I'm back in 1990

Chapter 866: A Comprehensive Solution

We wholeheartedly recommend this book to you: "1990, I'm Back". You can read it here.

Soon it was August 2007, and in that month, the problems that had accumulated in the US financial market for many years finally erupted like a volcano.

This caused a violent shock to the global financial system, and most people were not yet fully aware that this would be the most serious financial crisis since the Great Depression.

Even though Huang Xiaochuan had warned about this months earlier in an interview with CNBC, most people still chose to bury their heads in the sand like ostriches.

It's as if disaster won't strike as long as they don't approve.

On August 3, BNP Paribas announced that it was suspending redemptions for three of its investment funds due to the complete loss of liquidity in the US securities market. These three funds were investing in US subprime mortgage derivatives, BS and CDO.

This was quite a shock. Many investment institutions and investors discovered that the market, which was once considered the safest and most liquid, had suddenly been frozen. No one knew how much these assets were worth (but they had certainly shrunk significantly), so naturally no one dared to take them on.

Subprime mortgage derivatives seemed to be under a spell, plummeting in value. Investors in the market were filled with anxiety, watching helplessly as the value of their financial products shrank dramatically. The key issue was that they couldn't sell them because no one was willing to take them on.

The BNP Paribas incident is not an isolated case.

Capital is inherently profit-driven. In a global environment of prolonged low interest rates, pension funds, insurance companies, sovereign wealth funds, and even banks in various countries are seeking high-yield investment assets.

Even more egregiously, these banks and funds used extremely high leverage, borrowing 30, 40, or even 50 times the amount to purchase these subprime mortgage-backed securities, all in an attempt to maximize returns.

When the market is rising, this method is indeed like a money printing machine, bringing huge profits to investment banks and funds.

However, when the market is falling, this method becomes a deadly meat grinder, and huge amounts of money vanish in an instant.

Even more tragically, BNP Paribas signed a series of CDS contracts with Dark Night Capital, controlled by Zhang Sui, for a mere tens of millions of dollars in premiums.

The bankruptcy of New Century forced BNP Paribas to pay $1528 billion to Dark Night Capital, while the premium for the CDS contract signed at the time was only $6000 million. In other words, this single contract caused BNP Paribas to lose $1468 billion.

What's even more frightening is that there isn't just one such contract. This means that if an investment bank or financial institution goes bankrupt or defaults, BNP Paribas will still have to pay compensation according to the contract, which could be disastrous.

In fact, after assessment, BNP Paribas discovered that it had incurred huge losses on its books. Similar to BNP Paribas, several other European banks, such as Barclays in the UK and Deutsche Bank in Germany, were also in similar situations.

Barclays is now kicking itself, but there's no going back. The vice president of the investment department and other relevant personnel who made the decision to sign the CDS contract with Dark Night Capital were ruthlessly laid off by Barclays without any compensation, on the grounds that their actions caused huge losses to the bank.

The parties involved were devastated, but they had no choice but to accept the decision. They had received substantial commissions from these contracts, and Barclays was being merciful by not making them return their money.

In order to minimize losses as much as possible, Stuart, president of Barclays' investment division, traveled to the United States on the full authority of the board of directors to meet with Zhang Sui and negotiate a comprehensive solution. This solution would involve paying a lump sum to terminate all CDS contracts, as they had realized the situation was dire. When the crisis truly arrived, the compensation payments based on those contracts would amount to at least tens of billions of dollars, which would be the largest loss in Barclays' century-long history.

The two sides met at a estate on Long Island, a location chosen to avoid media attention.

This Long Island estate belongs to a foundation under Huang Xiaochuan's name. The estate is tranquil and luxurious, a stark contrast to the hustle and bustle of Manhattan.

Stuart, with the demeanor of an English gentleman, bowed slightly to greet Zhang Sui upon seeing her.

"Dear Madam, thank you for agreeing to meet with me. I am confident that we will reach a satisfactory agreement."

"I would also like to welcome you, Mr. Stuart."

The two entered a study, which had been temporarily converted into a conference room. The walls were decorated with classical oil paintings, and outside the window were neatly trimmed shrubs and lawns.

The attendants of both sides followed the two into the study.

After both parties were seated, Stuart, who was in charge of a heavy responsibility, got straight to the point. As a seasoned banking professional, he knew that it was better to reach an agreement as soon as possible to minimize Barclays' losses than to waste time on useless words.

"Madam, I personally admire your foresight in the field of financial derivatives. I am here today to meet with you regarding a series of CDS contracts that we signed previously. I hope that we can find a solution that is acceptable to both of us. You are probably more aware than I am of the current market volatility, so there is a lot of uncertainty about the future under these circumstances, which is not good for either of us."

Zhang Sui's tone was very calm, but her attitude was very firm: "Mr. Stuart, market fluctuations are normal. We will only make judgments based on our own risk assessments and make investment decisions accordingly. What is gratifying is that the decisions we are implementing have brought us substantial returns."

Zhang Sui's words made it very clear: don't try to scare me with market fluctuations, no way. We make profits by anticipating these kinds of fluctuations, so don't expect us to back down just because you say a few words.

Stuart understood the implication in Zhang Sui's words. He also knew that as long as the conditions were met, an agreement could be reached, but it required negotiation.

He took a deep breath and presented the plan first. There was no other way! The financial market was in a sharp decline, and reaching an agreement sooner would stop the losses sooner. The conclusions drawn by those actuaries and calculation models were not to be taken lightly.

"We propose that we settle all outstanding CDS contracts in one lump sum, and we are willing to pay a substantial amount, such as $30 billion, to avoid a long and uncertain claims process in the future. This would allow you to lock in your profits in advance, and we could also eliminate a huge potential risk as soon as possible."