Dow Jones U.S. Financial Index, amounting to at least $100 billion."

"Has Ernst gone mad?" Mark Schneider screamed, his face filled with disbelief. "They're committing suicide!"

The conference room erupted in uproar as executives discussed the matter, their faces filled with shock and anger.

Shorting Wall Street now is no longer just retaliation for Wall Street's previous shorting of Jump Games; it's a direct confrontation with Wall Street, the Federal Reserve, and the US economy.

He brought down the US economy, and Ernst will become an enemy of the entire United States.

Of course, his amount of money is not enough to bring down the US economy.

But wouldn't this please neither side?

The Federal Reserve will not stand idly by; it will inevitably intervene to rescue the market, inject liquidity, and stabilize market confidence.

At that time, major Wall Street giants will use the Federal Reserve's funds to buy up their own stocks, driving up stock prices. Ernst's put options will face huge losses and will eventually be forced to liquidate.

"Why would he do that?" Fuld muttered to himself, his eyes filled with doubt.

Humphries added, "All the put options that Ernst Asset Management bought were very short-term contracts."

"Ultra-short-term options?" Fuld's eyes lit up, his doubts deepening. "Are they trying to profit from the time difference and run away?"

Ultra-short-term options are options with an expiration date of less than one week.

If it's just a few days, taking advantage of the time difference and before Wall Street and the Federal Reserve can react, it's possible to drive down the stock price, complete the transaction, and exit with a profit.

But this is not Ernst's style of doing things.

"What could be the reason?"