America's No. 1 financial conglomerate

Chapter 620 Paulson's Toughness

Henry Paulson, who had just been actively expressing his willingness to consider investing, suddenly felt the focus of everyone's attention. His slightly hesitant expression vanished instantly, replaced by a gloomy look like the calm before a storm.

His voice, laced with suppressed anger, broke the brief silence: "This is not negotiation, but blatant coercion."

Sitting opposite him, Richard Fuld adopted a righteous stance: "Goldman Sachs is Goldman Sachs of America, a core pillar of the American financial system. For the overall economic interests of America, it sacrifices some of its own short-term interests. This is not only a responsibility, but also the duty that Goldman Sachs should have."

The two were bitter rivals. In the online payment market, Paulson contacted almost all the giants on Wall Street, but he couldn't reach Lehman Brothers.

Even a fool knows that this is why Goldman Sachs didn't include Lehman Brothers.

If Goldman Sachs compromises, Lehman Brothers will definitely be the first to applaud.

"Ha!" Paulson let out a mocking chuckle, his sharp gaze sweeping over Fuld, his tone filled with disdain. "Since Mr. Fuld speaks of sacrificing for the American economy in such a grand and noble way, why doesn't Lehman Brothers take the lead and set an example for the entire Wall Street?"

In response to Paulson's question, Richard immediately adopted a passionate demeanor and declared, "If the exchange terms proposed by Ernst Asset Management involve Lehman Brothers' business or strategic plans, Lehman Brothers is willing to make the necessary concessions and sacrifices."

That unwavering courage, willing to sacrifice everything, would earn a thumbs-up from anyone who didn't know the inside story.

After saying that, he looked away from Paulson's face and looked at Greenspan. "I just did some calculations. Long-Term Capital Management's holdings cover interest rate swaps, mortgage-backed securities, emerging market bonds, and there are at least 12 categories that I know of."

"These product categories almost all involve emerging markets. The risk exposure is quite concentrated."

He paused, then turned his gaze to Sandy Weir. "Solomon has recently liquidated a large portion of similar positions, which in itself has widened the market spreads of related assets considerably. Now, coupled with the sudden shock of the Russian sovereign debt default, if Long-Term Capital Management's massive positions are forcibly liquidated, the chain reaction that would trigger is self-evident, isn't it?"

If forced liquidation is chosen, the massive sell-off of assets will inevitably lead to a collapse in market liquidity, thereby triggering systemic risks in the entire US financial system and potentially crippling the overall US economy.

However, if no liquidation measures are taken, the interest rate spread between emerging market bonds and US Treasury bonds is widening at an alarming rate, and Long-Term Capital Management's losses will continue to increase until it goes bankrupt. Such an outcome would be an unbearable burden for the US economy.

Converging trading relies on the volatility of interest rate spreads between different assets to generate profits.

In a normal market environment, the United States, as one of the world's highest-rated economies, has relatively low interest rates on its government bonds due to their stable credit backing.

Emerging market countries like India, with their lower credit ratings and relatively weak economic stability, must offer higher yields to attract investors to buy government bonds.

In the long run, as long as the economies of both countries maintain steady development and there are no major unforeseen events, this interest rate differential will usually remain within a relatively stable range.

The yield on U.S. Treasury bonds acts as an anchor in the market, and the yields on bonds in other countries will revolve around this anchor, taking into account their own economic conditions, credit ratings, and other factors to form a reasonable interest rate spread.

However, financial markets are never short of variables. For example, sudden events such as the Federal Reserve raising interest rates, political turmoil or economic crises in emerging market countries can cause significant fluctuations in short-term interest rate spreads.

Long-Term Capital Management's core strategy is based on its assessment of such short-term fluctuations.

They firmly believe that no matter how much the short-term interest rate spread deviates from the normal range, in the long run, the market will automatically correct itself, and the interest rate spread will eventually return to a reasonable level.

Therefore, whenever the interest rate spread between the two countries' government bonds widens or narrows abnormally, Long-Term Capital Management will buy up the relevant assets in large quantities, waiting for the spread to converge to capture the profits.

But things are different now. The collapse of Russian debt has led to the abandonment of low-liquidity bonds in emerging markets, with investors turning to highly liquid bonds. As a result, interest rate spreads have not only failed to tighten but have continued to widen.

