America's No. 1 financial conglomerate

Chapter 642 The crisis has just begun, and all the dirty stuff has already been distributed.

December 31, 1998, the last day of the year.

In a conference room at the Federal Reserve headquarters building in Lower Manhattan, New York.

Alan Greenspan sat at the head of the long oval conference table. This old man, who had been in charge of the Federal Reserve for more than a decade and was regarded as the economic czar by the market, held a Cuban cigar between his fingers, and his dark brown eyes appeared even more profound in the smoke.

He didn't rush to speak, but slowly turned his cigar, his gaze sweeping over each of the attendees.

William McDonough, President of the Federal Reserve Bank of New York; Lawrence Summers, Under Secretary of the Treasury; Henry Paulson, CEO of Goldman Sachs; Phillips of Morgan Stanley; David Komansky, CEO of Merrill Lynch; Richard Fuld, President of Lehman Brothers; and other leaders from 22 top Wall Street financial institutions were all present.

These usually powerful financial tycoons mostly looked gloomy at this moment, and rarely communicated with each other.

"We have confirmed that Long-Term Capital Management holds more than $1.2 trillion in various derivative contracts, with counterparties covering almost all Wall Street giants and international capital giants. If they default, these contracts will become a chain reaction of explosive events."

McDonough turned on the projector, and a complex diagram appeared on the screen: "This company is like a heart, connecting to every vein on Wall Street."

To understand just how complex Long-Term Capital Management's holdings are, just look at the customized derivative contracts on the screen, which resemble entwined vines. Major financial institutions are bound together in a dense, complex manner, making everyone feel apprehensive.

"Can you confirm the veracity of MGM's report?" someone asked.

"We've already contacted Ernst Asset Management and can confirm," McDonough nodded.

In fact, everyone knows that the Long-Term Capital Holdings chart released by MGM is real.

Ernst Asset Management, by using capital injection as bait, obtained Long-Term Capital's holdings details and risk models, which have now spread throughout Wall Street.

The reason I asked the question was because I had a sliver of hope in my heart.

"Gentlemen," Greenspan put down his cigar and began, "According to our calculations, even if Long-Term Capital Management does not go bankrupt, this exodus caused by the Long-Term Capital Management crisis will lead to a 10% drop in the global bond market, and the US stock market may even plummet by 15%."

"Today we must come up with a plan on how to save the American economy and prevent this disaster from happening."

"But shouldn't we stabilize long-term capital first?" At the end of the long table, someone frowned and couldn't help but question, "If this bomb really explodes, the consequences will probably be far more than just a 10% drop."

"Once the credit chain breaks, every institution here will be dragged down."

Long-Term Capital Management's counterparties are spread across the global financial system, and the chain reaction triggered by its defaults is unpredictable.

Like dominoes, once the first one falls, the chain reaction that follows will be unstoppable.

Greenspan, however, remained unusually calm. He slightly raised his hand, signaling the other party to calm down. "You don't need to worry about that. Someone is already willing to take on this hot potato of Long-Term Capital for us."

As soon as he finished speaking, the heavy solid wood door of the conference room slowly opened from the outside, and the two figures that appeared at the door instantly attracted everyone's attention.

Leading the way was Warren Buffett, the world-renowned stock market guru known for his value investing. He wore a simple gray suit, had a kind face, and sported his signature gentle smile.

Another is Ernst Garfield, a recent figure of great interest and currently the absolute focus of American public opinion.

"Sorry, there were some unexpected issues, we're late."

"It's good that you can come," Greenspan said with a smile.

Buffett's lateness was understood by everyone, and many people stood up to acknowledge him.

Paulson of Goldman Sachs and Komansky of Merrill Lynch both nodded and smiled at him, while Philip of Morgan Stanley even stood up and went over to give Buffett a warm hug.

Ernst, and even Sandy Weir, with whom he had a fairly good relationship, gave a snort, while most people treated him with cold indifference.

Richard Fuld of Lehman Brothers nodded and greeted them, but the only ones who were truly enthusiastic were the officials from the Federal Reserve.

"These two need no introduction, right?" After everyone was seated again, Greenspan said with a smile, "Ernst Asset Management and Berkshire Hathaway will acquire Long-Term Capital Management for $3 million, so we don't need to worry about that anymore. It's a relief for all of us."

Greenspan's words sounded grand and dignified, but the people present were all seasoned veterans of the financial markets who had been immersed in them for decades, so it would have been pointless to continue the conversation.

The meeting room was silent. On the surface, everyone was listening attentively, but in reality, many people were experiencing a storm of emotions.

The heads of several financial institutions sitting at the middle and back of the long table subconsciously exchanged glances, and then looked at the leaders of giants such as Goldman Sachs and Morgan Stanley sitting in the front row.

Seeing that most of the giants remained calm and silent, as if they had known this outcome all along.

In an instant, they all understood a cruel truth.

The US economy has just exploded, and the spoils-dividing ceremony is already over.

The $3 million acquisition of Long-Term Capital Management is not a bargain; it's practically the Federal Reserve handing a piece of meat to Buffett and Ernst.

Although Long-Term Capital Management (LTCM) has a high risk exposure, everyone knows that LTCM's core problem is not the deterioration of asset quality, but the liquidity crisis under high leverage.

By injecting two or three billion US dollars to stabilize the risks brought about by fluctuations, one can earn several billion US dollars when the interest rate spread converges.

There are also long-term capital holdings of dollar bonds, interest rate swaps, and other contracts, totaling a whopping $1400 billion.

