America's No. 1 financial conglomerate

Chapter 621 The Storm Is Brewing

At 10:17 p.m., as the bigwigs left the New York Federal Reserve headquarters, without exception, they all had somber expressions.

Paulson strode toward the black bulletproof car parked by the roadside, and the moment the door closed, he pulled out his phone without hesitation.

"The additional $7.5 million in liquidity must be transferred in full from the group's proprietary trading account to the dedicated Treasury bond trading account within one hour." He stared sharply at the street scene outside the window, which was already receding into the distance, and added firmly, "Immediately initiate a full liquidation process, clear all positions in emerging market sovereign bonds, corporate bonds, and related derivatives, regardless of profit or loss, and allocate all the recovered funds to 30-year U.S. Treasury bonds."

The person in charge of the transaction responded hesitantly on the other end of the phone, "But the US Treasury market is currently experiencing a massive influx of capital, and yields have already fallen to rock bottom."

As global financial markets grow increasingly fearful of a Russian debt default crisis, risk aversion is driving massive amounts of capital into the US Treasury market, considered a safe haven. This sharp imbalance between supply and demand has directly led to soaring Treasury prices, while yields have fallen rapidly in tandem.

This is known in financial markets as "flight to quality," meaning moving towards safe assets.

What is the current real-time yield on 30-year US Treasury bonds?

"4.15%, and the downward trend continues." The other party quickly reported the accurate data.

"Damn it," Paulson muttered under his breath, his fists unconsciously clenching on his knees.

He recalled that just this morning, the yield on 30-year U.S. Treasury bonds was stable at 5.45%, but in less than ten hours, the yield plummeted by more than 130 basis points, which is enough to demonstrate the speed at which market panic spread.

"Go for it, even if the return is only 4%, buy in."

After hanging up the phone, Paulson leaned back in his seat, closed his eyes, and quickly processed the current situation in his mind.

He knew that Barclays' forced liquidation of long-term capital-related bonds today would not be an isolated case in this crisis.

Even though public opinion has been suppressed, the exclusive report broadcast tonight by MGM's CNBS channel has undoubtedly allowed well-informed institutional investors to detect some of the precursors to this storm.

The good news is that Long-Term Capital Management has generated amazing returns on investment over the past few years, attracting countless institutions to follow suit.

Among these followers are radicals who are blinded by high returns and unwilling to easily give up their vested interests.

If one-third of the institutions choose to close their positions, the funding pressure faced by Long-Term Capital will increase exponentially.

He could almost foresee the fate of Long Time Capital executives and founder Merryweather; prison would be their final destination.

That's not the most crucial point. The problem is that the text message he just received gave him a feeling that a storm was brewing.

He hadn't expected that those people would actually target Ernst.

It goes without saying that the entire Wall Street will be affected by them.

No one can guarantee what will happen to the stock market after it opens tomorrow.

The Federal Reserve is unlikely to allow the US economy to collapse; that's for sure.

But when will the market be rescued, and what kind of pressure Wall Street will have to withstand, no one can say for sure.

At the same time, the high-rise conference room in Morgan Stanley's headquarters building was brightly lit.

Philip had just left the Federal Reserve Bank of New York and rushed back to the company, where all the core management members were sitting there waiting for him.

Risk Director Gordon placed his hands on the table, his fingertips trembling slightly. "Philip, we severely underestimated Long-Term Capital's associated risk exposure. After you sent me the message, I immediately organized a team to conduct a comprehensive review of the business cooperation between the two parties."

His words were somewhat powerless, as if carrying a sense of bewilderment about the future: "The results showed that the interest rate swap contract they signed with us contained a complex three-layer credit derivative structure, and the actual risk exposure was three times higher than the figure disclosed in the financial statements."

"Underestimate?" Philip jerked his head up, his icy gaze fixed on Gordon, his tone filled with sarcasm and anger. "This isn't underestimation, it's malfeasance!"

He angrily slammed his coffee cup onto the table, scalding coffee splashing everywhere, just like the mark this crisis left on Morgan Stanley.

The meeting room was deathly silent; no one dared to speak.

He took a deep breath and forced himself to calm down.

Now is not the time to assign blame. The urgent task is to control the spread of risk. The scapegoat who should bear the responsibility must play a role at the most critical moment.

"Immediately activate the highest level of emergency plan." Philip's voice gradually returned to calm. "First, notify all counterparties that have transactions with Long-Term Capital Management and require them to add sufficient margin before the market opens tomorrow, especially those hedge funds with leverage ratios exceeding 30 times. Increase the margin ratio to 30%, or directly initiate forced liquidation procedures."

"Second, suspend all new transactions related to Long-Term Capital Management and freeze all their account permissions at Morgan Stanley. If asked, say it's a technology upgrade."

"Third, the risk control department, in conjunction with the legal department, will conduct a thorough review of all related contracts to assess the risk of default and potential losses."

"Also, blacklist all of Meriwether's contact information. I don't want to hear that liar's voice again."

Inside Bear Stearns' headquarters building, a similarly dramatic crisis response was unfolding.

