Coronavirus (COVID-19).
Its fatality rate was not high, but in exchange, its contagiousness was monstrous. This cold-like virus had fundamentally reshaped the global economy of the twenty-first century.
Nations that lived off tourism closed their borders; nations that lived off manufacturing shut their factory doors. Festivals and even ceremonies for weddings and funerals were banned. It was truly an economic nuclear bomb.
Jobs vanished overnight, and consumption withered, so every nation had no choice but to deploy stimulus measures.
For roughly two years as COVID dragged on, governments lowered interest rates to zero and poured out state support funds, praying the crisis would pass quickly.
But zero interest rates and state subsidies were essentially money printing, an addictive painkiller. And they had administered it not for a month or two, but for two years; withdrawal symptoms were inevitable.
Where the coronavirus retreated, an inflation virus began to spread, and now governments were racking their brains over soaring prices.
—Fuck! Vidon!
Of them all, America was the one hit hardest by withdrawal symptoms.
Having trusted in dollar hegemony and printed the most money, it was inevitable.
US prices rose the moment one opened their eyes, and though the Fed hiked rates steeply in response, inflation remained untamed, as if no medicine could cure it.
Out of the frying pan, into the fire.
America's employment indicators were also too hot.
Of course, had these indicators been good under normal circumstances, Biden would have ascended as an economic president rivaling Roosevelt.
But under the present circumstances, hot employment figures meant companies that should have gone bankrupt were alive like zombies—a side effect of money printing.
Consequently, the Fed was now waging daily war against prices, carrying out an unprecedented high-interest-rate policy, raising rates higher than other countries for the first time in history.
[Breaking News! — Silicon Bank!]
A fragment of this high-interest-rate bomb flew in a completely unexpected direction.
Bonds inherently lose value as interest rates rise.
During the ultra-low-interest-rate era, SB had invested most of its assets in long-term bonds. Under the Fed's high-rate policy, US bond prices had crashed below cost.
*
Director O, who had been poring over Sejun's report for quite some time, asked with a complicated expression.
"So what's the conclusion? That SB might go bankrupt?"
Team Leader Choe answered with a face devoid of humor.
"Yes. Going by the indicators alone, it's not impossible."
"Who wrote this report?"
"...Associate I Sejun."
"That sleep-talker?"
As Team Leader Choe lowered his head, Director O set the report down irritably.
"Team Leader Choe, no matter how you look at it, isn't this too much of a delusion? Long-term bond declines raise concerns of massive losses for SB, nervous investors withdraw their deposits, and of all times, it's the mobile era so withdrawals happen to be easy. Then a bank run occurs and a company with 300 trillion won in funds goes under overnight... Is this a financial report or a literary contest entry?"
"..."
"Leaving everything else aside. You lot clearly said at yesterday's meeting that there didn't appear to be any possibility of bankruptcy. So why bring me this sleep-talker report overnight?"
Team Leader Choe groaned.
He himself had reacted the same way as Director O when he first saw the report.
But securities reports had to be approached with pure logic. Setting aside how detestable Sejun was, the evidence he had brought was irrefutable point by point, and before he knew it, he found himself convinced.
"My apologies, Director. But isn't this an unprecedented situation where the Fed has carried out three big steps? We must change our stance not overnight, but within an hour."
"So this is flexibility. But even so, this is too spineless, isn't it? It's on the level of a literary contest entry, not a stock market report."
"I don't think every prediction in here will pan out either. But it's true that there's nothing to refute."
"What?"
"US prices refuse to come down. Employment indicators are blazing hot, beyond normal levels. In this situation, all the Fed can do is hike rates. Then the long-term bonds held by SB have no choice but to fall further."
Director O was also the type to take off his rank and leave emotions at the door when talking about money.
With no counterargument to the evidence Team Leader Choe presented, his mouth gradually closed.
"Fine, let's say all of that is correct. But the other party is a bank with 300 trillion won in assets. If a bank run occurs there, the entire US banking sector won't emerge unscathed. Would the Fed really not put out this fire?"
"That..."
This time, Team Leader Choe fell quiet.
From here on, it was the domain of politics, not Wall Street. No one could predict whether Washington and the White House would extinguish the fire at a burning bank.
"I'd better hear the explanation directly from the person in question. What's that sleep-talker called again?"
"...Associate I Sejun."
Director O spun the dial and spoke curtly.
"Yes, Associate I Sejun. This is the director's office. Get in here right now."
*
The director's voice clearly sounded angry.
I took a long, deep breath and headed upstairs.
I knocked and opened the door; as expected, Director O greeted me with a face brimming with killing intent.
"You called—"
"Explain."
Without even offering me a seat, Director O immediately pressed me.
"Yes. As you know, SB has invested the majority of its assets in US long-term bonds..."
