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

Sunday, July 7, 2008.

270 Park Avenue, 27th floor.

The Farstar Capital office was empty on Sunday.

There were no keyboard clicks, no blue LED arrays on the terminals, and no Lin Tao muttering to himself in a low voice at his workstation.

The central air conditioning was set to energy-saving mode, and the air vents emitted a lower, almost whispering hum than on weekdays.

But the lights in the main office were on.

Lu Ze sat behind the mahogany table, with two laptops open in front of him.

The remote terminal on the left is connected to Bloomberg, while the one on the right is a multifactor monitoring panel he built himself—written in Python, with an extremely rudimentary interface, black background and green text, like a DOS system from the 1990s, but the data refresh speed is almost two seconds faster than Bloomberg's.

There was no trading in U.S. stocks on Sunday. But global markets won't stop just because of the New York weekend.

Middle Eastern crude oil futures are trading as usual on the Dubai Mercantile Exchange (DME).

European financial futures are traded after hours on Eurex.

Nikkei and Hang Seng futures in the Asia-Pacific time zone are trading on the Singapore Exchange (SGX).

Most importantly, the credit default swap (CDS) market is an over-the-counter market. There is no exchange, and no concept of opening or closing prices. As long as the buyer and seller are willing, a transaction can be completed as early as 3 a.m. on Sunday.

Lu Ze stared at the set of numbers he had highlighted in red in the lower right corner of the screen.

It's not Lehman Brothers.

It's Fannie Mae and Freddie Mac.

The movement of the CDS spread between Fannie Mae and Freddie Mac over the past 48 hours made him stop his habitual tapping on the table.

Fannie Mae's 5-year CDS: jumped from 87 basis points at Thursday's close to 134 basis points at Friday's close. Saturday's off-exchange trading—though not large in volume, but remarkably consistent in direction—pushed the figure to 148.

Freddie Mac's figure is even more outrageous, rising from 91 to 152.

Two days. Nearly doubled.

This is not a normal widening of interest rate spreads. This is panic-driven credit repricing.

Moreover, for government-backed companies like Fannie Mae and Freddie Mac, the CDS spread on 5-year senior debt has already soared to this level, which is quite alarming.

Lu Ze looked at the number and tapped his fingers lightly twice on the table.

Faster. Faster than he expected.

The timing of the open letter was his choice. IndyMac would be taken over in the second week of July, one of the events he was certain of. He planned to release the letter four days before the actual takeover, allowing Wall Street enough time to first reject it and then be proven wrong—this rhythm was carefully orchestrated.

The effect even exceeded the design.

What he could anticipate was a precise establishment of credibility: the message was sent, it was ridiculed, and then it was validated. From then on, every public judgment made by Yuanxing would be treated by the market as some kind of divine revelation.

This is extremely important for realizing subsequent positions—when you need to liquidate a large number of positions during a crash, the market's "perceived weight" of you directly determines the liquidity and price you can obtain.

But the cumulative effect was even more intense than he had anticipated. It wasn't just that Yuanxing's reputation was established; it tore a hole in the entire market's trust in the phrase "everything is normal."

The CDS spread between Fannie Mae and Freddie Mac is the most direct measure of this channel.

In his recollection, Paulson invoked the "bazooka" rhetoric in mid-July, and then officially took over Fannie Mae and Freddie Mac in early September. During those two months, the market was tense but relatively orderly, giving Paulson time to accumulate political capital, coordinate with various parties, and make legal preparations.

The current pace is clearly unsustainable. A 148 basis point spread means the market can't wait two more months. Paulson will be forced to act sooner. He's unsure how soon—maybe a few weeks, maybe a month—but the direction is clear.

What does this mean for distant stars?

Lu Ze leaned back in his chair, shifting his gaze from the screen to the overly bright skyline outside the window.

Will Lehman Brothers be prematurely detonated as a result?

possible.

The more political capital Paulson expended on Fannie Mae and Freddie Mac, the fewer cards he would have left when Lehman Brothers collapsed. However, the opposite could also be true: resolving the Fannie Mae and Freddie Mac issue early might actually give the market a boost, allowing Lehman Brothers to survive a few more weeks.

He had considered all these possibilities. But to be honest, the specific outcome of Lehman Brothers—bankruptcy or being sold off cheaply—would not have as much impact on Farstar's final profits as outsiders imagined.

Lehman Brothers accounts for approximately 20% of the CDS basket in Farstar.

If Lehman Brothers went bankrupt, this portion would trigger a full default payout, resulting in substantial profits. If Lehman Brothers was acquired, this portion would not trigger a payout, but the positions held by other financial institutions in the CDS basket would still generate profits for him.

