A $50 million margin call? I'll short Wall Street.

A few days passed peacefully. Bear Stearns' stock price remained largely unchanged. Isabella was uneasy, but Lu Ze was surprisingly calm.

...

Thursday, June 2008, 3.

Lower Manhattan, 6:40 a.m.

The sky was not yet fully bright. The chill of late winter enveloped the empty streets, and the streetlights cast a dim, yellowish glow in the morning mist.

In the office of Farstar Capital, only two lights were on.

Lu Ze had been sitting here all night.

Three Bloomberg terminals were placed in front of him, with various data from Bear Stearns displayed on the screens—stock price, trading volume, option chain, CDS spread, and changes in institutional holdings.

His eyes were bloodshot, a half-empty whiskey bottle was on his right, and an ashtray piled high with cigar butts was on his left.

But his eyes remained sharp as knives.

Isabella pushed open the door and came in, carrying two cups of hot coffee that she had just bought from Starbucks downstairs.

She had gotten used to her boss's almost self-torturing work rhythm—for five consecutive days, Lu Ze only slept three to four hours a day, spending the rest of his time immersed in data, organizing the ammunition that was about to be loaded.

"Good morning." She placed the coffee beside him.

"Hmm." Lu Ze didn't even look up, his fingers flying across the keyboard.

Isabella walked to her workstation, turned on her computer, and routinely refreshed various financial news websites.

Bloomberg, Reuters, CNBC, The Wall Street Journal...

Her gaze suddenly fell on a small news item on the Bloomberg website.

It was a very inconspicuous news item, sandwiched between "Federal Reserve keeps interest rates unchanged" and "Crude oil futures rise 1.2%", consisting of only two short lines:

Moody's Investors Service on Wednesday downgraded its outlook on some of Bear Stearns' mortgage-backed securities from "stable" to "negative." Moody's stated that this move reflects concerns about deteriorating quality of the underlying assets.

Isabella paused for a moment.

She immediately opened the Bloomberg terminal and pulled up Bear Stearns' stock price chart.

Yesterday's closing price: $61.23.

Today's opening price: $61.18.

Almost nothing has changed.

She turned to Lu Ze: "Boss, Moody's has downgraded Bear Stearns' rating outlook."

"I know."

Lu Ze's voice was calm. "Forty-seven minutes ago."

Isabella froze: "You've already seen it?"

"Hmm." Lu Ze finally raised his head, leaned back in his chair, picked up his coffee, and took a sip.

"This is the first dark cloud."

"The first one?"

"Yes." Lu Ze turned the screen around and pointed to a complex chart on it.

"Look here."

That's Bear Stearns' trading volume data for the past week.

Isabella looked closely for a while, her pupils contracting slightly.

For the past five trading days, Bear Stearns' average daily trading volume had remained around 12 million shares. However, starting March 3rd, the trading volume suddenly jumped—

However, the stock price only declined moderately.

This means one thing in technical analysis—

"Someone is quietly reducing their holdings."

Lu Ze said his voice was very soft, but each word was like a nail driven into the air.

"And they are large institutions. They are slowly unloading their shares while trying to avoid causing market panic."

"But why didn't the stock price collapse?"

Isabella asked.

"Because someone is taking over."

Lu Ze switched to another data page.

"Look here, the market makers' quotes have remained very stable, and the bid-ask spread hasn't widened. This indicates that there are funds maintaining liquidity."

He paused:

"Retail investors, or slow-reacting institutions. But this kind of maintenance can't last long. Like a rat digging holes underwater, the more holes it digs, the faster the water level will collapse."

As Isabella looked at the curves and numbers, she suddenly felt a strange chill.

While everyone was still laughing at Lu Ze, while CNBC hosts were still telling him jokes, while Wall Street traders were still making fun of him in bars—

The first piece of necrotic tissue had begun to grow inside Bear Stearns' body.

"Moody's downgrade,"

Lu Ze continued,

"This will accelerate the process. Those institutions currently on the sidelines will begin to reassess their risk exposure. More people will start reducing their positions."

He looked out the window; the sky was already beginning to lighten, and the morning light was starting to paint the Manhattan skyline.

"This is just the beginning. The next week is going to be very interesting."

[At the same time, at Goldman Sachs headquarters, 43rd floor]

Richard Kleiman sat at his desk, staring at the Moody's news article on his computer screen, his fingers gripping the mouse tightly.

His face looked terrible.

He didn't sleep well last night. He had a dream that he was standing on top of a crumbling building, and the concrete ground beneath his feet began to crack, the cracks growing wider and deeper until finally the entire building started to tilt to one side...