"I don't have time for you to recite what I already know. Didn't SB stock drop another 5% yesterday?"
"Ah, yes."
"I acknowledge the contents of the report. Honestly, it looks like a literary contest submission to me, but the evidence presented is persuasive, so I'll let it pass."
"Yes."
"But, Associate. No matter what, SB is a 'bank' with 300 trillion won in assets. I get the feeling the Fed will send every firefighter it has if this place catches fire. Why does this report conclude it will go bankrupt?"
I saw it in a dream. The Fed and Washington not putting out that fire!
Those words surged to the tip of my tongue, but I couldn't voice them.
"I agree with all the evidence you've presented, but in the end, the Fed will put out the fire. That's my conclusion. Can you refute my opinion?"
"Yes. I believe the Fed will stand by and do nothing."
Had I answered too bluntly?
Director O was surprised, and Team Leader Choe beside him flinched as well.
"Your reason?"
"The Fed watched Lehman go bankrupt too. It won't panic over a mere bank."
"It's not a mere ba—"
"Of course, measures like deposit insurance will be handled at the government level. But only that. They'll absolutely never pour money into a bailout."
This was the Fed that had let Lehman, a 700-trillion-won behemoth fifteen years ago, collapse. It would only prevent the bank run from spreading nationwide; it would never save SB itself.
"Associate, this is a grave matter. Why do you keep speaking with such certainty?"
"Because once they start pouring money in, there'll be no end to it."
"What?"
"Director. The truth is, SB Bank is simply where the problem erupted first. Right now, virtually every US bank is suffering the same hardship."
Truly, this is an unprecedented pace of rate hikes.
In other words, banks that bought medium- and long-term bonds during the zero-rate era were without exception in the red, and once you start bailing one out, ten more will come running.
Though this report had started from an absurd dream, at some point while writing it, I had begun to convince even myself.
"..."
Director O's face, which had been filled with wrath initially, had begun to soften ever since I brought up Lehman.
"This is insane. A bank with 300 trillion won... going under like a corner store?"
He couldn't continue for a moment, then pressed his fingers to the space between his brows.
"Team Leader Choe, what's our current investment amount?"
"Yes, a total of 40 billion won in bonds and stocks combined. Losses so far are around 20%, but... yesterday it dropped another 5%."
"So that means we're already at a 25% loss?"
"Yes... or was it a 75% profit?"
At those meaningful words, Director O turned his eyes to Team Leader Choe.
"You want to sell too?"
"Forgive my presumption, Director. But the more I look at the evidence, the more this associate's report seems to hold water."
"..."
"Rates that had hit bottom shot to 2.5% in just three months, but there's no sign of US prices coming down. I think the entire US banking sector is due for a round of restructuring."
With even Team Leader Choe turning, Director O looked at me fiercely.
"You're the portfolio manager, aren't you? Sleep-talker?"
"...Yes."
"Sell half for now and watch market conditions. As for the other half..."
He looked at the calendar and said,
"Let's decide after next week's US CPI announcement."
*
That evening.
It was well past 10 p.m., but the lights in the overseas equities team office were still on. In one hour, the US market would open.
Director O had ordered financial investigations not just on SB, but on the entire banking sector, targeting those with large medium- and long-term bond exposure, and directed equity divestment according to their weightings.
Because no matter how he looked at it, this high-interest-rate cold front didn't seem like it would stop at SB alone.
"Team Leader. I've sold half as instructed."
I took over the company computer and security key and liquidated half of our SB position.
"How much did we lose?"
"Fortunately, the market was rising today, so we closed out at a 25% loss."
It seemed heaven was helping. We had dumped about 15 billion won worth of stock onto the market, but fortunately today's rally meant no additional losses.
But that only fueled Team Leader Choe's anxiety.
"Is this really going bust? Looking at the chasing buys, there are people out there who think SB won't go under."
"Lehman was floundering right until the moment it collapsed. From here on, it's a speculative market."
"A speculative market..."
He looked at the Nasdaq, blazing hot again today.
US stocks were truly strange. Usually rate hikes were bad news for the stock market. The Fed carrying out three big steps should have snapped all four limbs... yet the US stock market remained in a boom.
"I just can't figure it out. If SB is a speculative bet, is the current Nasdaq a bubble too? Or is it America's unique underlying strength?"
"..."
"Associate I, what do you think next week's CPI will look like? The prevailing view is that with rates hiked this much, US prices should come under control."
"The employment indicators are too strong for that. I think the CPI will come in above market expectations, and the Fed will send out another rate hike signal."
CPI. In simple terms, the Consumer Price Index.
Usually, the Fed sets interest rates based on this indicator.
If this indicator turns out bad and the Fed signals another rate hike... the comatose SB would take one step closer to crossing the Jordan.
"Right. We've sold half anyway, so let's watch next week's results."