As soon as Kane stepped into the office, David, the head of the investment banking department, walked in, his face ashen, clutching a thick report tightly in his hand, his voice trembling uncontrollably.

"Boss, our money market fund is experiencing a massive wave of redemptions." David handed the report to Kane. "In the past three hours, we've received a total of $20 billion in redemption requests, and it's still increasing."

"Most investors saw the news reports about MGM and were worried about the risks associated with our connection with Long-Term Capital Management, so they chose to withdraw their funds in advance."

Bear Stearns' investments were most closely linked to Long-Term Capital Management, a fact that is no secret on Wall Street.

The two institutions have extensive cooperation in multiple derivatives and bond markets, with Long-Term Capital Management being a key counterparty to Bear Stearns.

If Long-Term Capital Management collapses, Bear Stearns will inevitably face huge losses and may even repeat its mistakes, falling into a liquidity crisis.

"Damn it!" Kane angrily kicked over the solid wood chair next to him.

"Immediately issue a formal statement."

"The statement should clearly state that Bear Stearns currently has sufficient liquidity reserves to fully meet all redemption demands; the risks associated with the company's connection to Long-Term Capital Management have been strictly controlled within a safe range, and there is no substantial risk of default; furthermore, the company's operations are normal, so investors need not worry excessively."

"Further notify all media partners that, from now on, it is prohibited to publish any negative reports related to Long-Term Capital Management, especially any related analyses involving Bear Stearns."

"But what about MGM?" David asked hesitantly. "They've already broadcast the report. If they continue to follow up, other media outlets will probably follow suit."

Right now, the main issue is with MGM. MGM isn't reporting on it anymore, so other media outlets can't get any news either.

"Greenspan has probably contacted Ernst by now, so we don't need to worry."

In the New York Federal Reserve's conference room, Greenspan did not leave; he was sitting in his seat reviewing the situation with Colesman.

"We missed a crucial issue," Greenspan said, pointing to the information about Long-Term Capital gathered on the table. "Their individual partners also leveraged the funds through private accounts."

Looking at the information above, he said, "Look, Meriwether alone has borrowed $2 million. If these debts are defaulted on, it will trigger another chain reaction."

Colesman sat up straight instantly and said, "No wonder MGM's CNBS reported that Long-Term Capital Management's risk exposure is nearly a trillion dollars, but we don't have that much information now. It turns out we've overlooked individual investors."

He then sighed, "It's time to strengthen regulation again. If there were strict limits on leverage, Long-Term Capital Management wouldn't have been able to create such a huge risk exposure."

"There's no time to worry about that now. All we can do is stabilize the market first," Greenspan said. As he finished speaking, his secretary came over with a telephone in his hand.

He took it, held it to his ear, and spoke first, "Ernst, you don't mind being called that, do you?"

"Of course, you are a senior, and a role model I greatly admire," Ernst's voice came through the receiver.

Greenspan smiled at the compliment, then got straight to the point: "Listen, we need your MGM to completely stop the negative reporting on Long-Term Capital Management."

There was a moment of silence on the phone, but he still replied, "Yes, I understand the Federal Reserve's position and am willing to contribute to maintaining market stability."

Greenspan nodded in satisfaction, then continued, "And Ernst Asset Management, I hope that's enough. I can assure you that these financial stocks won't surge before your short-term put options expire."

This time Ernst did not agree, but said with some grievance, "I am the victim, this is just a normal retaliation by the victim."

Greenspan understood his meaning: "Paulson told me that I can approve the inclusion of Ernst Asset Management in the primary dealer list and allow Ernst Asset Management to participate in this bailout."

On the other end of the phone, Ernst's eyes did indeed light up.

This not only means that Ernst Asset Management will gain the qualification to trade directly with the Federal Reserve, significantly enhancing the company's industry standing, but also that Ernst Asset Management will be able to obtain a large amount of low-cost Federal Reserve funds to buy at the bottom in emerging markets and futures markets.

Ernst was still not satisfied, and after a pause, he said, "What if I told you that Long-Term Capital Management's risk exposure is as high as $1.2 million?"

"What did you say?" Greenspan's voice suddenly rose, his eyes filled with shock.

"Moreover, I possess crucial evidence sufficient to kill Long-Term Capital Management," Ernst reiterated. "Enough for you to legitimately enter into the investigation and audit of Long-Term Capital Management."

Greenspan felt a chill run down his spine as he recalled MGM's report, which claimed that despite having substantial evidence, they remained vague and ambiguous.

What does this mean?

MGM wants to generate buzz about this and then deliver a fatal blow.

"I am very willing to cooperate with the Federal Reserve, and I hope to see the US economy prosper and become stronger."

"I can remove the reports, I can stop the Wall Street sell-off, and I can even help those Wall Street short sellers close their positions."

"But I also have a large group of employees to support, and behind them are hundreds of thousands of families. I have to consider their lives."

He spoke in grand and dignified terms, but Greenspan knew what he wanted.

"I'll help you with the mainland telecommunications license. As for other things, that's beyond my control."

Ernst smiled instantly; that was enough.