There are differences, but they are not decisive.

The truly decisive factor is not in CDS.

In those deeper positions.

Crude oil put option with a strike price of $60. S&P 500 put option with a strike price of 800 points. VIX forward call option.

These assets are currently dormant. Their strike prices are separated from their current market prices by a seemingly insurmountable chasm.

The investment banks and market makers that sold these options to Yuanxing are probably still counting the premiums they received as free profits in their year-end performance reports.

But for these options to awaken, the death of Lehman Brothers is not necessary.

What is needed is a systemic, comprehensive, and months-long economic collapse.

Crude oil prices need to fall from $140 to $50 or $60 or even lower.

The S&P 500 needs to fall from 1300 to below 1000, then below 900, and finally to a number that no one can believe.

You need to increase your VIX from 28 to 60, 70, or 80 or higher.

在他带过来的那条时间线里，这些全部发生了。原油在半年内从147跌到35。标普在六个月里从1300跌到了700以下。VIX在十月份冲到了80以上。

The collapse of that timeline was dramatic, but it had rhythm.

Lehman Brothers collapsed in September, followed by AIG, then Washington Mutual, then Wachovia, then Citigroup's near-collapse, and then the first rejection of the TARP Act. The panic came in waves, with brief respites between each wave.

But now?

Panic was amplified. The cracks in confidence were widened prematurely. Paulson's political ammunition was forced to be used up prematurely.

Moreover, this year is an election year.

This was already Paulson's biggest obstacle in the original timeline. Every time public funds were used to bail out Wall Street, it became ammunition for his election opponents.

Republican McCain was hesitant to support a bailout because voters would accuse him of "using my taxpayer money to clean up the messes of the rich." Democrat Obama, on the other hand, welcomed the deepening crisis because the worse the economy, the more voters would vent their anger on the ruling party.

In the original timeline, this political paralysis had already led to the first major defeat of the TARP bill in the House of Representatives: the Dow Jones Industrial Average plummeted 777 points in a single day.

Now, if the pace of panic accelerates, Paulson's political capital is depleted sooner, and Congress becomes even less willing to cooperate under election pressure—

The collapse won't get shallower; it will only get deeper.

Dominoes don't stop falling just because one less domino has fallen.

Lehman Brothers was followed by Merrill Lynch, Merrill Lynch by AIG, AIG by Washington Mutual, and then Citigroup and Wachovia.

Each card in this chain has its own bad debts and vulnerabilities. It doesn't need external force to push it; as long as the cards in front fall, the airflow is enough.

In a more panicked and politically paralyzed environment, these cards will fall faster, at shorter intervals, and the window for rescue will be narrower.

If crude oil didn't stop falling at $35, and the S&P 500 didn't stop falling at 700...

If the panic intensifies and the response slows down, where will the bottom be?

Lu Ze didn't know the exact numbers, but he had a general idea of ​​the direction.

lower.

It was even lower than the bottom he remembered.

In that case, those dormant deep options he holds—those put contracts with ridiculously low strike prices that everyone considered worthless—will be worth more than he originally expected when they wake up.

It's not about making a little more money.

It's an exponential difference.

Because the payoff of an option is linear when it is deeply in the money, but the burst of Gamma is non-linear as it moves from out-of-the-money to in-the-money.

The drop in the S&P 500 from 1000 to 900 and from 900 to 800 have completely different meanings for a put option with a strike price of 800. The former means "it hasn't reached its target yet," while the latter means "a nuclear bomb has been detonated."

The breath Lu Ze created with his open letter not only knocked down the building blocks.

It changed the distribution of the building block fragments, making the ruins wider and the pits deeper.

The net of distant stars had already been laid at the bottom of the deepest pits long before the ruins were formed.

This is what he wanted.

Lu Ze picked up his water glass and took a sip.

His expression remained unchanged.

The game was progressing as expected. He couldn't predict the details, but the general direction was fine. He would keep an eye on the details.

He closed the Bloomberg terminal.

Everything that needed to be seen has been seen. Everything that needed to be confirmed has been confirmed.

The market is panicking and collapsing at a faster pace than he remembers. He helped create this acceleration, but the specific path it takes afterward is no longer entirely under his control.

But that's okay.

The net is already laid out. No matter which path the prey comes from, it will be within the net's coverage.

All that's left is to wait.

As he put the water glass back on the table, his personal cell phone rang, which surprised him. Not many people had his number, so who would call him at this time?

He picked up his phone.

Caller ID:

Nathaniel Greenberg.