Golden Spoon Investor

Long-Term Capital Management (LTCM) was a hedge fund that Seok-won knew well.

[LTCM was founded by Jacob Wiseman, the former Chief of Bond Trading and Vice President at Salomon Brothers, along with traders he used to work with], Landon explained.

"Jacob Wiseman is a well-known figure on Wall Street," Seok-won remarked.

[Exactly. According to Andrew, Wiseman was so successful that he single-handedly accounted for most of Salomon Brothers' profits over the past few years]

"If he made it to the position of Vice President, it means he was recognized by the company. So why did he go independent?"

[It's a bit complicated. Wiseman left the company two years ago]

Leaning back in his chair, Seok-won sipped his Americano, listening closely.

[One of the traders under his management falsified reports and conducted trades during a government bond auction to boost profits. This caused an uproar, not just in the Treasury Department but also at the Federal Reserve. As a result, the CEO of Salomon Brothers was forced to step down]

"So Wiseman must have been held accountable as well," Seok-won concluded.

[Even though he was the top performer at Salomon Brothers, it was his team that made the mistake. It would have been hard for him to avoid responsibility]

"True. It would be odd if the CEO resigned but the person in charge of the team was left untouched."

Landon continued, agreeing with Seok-won.

[There are also rumors that the current CEO of Salomon Brothers found Wiseman to be a threat and pushed him out]

"Because he saw Wiseman as a competitor for his position?"

[Exactly. Not only was Wiseman generating the highest returns, but he was also highly regarded within the company. It must have made the CEO uncomfortable]

Office politics are the same everywhere, even in the U.S., so this scenario was entirely plausible.

[But after Wiseman left, the bond trading team's performance plummeted. So much so that the company reportedly asked him to return]

"But instead, he refused and decided to start his own hedge fund."

[There's no way Wiseman would have held any goodwill toward Salomon Brothers after being ousted. Besides, after Black Wednesday, there's been a hedge fund boom, so Wiseman probably saw an opportunity]

Indeed, so many hedge funds were being established in Greenwich, Connecticut—the cradle of hedge funds—that it was difficult to find office space.

"With the track record he had at Salomon Brothers, raising capital for his hedge fund would have been relatively easy."

[That's not all. Professors from prestigious universities like MIT and Harvard are partnering with him, which has generated a lot of interest]

"That's quite intriguing," Seok-won remarked, though he already knew this.

[Some of the scholars he brought on board are so renowned that they're even considered Nobel Prize candidates for their economic theories]

"If that's true, it's no wonder Wall Street is buzzing."

[It is, but many investors are hesitating due to the way Wiseman plans to manage the fund]

"What's his plan?"

Landon answered, sounding almost exasperated.

[He's asking for a management fee of 2% of the total assets every year, plus a 25% performance fee on the annual profits]

"That's higher than average," Seok-won commented.

Even the best hedge funds typically charged around 1% of assets and less than 20% of profits as fees.

[What's even more outrageous is that Wiseman's fund is a closed-end fund with a minimum lock-in period of three years. Once invested, you can't withdraw your money until the end of the term]

"He must be really confident."

For someone setting up a hedge fund for the first time after going independent, Wiseman's demands were audacious, and Seok-won couldn't help but admire his boldness.

'It's that level of audacity that eventually led to the colossal disaster that shook Wall Street.'

Just by looking at the fund's terms, you could tell how confident Wiseman was.

[He was the ace of Salomon Brothers, one of the top firms on Wall Street, so he must be sure he can make the fund a success]

"That, and he's probably hedging his bets to ensure survival in an unpredictable market."

[What do you mean by that?]

Adjusting his grip on the phone, Seok-won explained,

"With a closed-end fund, even if the market turns bad and the fund loses money, investors can't demand a redemption. This allows him to manage the fund stably until maturity."

Landon let out a low exclamation, realizing the implications.

[Ah! I see your point]

"While it's advantageous for the fund's management, the terms are unfavorable to investors, which makes them hesitant to commit."

Landon echoed Seok-won's sentiment.

[Exactly. Moreover, given that Wiseman was recently sanctioned by the SEC, it's understandable why investors would be cautious]

The SEC, or the Securities and Exchange Commission, was the regulatory body overseeing the U.S. stock market.

[That's likely why they're having a harder time raising funds than expected]

"So that's why they've approached us with an investment proposal."

[Yes]

While LTCM might be struggling now, Seok-won knew that once they started posting remarkable returns, investors would be lining up with bags of money, eager to get in.

'Of course, it won't last more than a few years before it ends in spectacular failure.'

Had he not known the outcome, even Seok-won would have been tempted to invest, given the incredible returns LTCM would generate in its early years.

'It was probably that greed that led them to their downfall.'

Had they not been so overconfident and reckless with leverage, even if the fund had failed, it wouldn't have spiraled into a crisis that shook Wall Street to its core.

[They sent an invitation to an investment briefing in New York. What should we do?]

Clearing his thoughts, Seok-won asked,

"How much are they asking for?"

[There's no upper limit, but the minimum investment is ten million dollars]

"So they're cutting out the small fry and targeting only the big players."

[That's why they're struggling to raise funds]

"No matter how reputable Wiseman is, it's hard to convince someone to part with that much money without any track record."

[Exactly]

After a moment of consideration, Seok-won asked,

"When's the briefing?"

[In a week]

"I'll attend and listen to what they have to say before deciding."

[Are you going to go yourself?]

"Yes."

Seok-won wanted to meet the man who would become infamous for shaking up Wall Street.

[Understood. I'll make the arrangements]

"See you in a week."

After ending the call, Seok-won recalled an incident he had experienced with Manager Oh in the past.

