Chapter 44: The End of the 80s (3)

“The Soviet Union will collapse. Within two years.”

My prophecy elicited a rather intense reaction.

“…The Soviet Union? No way, that’s impossible.”

“What are you trying to do this time, missy?”

“No, so what is a CDS…?”

I quietly nodded, maintaining a serious expression.

“To be precise, two years after the collapse of Eastern Europe. The Soviet Union is already at its economic and political limits… and it won’t last two years after Eastern Europe collapses.”

On December 26, 1991, the Soviet Union officially dissolved. It’s March 1989 now, so there are a little over two years left.

The managing directors looked at each other with puzzled expressions.

They trusted me, so they believed what I said, but they couldn’t accept the future I described.

If I hadn’t predicted Black Monday, they would have ignored me completely. That’s what the collapse of the Soviet Union means.

The only country besides the US called a superpower… collapsing before 1991 is something no one can imagine at this point.

“Miss, so what is a CDS?”

Managing Director Choi adjusted his glasses and stared intently at me.

“Credit Default Swap. From now on, we’ll trade the creditworthiness of companies and countries. There are many bonds with a high risk of default, right? It means there’s demand.”

Credit Default Swap, abbreviated as CDS, trades the risk of default on bonds themselves. There are several derivatives that trade creditworthiness, but the most basic is CDS.

Think of it simply as insurance. If a company goes bankrupt and its corporate bonds become worthless, if you have a CDS, the seller of this derivative will pay you.

Originally, CDS was first developed and concluded by JP Morgan in 1994. And after it was fully established by the ISDA (International Swaps and Derivatives Association) in 1997, it became popular.

In other words, it takes three years for CDS to be created and established in the original timeline. That’s why I tried to introduce CDS as soon as Daeha Investment Bank was established.

“I understand. Miss… you’ll maintain a short position until then, and then buy a large amount of CDS when the Soviet Union collapses.”

The managing directors, who were beginning to understand my plan, nodded with knowing smiles.

-Yu Hayeon, as expected.

That’s probably the feeling.

“Yes! I’m glad you understood so quickly. As expected, our managing directors are smart!”

I dismissed those who couldn’t grasp the situation, so it’s a natural outcome.

Even people who were section chiefs or team leaders a few years ago have been promoted. Thanks to that, no one looks down on me because I’m young, and their loyalty is also unwavering.

I smiled brightly and ate a candy from the glass table.

-Crunch.

A sweet sensation lingered on my tongue.

“Let’s issue CDS under the investment bank’s name. Since it’s a new investment bank from the East, they’ll understand even if we introduce a unique product.”

-Thump.

I passed around a neatly printed portfolio. It’s a basic CDS structure, carefully constructed to avoid any legal problems.

To be precise, it’s more accurate to say that there are no laws or agencies to regulate it yet.

“…As always, impeccable work. You haven’t done any fieldwork, yet you’re this good.”

Managing Director Seo, who had worked with Ha Jusung and then joined Daeha Securities, expressed his admiration. Having worked in the field, his eye for detail was excellent.

The only drawback is that I have to look up at him because he’s so tall. Having been overlooked before I arrived, he was from Ha Jusung’s line, which shows that his political acumen was lacking.

It’s a good thing for me who dislikes seeing my subordinates playing politics.

“We need to work quickly. Alpha Fund will help a lot, but it will still be difficult to popularize a new product.”

“…Even if we accept losses?”

I nodded.

“Yes. Even countries can’t fully predict the future, so let’s think of it as hedging the risk and sell CDS on Eastern European bonds. Combining it with short selling bonds will offset it.”

Alpha Fund earns the money, so Daeha Investment Bank only needs to avoid losing its own capital. Influence is important here.

An investment bank that created the CDS that thrived enough to become one of the causes of the Great Recession… its reputation alone will suffice.

“Wouldn’t it be difficult to increase the size of the CDS? The CDS risk is much greater than short selling bonds.”

The amount of insurance to be paid becomes enormous if the number of bankrupt companies and countries increases. It’s because the conditions are more extreme than ordinary options.

“That’s right, CDS premiums use basis points. When the Eastern European crisis hits, we need to set a very high premium and sell… but conversely, demand will steadily increase. Insurers increase when the probability of receiving insurance is high.”

“Supply will naturally increase. We’re only creating the flow…”

The managing directors’ faces brightened, as they seemed to think it was a pretty good financial product.

