America's No. 1 financial conglomerate

Chapter 638 The Chips Are in Hand

Upon returning from the hospital, Jane Fraser, at the headquarters of Ernst Asset Management, immediately called Merryweather of Long-Term Capital Management.

Meanwhile, in the trading room at Long-Term Capital Management's headquarters, the green lights of more than thirty terminals flickered in John Merryweather's bloodshot eyes. The father of bond arbitrage had two inches of cigar ash between his fingers, yet he was completely unaware of it.

He even forgot to put down the phone after hanging up.

"The spread on Russian government bond CDS has broken through 1500 basis points." The trading manager's voice, sharp as sandpaper, dragged Merryweather back to reality. "Deutsche Bank just sent a margin call notice: $4 million, due by noon tomorrow."

Merryweather abruptly raised his hand and stubbed out his cigar in the crystal ashtray, his knuckles turning pale from the force.

He leaned over and stared at the scrolling list of holdings on the main screen. Each set of numbers was like a sharp dagger, piercing the myth of the mathematical model that Long-Term Capital Management was so proud of.

120亿美元义大利国债多头头寸、90亿美元德国国债空头头寸、60亿美元皇家荷兰与壳牌石油的配对交易仓位，以及名义价值超过 3000亿美元的利率掉期合约、200亿美元抵押支持证券套利组合……

These assets, once hailed as risk-free arbitrage opportunities by Long-Term Capital Management's mathematical models, have now become swords hanging over his head.

Three days ago, Russia defaulted on its debt, and MGM Resorts International suffered a major long-term capital crisis.

Although all the news disappeared the next day, as if the previous day's reports were an illusion that never happened, the seeds of panic had already been sown.

The sell-off by some institutional investors caused the prices of Long-Term Capital Management's holdings to continue to fall, and the multiplier effect of high leverage amplified the losses exponentially.

Merryweather knew better than anyone that if a large influx of funds couldn't be secured in the short term, Long-Term Capital's financial chain would break completely within a week, and in severe cases, it might not even last three days.

Deutsche Bank's $4 million margin requirement was just the first straw that broke the camel's back.

Over the past 72 hours, Merryweather's private and office direct lines have been ringing almost non-stop.

He dialed the number of Richard, the CEO of Lehman Brothers, but instead received a message relayed by his secretary.

He contacted Jon Corzine, co-chairman of Goldman Sachs, who kept delaying, citing board meetings as the reason.

Instead of finding funding, more institutions are demanding additional margin from Long-Term Capital Management.

Philip of Morgan Stanley, for example, stopped answering his calls altogether.

Just when he was at his wit's end, Jane Fraser from Ernst Asset Management called him.

"We are willing to invest $15 billion in exchange for a 70% stake in Long-Term Capital Management. The condition is that we provide results within one hour; I need to see Long-Term Capital's complete portfolio details and risk management model."

Jane Fraser's words still echoed in his ears, but Merryweather's heart suddenly clenched.

He knew this was a short-sighted approach, possibly saving long-term capital, but not his long-term capital.

But everyone rejected his pleas for help, and now Ernst Asset Management is the only lifeline he can grasp.

Unlike the brightly lit Wall Street in Manhattan, the headquarters of Ernst Asset Management is surrounded by darkness, like a solitary lighthouse in a dark ocean.

The good thing is that it's close to Manhattan, so the area is quite safe.

Jane Fraser's office is where executives from Ernst Asset Management gather.

"Jane, with us pressing this hard, will Merryweather really agree?" Rob Mario couldn't help but ask, his tone tinged with uncertainty.

This is a crucial part of Ernst's strategy. If Long-Term Capital Management does not agree to Ernst Asset Management's acquisition, then the commotion they've made will be greatly diminished.

Jane Fraser stood by the window, her gaze fixed on the dark night sky outside, and it was unclear what she was looking at.

Upon hearing Rob Mario's question, she turned around and said, "I now think that this is the best time to get involved with Long-Term Capital Management."

"Although the MGM report has been removed, Long-Term Capital Management's core operating strategy, convergent arbitrage based on mean reversion theory, has never been a secret on Wall Street."

Jane Fraser walked to the rest area and sat down, crossing her right leg over her left. "They were betting that the price spreads between different assets would converge to the historical average, but now, the global risk aversion triggered by the Russian debt default has completely dashed that expectation. The price spreads have not only failed to narrow, but have continued to widen."

"Long-Term Capital Management has already been losing hundreds of millions of dollars for three days. Because of its massive holdings, which are mostly illiquid over-the-counter derivative contracts, it is simply impossible to close out its positions and stop the losses in the short term."

