Chapter 283: Goldman Sachs’ Risk Management Crisis

Will Emerson, the Executive Vice President of Risk Management at Goldman Sachs, stared intently at the contract signed last Friday.

The red-haired man standing beside him, who had been patiently waiting for the VP to speak, finally broke the silence.

“Should we contact Miracle Investments first?”

“Hold on a second. We need to figure out the exact total amount first.”

VP Will Emerson propped his chin on his hand, his eyes still glued to the contract.

His phone rang, and he answered as if he’d been expecting the call.

“Give it to me.”

Pen in hand, he rapidly jotted down the numbers relayed through his cell phone.

“Are you sure about this?”

He tapped the paper with the list of numbers with his pen, confirming it once more before ending the call. Will Emerson’s face had already paled.

He turned to the red-haired man beside him.

“Everyone to the conference room. Right now!”

The red-haired man shot out of the room the instant the VP finished speaking.

Will Emerson checked the numbers again.

The number 70 billion, circled in pen, felt like a crushing weight on his chest.

As Emerson entered the conference room, a dozen pairs of eyes turned towards him.

Without preamble, Emerson fired a question at one of the men.

“Michael, what’s the current default status?”

“Excuse me?”

“Subprime mortgages! What’s the repayment status after the variable rates kicked in!”

“It should be around 3%.”

VP Emerson frowned at Michael’s uncertain reply.

“Around? Should be? Don’t guess, give me the exact number. You have five minutes.”

Michael began furiously typing on his laptop.

“Last Friday, Miracle bet $2.8 billion that mortgage-backed securities would become worthless. Their plan was $3.5 billion, but they lowered the bet in a few places. Considering the contract terms aren’t any different from ours, if they win… they take almost $56 billion.”

Silence fell over the conference room; no one could close their mouths.

Miracle’s activities had been the talk of the town during weekend drinks, so everyone knew about it, but this was the first time they’d heard the total betting amount.

An expletive starting with ‘F’ almost slipped out, but everyone barely managed to hold it back due to the VP’s stern expression.

They couldn’t help but wonder if the VP was this angry because Miracle had poured in $2.8 billion while Goldman Sachs had only managed to secure a paltry $48 million.

“There have been others who thought like Miracle before. But the amounts weren’t significant, right?”

Some nodded at the VP’s words, while others seemed unfamiliar and just observed the situation.

“Miracle prioritizes stability above all else. They are extremely averse to losing principal, so isn’t it strange that they poured in $2.8 billion?”

“Emerson, we make $500 billion a year from mortgage-backed securities. $2.8 billion is a significant sum, but it’s relatively small change.”

Someone raised an objection, and another person, gaining courage, offered an optimistic view.

“At the Las Vegas Securitization Forum, they announced that the loss rate for subprime mortgage-related securities is only 5%.”

“Who did?”

“Bear Stearns’ President Bruce Miller in his keynote address….”

VP Emerson cut him off.

“What’s the basis for that 5%? Did you verify it?”

As the person who presented the optimistic view hesitated, unable to answer, Michael, who was investigating the default status, saved him.

But the numbers he found made everyone in the conference room feel like criminals.

“Emerson, starting this year….”

“How much? Just give me the number!”

“8%…….”

Michael was the first to truly feel the sense of crisis. He had seen the graph of non-performing loans rise sharply.

“At this rate, it will be over 9% next month. The 10% mark is right around the corner.”

Michael also revealed a crucial fact that couldn’t be concealed.

“Variable rates are already more than four times the fixed rates. If this continues, all the mortgaged homes will be seized….”

VP Will Emerson’s eyebrows twitched.

The numbers presented at the Securitization Forum’s keynote address could be considered baseless. The forum is just a gathering of street vendors hawking their wares to sell more derivatives.

Rosy futures, safe investments, a money feast…. Aren’t they just a bunch of guys spouting empty platitudes?

Will Emerson had climbed the ranks to VP solely through risk management because of his meticulous insight. He had the kind of careful and thorough personality that could find the tiniest crack in a massive dam and prevent it from collapsing.

But today, he felt like he would have to write a letter of resignation.

It wasn’t a small crack; a significant fissure had already formed, and water was gushing out. The dam felt like it was about to collapse.

It was too late to blame himself for doing nothing while blinded by the extravagant money feast.

He knew exactly what he had to do from now on.

He hadn’t been able to detect the risk beforehand, but he had to minimize the risk that was already upon them.

It was time to pack his bags and flee before the dam collapsed.

VP Will Emerson picked up the phone on the conference room table.

“Send up five security guards immediately.”

The people gathered in the conference room were bewildered by his sudden action but didn’t speak. The VP’s stern expression was ominous.

When the security guards arrived, Emerson spoke.

“While I’m gone, no one leaves this room. Put your cell phones on the table.”

As they just exchanged glances, he yelled.

“Quickly! Or you’re fired on the spot!”

People hastily took out their cell phones and placed them on the table.

The VP addressed the guards.

“Turn off all the cell phones and make sure they can’t be used. Same with the laptops. And unplug the phone lines. Don’t let these people leave the conference room. It’ll only be a minute.”