“Then, we can even take an exorbitant premium.”

“Let’s sell it to American companies first before Eastern Europe. We’ll gradually introduce it and, as missy said, when Eastern Europe collapses, we’ll team up with Alpha Fund to make a big score.”

“Hmm, what are your thoughts, Managing Director Choi? I think investing directly in Eastern Europe would be better? Haven’t communist countries been borrowing a lot of money from the West? Except for Romania, no country has repaid its foreign debt, so they’ll start thinking about repaying their loans soon.”

“Ah, to approach Eastern Europe now…? If it’s government bonds, it’s not bad. The money tied up in Eastern Europe due to risk management isn’t circulating, so if we bear the risk, they’ll be happy.”

I smiled proudly at the managing directors actively exchanging ideas.

See? Korea doesn’t lack talent. They just lacked environment and experience; everyone here is smart.

Of course, lack of experience is difficult to compensate for, but it’s fine because I’m here.

“Okay, let’s get in touch. Managing Director Seo, please find suitable companies first and create a portfolio. I’m thinking of a premium of 500 basis points.”

I smiled and clapped my hands. The sweet taste of the candy still lingered on my tongue.

“Isn’t that too high? Only companies on the verge of bankruptcy would accept that.”

Managing Director Seo, knowing that 500bp is an absurd number, expressed concern. It means they have to pay 5% of the bond amount annually as insurance premiums.

That’s why 500bp in CDS is usually seen only in junk bonds. It exceeded 1000bp right before Lehman Brothers’ bankruptcy, right before AIG received a bailout, and when Greece faced a sovereign debt crisis.

Well, it’s fine now. Taking advantage of the situation before a systematic market is established is common.

“Aha, it’s fine. There will be banks and funds that desperately need risk management. They can’t make a deal with anyone else but us. It’ll also be much easier for competitors to emerge later.”

“…So you’re doing this on purpose? To take advantage of the situation and artificially increase competitors.”

“That’s right. We need more competitors to transfer the short position and switch to a long position when the Soviet Union collapses.”

Derivative contracts need someone to accept them, that’s the problem. It’s the same with stocks… but this market is too small right now.

“I understand. It’ll take quite some time; I need to look at the materials sent by Alpha Fund first. We need to look at America, not just Tokyo…”

Seeing Managing Director Seo fall into thought, I smiled brightly and praised him.

“I’m glad you understand so quickly. As expected, the managing directors of Daeha Securities, no, Daeha Investment Bank are smart.”

This time, I will only plan, and the managing directors will carry out the execution.

I can’t work alone forever. A great leader isn’t someone who does the work well, but someone who uses people who do the work well.

Seeing my smoothly running company, I felt a deep sense of satisfaction.

The preparations for the end of the 1980s were proceeding smoothly, step by step.

My department store, built with stable construction methods by pressuring the construction company, had opened, and Alpha Fund had made stable profits by investing in the Japanese and US markets.

And… getting permission to sell CDS was very difficult, but thanks to the high premium, I somehow got the government’s permission.

‘There are so many regulations for just one contract.’

Because there were few people willing to make a contract, I ended up making a CDS contract with a Japanese securities company that I had previously indebted.

The nominal amount to be compensated in case of default is 10 billion won, and the premium we receive is 500 million won. It wasn’t a very satisfying deal, but considering that the premium JP Morgan received in the original history was 40bp, it was quite good.

As if it was planned (it was), Alpha Fund, which was doing very well in America, declared that it would start trading creditworthiness, and articles analyzing the new financial product and interest poured into Wall Street.

This was especially true because the situation in Eastern Europe was very chaotic.

May 2nd, Hungary began removing the barbed wire separating Austria and Hungary…

June 4th, the Communist Party suffered a crushing defeat in the Polish parliamentary elections. It barely maintained its position as the leading party through allocated seats, but it didn’t win a single seat in the free elections.

Also on June 4th… China’s last democratization movement was crushed at Tiananmen Square in Beijing.

It was an interesting event, and also a sad one.

Of course, I profited greatly by exploiting the excited pro-democracy forces… but China needs to democratize for me to exploit it. Its market is so huge.

I sighed, watching the wheel of history turn.

‘That’s why I hate dictators.’

…To be precise, I hate dictators who are hostile to me. Anyway.

Well, it’s fortunate that I can intervene in Russia.

I have refined taste, so I like black tea.