"A trillion dollars of risk exposure! If Long-Term Capital goes bankrupt, America will immediately enter the Great Depression. He, Merryweather, will be a sinner forever nailed to the pillar of shame in American history."

"However, he also knew that the Federal Reserve would not allow long-term capital to collapse and would definitely provide assistance."

"But for Merryweather, at best he'll be burdened with huge debts, at worst he'll be enjoying free room and board."

"We are now his desperate olive branch. Although the acquisition price we offered is not high, at least it gave him hope of survival. He has no choice."

Time ticked by in the tense wait, and with each tick of the European-style wall clock, it felt as if the heart of everyone present was being struck.

The executives were either whispering to each other or deep in thought, while Jane Fraser walked back to the window, gazing at the dark night sky as if she were watching an impending financial storm.

As the clock struck the last minute of the appointed time, the red telephone on the desk suddenly rang, its sharp ring breaking the silence of the office.

All eyes immediately focused on the phone, and Rob Mario let out a long sigh of relief, a relieved smile spreading across his face.

Jane Fraser's lips curled into a smile that was a mixture of smugness and greed.

That's the unique excitement and satisfaction a hunter feels when capturing his prey.

As soon as the call was answered, Merryweather's voice came through the receiver: "When will the funds from Ernst Asset Management arrive?"

"The funds will be available immediately after the equity acquisition agreement is signed," Jane Fraser replied without hesitation.

"No!" Merryweather's voice suddenly rose. "I demand that the entire $15 billion be deposited into Long-Term Capital Management's designated account within three days."

"Otherwise, the deal is cancelled!"

Waiting for the contract to be signed?

It will take at least a week to complete all the legal procedures.

Whether long-term capital still existed at that time was also a question.

The rapid breathing coming through the receiver made Jane Fraser clearly sense Merryweather's despair.

She paused deliberately for a few seconds, pretending to weigh the pros and cons, her tone hesitant, "Mr. Merryweather, this is not in line with industry practice. Investing in advance would place enormous risks on Ernst Asset Management..."

"Since you dared to make the acquisition offer, you should have the courage to take the risks!" Merryweather interrupted her. "If Long-Term Capital Management is saved, you know very well how much you can gain."

Jane Fraser feigned hesitation for a moment, then reluctantly agreed, "Okay, I agree to your request. The $15 billion will be in your account within three days, but what about what I want?"

"It's already been sent over." Merryweather's voice visibly relaxed.

After hanging up the phone, Jane Fraser told everyone what had happened.

Rob Mario was somewhat surprised. "It seems that Long-Term Capital Management has reached a point where they're on edge, and they don't even dare to use fax or email anymore."

"This just shows that their situation is more serious than we imagined." Jane Fraser sneered. "They're afraid of their holdings data being leaked, triggering a panic sell-off by more institutions. If that happens, even if we inject capital, it won't be enough to save them."

"But isn't this exactly what we wanted?"

Long-Term Capital Management is headquartered in Greenwich, Connecticut, a core cluster of the U.S. hedge fund industry, home to top institutions such as Bridgewater and Renaissance Technologies, and just a 45-minute drive from Manhattan, New York.

Perhaps there were no cars available at night, or perhaps Melliweather had already made the decision.

In any case, within half an hour, Long-Term Capital Management's holdings report was on the coffee table in Jane Fraser's office. The document, more than 300 pages long, was placed in a brown paper bag marked Top Secret.

"Just as we guessed." O'Shea Ricardo flipped to page 17, his finger trading over the sovereign debt arbitrage portfolio section. "Italian government bonds long 120 billion, German government bonds short 90 billion, the spread is now 320 basis points... They're still stubbornly holding onto the convergence expectation."

"Their short positions in S&P 500 volatility are also fatal; implied volatility has now risen to 28%."

"They were able to close out many of their positions and cut their losses in time. But they just believed they could weather the storm and that the market would improve, so they held on tightly and refused to let go."

"They don't believe the market will improve; they just have no other choice," Rob Mario said. "It's a lose-lose situation either way. Wall Street won't give losers a second chance. Hold on to the end, and maybe there's still a glimmer of hope."

As they read through the entire document, the group grew increasingly alarmed. Even those who knew that Long-Term Capital Management had significant risk exposure were still taken aback and exclaimed in surprise.

Jane Fraser glanced at her watch. "Make a copy. Have someone deliver this document to MGM personally. We need to come up with a strategy quickly."

Her face hardened, revealing a rare ruthlessness. "Tomorrow, I will send Wall Street to the brink of hell."