This leads to increasingly larger risk exposures for long-term capital, and when the funds run out and complete bankruptcy occurs, the entire US financial system will find it difficult to withstand the consequences.

In other words, closing out the position now is not an option, and dragging it out until the company goes bankrupt and is forced to close out the position is also not an option.

Therefore, there is only one way to deal with this big problem: keep it.

Inject funds, wait for emerging market economies to recover and interest rate spreads to return to normal levels, and then slowly close out positions.

The first step to solving this problem is to inject funds.

This is easy to handle; everyone can just share the burden.

The second issue is that the scope of this matter cannot be expanded further; that is, the media cannot report on it anymore.

If the entire market is forced to liquidate positions, these people will have to hold onto their funds, and no amount of money will be enough.

There is one last issue: the financial markets must first stabilize.

With the financial sector in a deep crash, people are struggling to save themselves, let alone care about long-term capital.

Philip added, "Morgan Stanley's trading system shows that at today's close, there were still more than $40 billion in sell orders that could not be filled across the entire financial sector."

"If this situation continues, we ourselves will face annihilation."

Everyone knows who he's talking about.

Greenspan glanced at him, then turned his gaze to Paulson, and said firmly, "Let's deal with Ernst Asset Management first. I'll call Ernst myself later."

"But," he looked around, his gaze finally settling on Paulson, "we also need to show some sincerity first."

"I object!" Kane slammed his fist on the table. "Bear Stearns won't contribute a single penny! If they're destined to go bankrupt, we should let the market absorb it, not use taxpayers' money to fill the hole!"

His voice echoed in the enclosed space, carrying a hint of barely perceptible panic.

It wasn't that he was unwilling to pay the money, but that Bear Stearns couldn't afford it.

Bear Stearns also suffered heavy losses in this Russian debt default, ranking third in terms of losses among all the institutions involved.

In terms of strength and scale, although Bearston is one of the top five investment banks on Wall Street, it is simply no match for Goldman Sachs, Lehman Brothers, Morgan Stanley, and Merrill Lynch; it is at the bottom of the list.

It wasn't that he didn't understand the importance of saving Long-Term Capital, but rather that he had to ensure Bearston's survival first; after all, if the sky fell, someone taller would hold it up.

"I object too!" Paulson raised his hand, ensuring that Bear Stearns was no longer fighting alone.

"Goldman Sachs has no problem with injecting capital; they can compromise. Goldman Sachs doesn't have that tradition."

Seeing that someone had already stood up to object, Fuld, who hadn't wanted to take the money in the first place, immediately chimed in, "Then Lehman Brothers won't participate either. Our capital adequacy ratio doesn't allow for such a risk."

The others quickly exchanged glances, all looking somewhat eager to join in.

Greenspan's face was grim; he knew very well that without the involvement of Bear Stearns, Lehman Brothers, and Goldman Sachs, the burden on other banks would be greatly increased.

It's not just the financial burden, but also the psychological hurdle.

Why should we pay for these three who get something for nothing?

Although there is no specific data yet on long-term capital holdings and losses, what is known is that it would take at least two billion US dollars to quell the situation.

"You need to understand, this isn't charity, it's self-preservation," Greenspan said, his tone becoming more forceful, even carrying a hint of threat.

"If the collapse of Long-Term Capital Management triggers systemic risk, no institution can remain unscathed. If you refuse to lend a helping hand today, you may find yourself ignored when the crisis spreads to you tomorrow."

At that moment, a Federal Reserve employee pushed open the door and handed over an urgent document. Greenspan's expression changed drastically after reading it.

"I just received news that Barclays has forcibly liquidated all positions related to long-term capital." He slammed the document on the table. "This has caused interest rate swap spreads to widen again by 15 basis points."

"Do you know what this means? If MGM continues to report, and more institutions force liquidation, your subprime mortgage business will definitely experience a run on it. Are you sure you can handle that?"

Kane and Richard's faces flushed red and then turned pale, and they remained silent.

Paulson continued to shake his head, showing no sign of yielding. He reiterated, "I've made it very clear: the word 'compromise' doesn't exist in Goldman Sachs' dictionary."