He woke up screaming from his dream, covered in cold sweat.

Now, that unease has returned.

He accessed Goldman Sachs' internal system and retrieved Bear Stearns' real-time monitoring data.

The stock price is relatively stable, just over $61, which is more than double the strike price of the put options he sold at $25.

But the trading volume...

Richard stared at the numbers, his brow furrowing deeper and deeper.

He's no fool. After twelve years at Goldman Sachs, his sensitivity to market data rivals that of any top trader.

Trading volume surged unusually, but the stock price declined moderately.

This is a typical signal of institutional selling.

He immediately opened the institutional holdings tracking system and filtered out the holdings changes of Bear Stearns' top 50 shareholders.

Data refresh.

His heart sank.

In the past week, at least seven large institutions—including two pension funds, three insurance companies, and two hedge funds—have reduced their holdings of Bear Stearns shares, with a total reduction of more than 2400 million shares.

These share reductions were all done cautiously, spread out across different trading sessions, deliberately avoiding attracting market attention.

But all of these combined are enough to explain those unusual trading volume fluctuations.

Richard leaned back in his chair, closed his eyes, and took a deep breath.

They are running.

The smartest, most astute, and most adept at finding shelter before the storm have already begun their quiet retreat.

He opened his eyes and glanced at the calendar.

Today is February 3.

There are 15 days left until that put option expires.

15 days.

He needs Bear Stearns to hold on for these 15 days.

Richard picked up the landline phone on the table, found a number in his cell phone, and dialed it.

It rang five times before the other end answered.

"Feed?"

It was a male voice, in his fifties, with a slightly hoarse tone from excessive smoking and drinking.

"Michael, this is Richard."

There was a second of silence on the other end of the phone: "Richard? So early?"

Michael Harrison, a 56-year-old senior ratings analyst at Standard & Poor's, has worked at S&P for 27 years.

Richard met him at an industry summit dinner five years ago, and they would occasionally play golf together afterward.

More importantly, Harrison is one of the core members of S&P responsible for rating financial institutions.

"I saw the news about Moody's."

Richard cut to the chase, his tone revealing barely concealed urgency, "About Bear Stearns."

"Oh, that," Harrison's voice sounded a little tired, "Yes, Moody sent it yesterday afternoon."

"What about your side?" Richard asked. "Has S&P taken any similar action?"

There was a few seconds of silence on the other end of the phone.

"Richard, are you asking me this on behalf of Goldman Sachs, or... yourself?"

Richard tapped his fingers lightly twice on the table:

"Michael, we've known each other for so many years, do you think I would ask such a question?"

"Then I'll take it as your own curiosity," Harrison said.

"S&P is indeed discussing Bear Stearns' rating. The rating committee will meet next week to review their capital adequacy and liquidity."

What will the conclusion be?

"I don't know," Harrison said, "but if you ask me my personal opinion..."

He paused for a moment:

"Richard, Bear Stearns' underlying assets are problematic."

"The default rate in the subprime market is still climbing, and the valuations of the CDOs and MBS they hold are highly inflated. Our internal quantitative model ran three times last week, and each time the results pointed in the same direction—downward adjustment."

Richard's fingers stopped tapping.

"but,"

Harrison continued, "As you know, ratings aren't just a math game. We also have to consider market stability, systemic risk, the Federal Reserve's attitude..."

"so?"

"So, I can try to recommend to the committee that they go through another internal review process," Harrison said. "That could buy some time."

Richard's breathing became lighter:

"How long can this drag on?"

"At most one week."

Harrison's voice turned serious.

"Richard, this is all I can do for you. Beyond this point, I can't control the situation any longer. I can't control Moody's, but if they continue their actions, S&P can't remain inactive indefinitely."

"A week is enough."

Richard said, his voice almost pleadingly urgent, "Michael, I owe you a favor."

"You already owe me several."

Harrison gave a wry smile. "Alright, I tried my best. But I must remind you, Richard—"

His voice lowered:

"If you have any open positions in Bear Stearns, you'd better deal with them as soon as possible. Whether you're long or short. This ship... isn't very stable."

Richard did not answer.

"I understand. Thank you."

He hung up the phone.

The office returned to silence.

Richard sat there, staring at the two folders on the table—one blue, the other brownish-yellow—in silence for a long time.

Then he picked up his Blackberry, opened the calendar app, and stared at the date March 21.

15 days.

He only needs to hold on for 15 days.

Moody's downgraded the rating, but the stock price hasn't collapsed yet. S&P can hold out for another week. Institutions are reducing their holdings, but the actions are still quite restrained.

It's nothing.

He told himself.