These are all high-quality assets with high ratings, but they were wrongly sold off due to market panic.

Once the economy stabilizes, after liquidation or restructuring, they can reap billions of dollars in profits, making a fortune for the two of them.

Then there are the talents at Long-Term Capital Management, which can be considered as hidden assets and will definitely be absorbed into Ernst Asset Management in the future.

Wall Street avoided the chain of risks that could have resulted from long-term capital defaults without spending a single penny, thus protecting its own balance sheet.

They can also share in the future returns of long-term capital through their partnership with Berkshire Hathaway.

The huge sums of money they originally planned to use to bail out long-term capital will be freed up and instead invested in emerging market assets that have been severely devalued due to the crisis.

Those high-quality assets in Asia and Latin America that were panic-sold are now at historical lows, making it the perfect time to buy.

What about Ernst?

They not only gained returns on long-term capital, but also expanded their financial company.

This will not only allow Ernst Asset Management to access a top-notch arbitrage trading team and a mature risk control model, but also leverage Long-Term Capital's market influence to further expand Ernst Asset Management's voice in the interest rate derivatives and sovereign debt markets.

The only losers seem to be John Melleyweather, the founder of Long-Term Capital Management, and his core team, as well as the small and medium-sized investors who didn't have time to escape during the crisis.

The group exchanged glances simultaneously, their eyes conveying unspoken messages.

So, what are we all here for today?

Are they here to witness the final outcome of this distribution of profits, or to serve as the backdrop for this capital game?

"What should we do with Merryweather?" Paulson, sitting in the front, asked what seemed like a normal question, but everyone looked at Ernst.

"We are paying the price for their mistakes. The greed and aggression of the Merryweather team were the root cause of this crisis."

"They relied too much on mathematical models, ignored black swan events in extreme market conditions, and blindly increased leverage in pursuit of high returns. In the end, they not only pushed themselves into a desperate situation, but also almost dragged down the entire US financial system."

"Therefore, they must pay the price for their mistakes."

Ernst’s words were firm and decisive, without the slightest hesitation.

Everyone present felt a chill run down their spines, sensing the ruthlessness inherent in this young tycoon.

Everyone understands that paying the price is not just empty talk.

This means that Merryweather and his core team will not only lose control of the company, but their personal wealth accumulated over the years may also be wiped out due to debt, and they may even face huge civil damages.

If nothing unexpected happens, he will likely spend the rest of his life in jail for violating regulations.

"What about Long-Term Capital Management's ordinary employees?" Paulson seemed uninterested in stopping there, continuing with a smile, "Should they retain their 10% employee stock ownership plan?"

Ernst realized that this smiling tiger was never going to miss a single opportunity to cause him trouble.

The first question seems normal; everyone here knows the saying, "Raising a tiger can lead to disaster."

He wants more than just long-term capital assets and talent; he wants to completely destroy any chance of Merryweather's team making a comeback.

After all, he acquired Long-Term Capital at a robbery price, which was tantamount to taking everything from Merryweather and causing him to lose his wife and children.

What kind of grudge is this? How could they not kill him with a single blow?

If this hidden danger is left unresolved, there's no guarantee that Merryweather won't make a comeback in the future, seeking revenge.

For Ernst, eliminating the problem completely was the safest option.

Therefore, his behavior can be understood.

Paulson wanted this answer. In just a few days, Ernst's words would spread throughout Wall Street, which would be extremely damaging to his reputation and would definitely affect Ernst's past illustrious image.

Now the question has come up regarding employee stock ownership. According to Long-Term Capital Management's current internal structure, employees receive 10% of the equity as dividends.

This money is unlikely to be given to the employees; now is the best time to recoup it.

It wasn't that Ernst wanted to take it back, but rather that all the beneficiaries behind this matter unanimously agreed, including Goldman Sachs.

But now the other party is clearly making him take the blame and make him say it himself.

Ernst smiled, picked up the coffee on the table, and took a leisurely sip.

After setting down her coffee cup, she looked up at Paulson with a faint smile on her face and said lightly, "Mr. Paulson, the issues of employee placement and equity disposal at Long-Term Capital Management are internal matters of Ernst Asset Management, so you don't need to worry about them."

"Instead of wasting your time, you should be more concerned about Goldman Sachs' stock price. Otherwise, if you go bankrupt, I'll have to come to the Federal Reserve for a meeting and figure out how to save you."

Many people smiled upon hearing this, but Henry Paulson's face turned pale.

But he was a seasoned veteran, and he quickly regained his composure, his gentle smile returning to his face, though the chill in his eyes grew even stronger. "Thank you for your concern. We have our own solutions for Goldman Sachs' situation."

"However, Ernst Asset Management has taken over such a huge mess from Long-Term Capital Management. The challenges ahead are likely to be considerable. They should be careful not to make a mistake."

"Mr. Paulson, I recommend you watch more Tom and Jerry. After all, Goldman Sachs is also one of MGM's major shareholders. You should learn more about MGM," Ernst replied casually.

No one else understood what Ernst meant by suddenly saying this, until he added, "Look at Spike, he never meddles in other people's business or goes after mice."

Many people burst out laughing after they realized what had happened.

To cover it up, various coughing sounds filled the room.

Ernst's words were practically an insult, calling Paulson a dog.

Finally, it was Federal Reserve Chairman Alan Greenspan, sitting in the main seat, who took a sip of coffee, slammed the cup down on the table, and brought the topic back on track.