----

It was during the chaos of the subprime mortgage crisis that had rocked the securities industry in Yeouido. Despite the turmoil, a weary-looking Manager Oh had walked into the cobbler's shop, where he was a regular, and sat down in an empty chair with a familiar demeanor.

Surprised but happy to see him after a few days, Seok-won greeted him warmly.

"You're here?"

As Manager Oh placed his three-stripe slippers by his feet and switched out of his shoes, he glanced around the small, empty shop.

"Why is it so quiet?"

"You're my first customer today, sir."

Seok-won replied casually as he picked up Oh's shoes and placed them on the repair stand. Glancing at his watch, Manager Oh clicked his tongue.

"It's past noon, and I'm your first customer? How do you expect to make a living?"

Though his tone was gruff, Seok-won knew that Manager Oh's words were laced with concern. Skillfully brushing off the dust from the shoes with a shoe brush, Seok-won answered,

"You know how things are in the neighborhood these days."

"Yeah, with the index completely tanking, who has the luxury to get their shoes polished?"

As Manager Oh muttered under his breath, Seok-won sneaked a glance at his face.

"Are you doing okay, sir?"

Given the subprime mortgage crisis and the plummeting stock market, everyone was feeling the strain. Manager Oh, who had habitually pulled out a cigarette, shrugged and replied with a touch of bravado.

"I sensed something was off and closed all my positions early, so I dodged the bullet."

"That's a relief."

It was just like the shrewd Manager Oh to be one step ahead.

As he sincerely expressed his relief, Manager Oh chuckled, lighting his cigarette with a flick of his lighter.

"Humans are creatures of forgetfulness, don't you think?"

"What do you mean?"

"Have you heard of LTCM?"

"No."

Manager Oh exhaled a cloud of smoke and began to explain.

"Long-Term Capital Management was a hedge fund on Wall Street that specialized in bond trading."

Recognizing that Manager Oh was about to share one of his famous stories, Seok-won continued polishing the shoes while keeping his ears open.

"It was in 1998, exactly ten years ago. A situation similar to today's unfolded back then. When LTCM faced massive losses and was on the brink of collapse, the heads of major Wall Street investment banks, including JP Morgan, Goldman Sachs, and Salomon Brothers, gathered at the Federal Reserve for an emergency meeting."

"All those big shots got together just because one hedge fund was going under?"

"Normally, that wouldn't happen. But the scale of the collapse was massive."

"How much money are we talking about?"

With a mischievous grin, Manager Oh spread his fingers wide, showing all ten digits.

"One hundred billion dollars."

Upon hearing the figure, Seok-won froze, his mouth agape, stopping mid-polish.

"Did you just say one hundred billion dollars?"

"Yeah. Isn't that enough to make even the heaviest hitters scramble?"

"Holy… Yes, it is."

Even now, that amount would be astronomical, but back then, it was enough to shake all of Wall Street. Eyes wide in disbelief, Seok-won asked,

"But how could one hedge fund manage such a huge amount of money?"

With a bitter expression, Manager Oh took a deep drag from his cigarette.

"If it was all their own capital, it wouldn't have caused such an uproar."

"Don't tell me they used leverage?"

"Exactly. They kept buying bonds with the ones they had as collateral, repeating the process over and over to build up leverage."

"But surely the banks weren't foolish enough to let them do that without any limits?"

"When greed blinds you, things like that happen. The subprime mortgage crisis that just hit us is no different."

Now Seok-won understood why Manager Oh had started with the remark about human forgetfulness.

"Back then, if LTCM had been allowed to fail and the banks that invested in it started dumping their bonds, the market would have collapsed, triggering a global depression. So the Fed had to step in and stop it."

"It's eerily similar to what's happening now."

"Even though the market was in shambles and everyone was panicking, do you know what happened afterward?"

"What happened?"

Curiosity piqued, Seok-won leaned in.

"Despite the grim outlook, the market soon recovered, and before long, the dot-com bubble started inflating, sending the stock market soaring."

"Now that you mention it, the timing overlaps with the dot-com bubble."

Manager Oh grinned at Seok-won's wide-eyed realization.

"Remember, opportunities always come with crises."

----

As the image of Manager Oh's face faded from his mind, Seok-won returned to the present.

Unbeknownst to him, a meaningful smile, much like Manager Oh's, played at the corners of Seok-won's lips.

"Yes, opportunities always come with crises."

TL/n - 

For a better understanding of the Subprime Mortgage Crisis, you can read the auxiliary chapter of An Investor Who Sees Future novel.

***

Innovative Models: LTCM employed complex mathematical models to identify arbitrage opportunities in the bond and derivatives markets.

High Leverage: The fund used significant leverage, borrowing large amounts relative to its capital base to amplify returns on its investments.

*

Success

Initial Returns: In its first few years, LTCM achieved extraordinary returns, gaining over 40% in its first year and around 20% in its subsequent years.

Reputation: The fund attracted substantial capital from wealthy investors and institutions, bolstering its reputation as a leading hedge fund.

*

Crisis

1998 Russian Default: The fund faced significant challenges following Russia's default on its government bonds in August 1998. This event caused a market crisis, leading to widespread sell-offs.

Liquidity Issues: LTCM's highly leveraged positions began to unravel as the market moved against them, resulting in massive losses.

*

Rescue

Bailout: In September 1998, a consortium of major banks and financial institutions, led by the Federal Reserve, intervened to prevent LTCM's collapse, which was seen as a potential threat to the entire financial system.

(Bailout means Govt. gives money to the company to control the overall situation. By the way, the bailout money is coming from your pocket i.e. taxpayer money)