As the guards began collecting the cell phones, Will Emerson dashed towards the Goldman Sachs chairman’s office.

The conference room had transformed into an isolated island, completely cut off from the outside world.

* * *

“John, it’s an emergency.”

“Sit down first. Have a glass of water.”

John Rogers, the Chairman of Goldman Sachs, calmed the urgently arriving VP Will Emerson.

“This is about Miracle, isn’t it?”

“Yes, but the real problem is somewhere else….”

Chairman Rogers raised his hand, pointing to the TV, cutting Emerson off.

“Watch this first.”

The TV was showing a CNN breaking news report.

『New Century Financial, the second-largest subprime lender, filed for bankruptcy protection on the 2nd at the court in Wilmington, Delaware. The company also announced restructuring plans, including laying off 54% of its employees, or 3,200 people, and selling its affiliates.

The company has been struggling due to rising interest rates on subprime mortgages and falling housing prices. It provided nearly $60 billion in loans last year but has suspended lending since last month.

Furthermore, it was explained that CIT Group and Greenwich Capital had agreed to provide $150 million in funding, but the stock price has already fallen by 97% compared to last year.』

Will Emerson squeezed his eyes shut.

Damn it!

It had already exploded.

“Do you know who New Century’s biggest creditor is?”

Emerson simply nodded at the chairman’s question. It was Goldman Sachs. And all the top 10 financial institutions in the world were also major creditors.

“Miracle made a $1 billion swap deal?”

“Yes, sir.”

“Is Rachel that woman blessed with incredible intuition? Or is she a meticulous mathematician? They pulled out just a day before.”

“John, Miracle’s $1 billion is nothing. We need to liquidate our CDOs (Collateralized Debt Obligations) quickly.”

Unlike the anxious VP, Chairman Rogers remained calm.

“If we start liquidating CDOs? Do you think others will just sit back and watch? All mortgage-based securities will flood the market in an instant, you know?”

“But we can’t just stand by and watch!”

“Will.”

“Yes?”

“Do you know why Miracle only contracted for $1 billion?”

Emerson was frustrated by the chairman’s laid-back demeanor and irrelevant question.

“$1 billion isn’t a small amount.”

“No, but the total amount is $60 billion, right?”

“$56 billion.”

“Even $56 billion is less than 2%. Miracle accurately assessed our ability to pay. We’ve already entered into quite a few credit default swap contracts.”

“H-How much exactly…?”

“$25 billion.”

VP Emerson realized that the chairman’s composure stemmed from resignation, and that there was nothing he, the VP of Risk Management, could do.

Rogers laughed heartily as he looked at the dumbfounded Emerson.

“Don’t worry too much. $10 billion of that is ours.”

“Sir? What do you mean…?”

“Just in case, we also bought insurance. You know Gary Trust, the company that spun off from us?”

“Yes. Isn’t it an independent investment team? Composed of exceptional talent….”

“Right, that company and our Goldman Sachs entered into a credit default swap. Our subsidiary made $10 billion, so it’ll ease the burden a bit.”

He was speechless, beyond disbelief.

Headquarters was touting that the housing market would thrive, while a subsidiary was betting that it would collapse.

What would Goldman Sachs’ shareholders think if they knew? It was clearly a betrayal of corporate ethics.

If Emerson had known that $10 million of that $10 billion was personally contracted by Chairman John Rogers, he would have been devastated.

John Rogers patted the sofa and stood up.

“It’s late, but we should strike first, right? Issue instructions to dispose of the worthless scraps of paper as quickly as possible. You make sure this fact doesn’t spread too far.”

He could manage things within the company, but the outside was already a lost cause.

Other companies weren’t stupid. They would analyze why Miracle had swept through and reach the same conclusion as him.

The bomb had already gone off on Wall Street.

The only thing he could do was to delay individual investors from finding out for as long as possible.

As always, wouldn’t the biggest victims be the average investors?

* * *

“Goldman Sachs is the fastest. They’re struggling to digest the volume as they dump everything?”

Rachel, who had been plagued by calls all day, took a break for a moment to drink some coffee.

“Tomorrow, everyone will be throwing them away. And there will be some idiots who try to buy them.”

“Now it’s just a matter of time until everyone realizes that it’s impossible to recover loans secured by US mortgages.”

A dark shadow lingered on Rachel’s face.

“Howard. From what I understand, mortgage-backed securities are just like pistols.”

“You’re talking about derivatives.”

“Yeah. Do you know the size of the synthetic derivatives that bundle CDOs, like complex CDOs, squared CDOs, and double CDOs?”

“Yes. It’s more than 20 times.”

Rachel shook her head at my calm reply.

“Why? Should I be making a fuss because I can hear the sound of the global economy collapsing?”

“No. The global economy is collapsing, and you’ve made a huge amount of money. But you don’t seem to feel much of anything.”

“Joy and sorrow have collided and canceled each other out. I made $56 billion, but hundreds of thousands of innocent American citizens will be wandering the streets because of America’s evaporated wealth. I can’t be happy about it forever.”

In truth, making money isn’t that joyful. The truly joyous thing is that this economic crisis is the bullet that will take down Vice-chairman Jin Dong-gi.