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

Tuesday, April 2008, 7.

9:07 AM.

All three televisions in the Farstar Capital trading room were lit up at the same time.

On the left, Bloomberg TV has a red banner at the bottom that reads:

The SEC announced an emergency ban on naked short selling against 19 financial institutions, effective immediately and for 30 days.

The Fox Business Channel on the right has a different banner:

Treasury Secretary Paulson formally submitted a request to Congress for emergency legislative authorization for Fannie Mae and Freddie Mac, seeking unlimited credit lines.

CNBC attempted to report on both events simultaneously, with the presenter speaking about 30 percent faster than usual and occasionally pausing briefly between the two news items, like a simultaneous interpreter trying to translate two languages ​​at the same time.

Lin Tao stood in front of his workstation without sitting down.

His gaze darted rapidly between the three television screens and the Bloomberg terminal in front of him. On the terminal, pre-market data for the financial sector was fluctuating wildly.

"Wait a minute—naked short selling ban?"

Lin Tao turned to Matt, his voice carrying an anxiety that hadn't yet been filtered out by reason.

Our short positions—

Matt didn't look up from the screen. He was meticulously checking the specific instrument type for each short-selling transaction in the financial sector on Farstar's current holdings list.

"Let me finish reading it," Matt said.

Lin Tao didn't wait. He pulled up the full text of the emergency order just issued by the SEC and began to scan it quickly.

The SEC's ban on naked short selling targets a specific method of short selling.

In a normal short selling transaction, you need to borrow stocks from a brokerage firm, sell them, and then buy them back to return to the brokerage firm when the price drops, thus profiting from the price difference.

However, "naked short selling" means that you sell shares without actually borrowing them—you are selling a loan agreement made of thin air, betting that you can make up the difference before the settlement date.

This kind of operation is a gray area in normal markets, but it becomes an accelerator in panic markets.

Because naked short sellers don't actually need to find shares to borrow, they can theoretically sell an unlimited amount, creating selling pressure far exceeding the actual circulating supply.

The SEC's emergency order today effectively shuts down this avenue. For the next thirty days, naked short selling of any form is prohibited for the stocks of nineteen financial institutions.

After reading the core terms of the order, Lin Tao's first reaction was to look at the list.

Fannie Mae. Freddie Mac. Lehman Brothers. Merrill Lynch. Goldman Sachs. Morgan Stanley. JPMorgan Chase. Citigroup...

Nineteen institutions. These cover almost all core institutions in the US financial system.

His second reaction was unease.

But he forced himself to calm down and first find out the scope of the ban.

"This emergency order applies to uncovered short selling transactions conducted through the securities lending market, but not to standardized options contracts traded on regulated exchanges, nor to over-the-counter credit derivatives transactions."

Lin Tao felt slightly relieved. He roughly knew that Yuanxing's positions were mostly constructed through options and CDS.

Matt finally looked up from the screen. He turned his chair around to face Lin Tao and Isabella.

"All of Yuanxing's current short positions in the financial sector,"

Matt's voice was extremely steady.

"The entire structure was established using three instruments: first, standardized put options traded on the CBOE and other regulated exchanges; second, over-the-counter credit default swaps purchased through nine ISDA channels; and third, a small number of VIX call options."

He looked at Lin Tao.

"None of our short sales were direct stock-level transactions. We have never borrowed shares from any financial institution to short sell."

"So this ban..."

"It's none of our business."

After saying that, Matt turned his chair around and continued looking at his screen.

Lin Tao sat down in the chair. He picked up the coffee on the table, which had gone cold, and took a sip. It tasted bitter, but he didn't mind.

He glanced back at Isabella. She had already refocused her attention on her data.

He suddenly realized something. From the moment he uttered "our short position" to Matt's "it's none of our business," less than two minutes had passed. But in those two minutes, Isabella and Matt reacted in completely different ways than he had.

He panicked first, and then looked for information to confirm whether he should panic.

They checked the information first and then confirmed that there was no need to panic.

The order is different. In this industry, order is everything.

Lin Tao secretly remembered this.

9:30 AM. Market opens.

The opening screen looked like someone had splashed a bucket of fluorescent green paint onto the screen.

Financial stocks surged across the board.

Lehman Brothers, which was still in the shadow of a 10% drop at yesterday's close, opened 16% higher today.

Merrill Lynch rose 12%. Citigroup rose 9%. Goldman Sachs rose 7%. Morgan Stanley rose 8%.

The XLF Financial Sector ETF rose 11 percent in the first five minutes after the market opened.

Lin Tao stared at the green numbers and felt a strange sense of disconnect.

He knew that the fundamentals of these institutions had not improved at all in the past week.

Lehman Brothers' commercial real estate hole is still there, Merrill Lynch's CDO impairment is still there, and Fannie Mae and Freddie Mac's five trillion dollars of toxic assets are still there. Nothing has changed.

Only two things have changed: the SEC said "naked short selling is prohibited," and Paulson said "I have a rocket launcher."

In short: Not a single penny of real money entered the market, not a single bad debt was cleared, and not a single institution's balance sheet became healthier.

Just two sentences.

Then financial stocks rose by more than ten percent.

That's the market. It doesn't trade reality. It trades feelings about reality. And feelings can be completely reversed in a single morning by just a couple of sentences.

Lin Tao stared at the screen, recalling something Lu Ze had said in the trading room a week ago: "The market doesn't know what it wants to do. That's the problem."

Today, the market knows what it wants to do. It wants to rise.

The problem is that it wants to rise not because the problem has been solved, but because someone tells it "don't be afraid" and "don't fall".

11:00 AM.

The upward trend continues, but at a slower pace.

Financial stocks gradually transitioned from a near-hysterical surge at the opening to a more moderate upward trend.

CNBC's footage cut to the Senate Banking Committee hearing.

Bernanke sat in the witness stand, a prepared written statement laid out before him. His shirt collar was impeccably neat, his tie impeccably tied, and he appeared calm and composed.

In public, the Federal Reserve Chairman cannot show any signs of fatigue. Fatigue is the seed of panic.

Bernanke began reading his written testimony.

The wording was polished to a near-perfect ambiguity—every sentence seemed to nod in two directions simultaneously.

The economy faces downside risks, but its fundamentals remain resilient.

Financial markets are under pressure, but the core of the system remains solid.

Inflation is a concern, but the weakness in the job market is equally important.

This kind of rhetoric has a specific name on Wall Street: "Federal Reserve rhetoric." Its design goal is not to convey information, but rather to make every listener feel like they've heard what they want to hear, without conveying any explicit message.

After hearing this, the bulls felt that "Bernanke said the economy is resilient, which is good news."

After listening, the short sellers felt that "Bernanke mentioned downside risks, which is bearish."

Both sides believed they were right. They then continued trading in their original directions.

Net effect: It's like saying nothing at all.

Lin Tao stared at Bernanke's extremely restrained face on television. Suddenly, a question occurred to him.

As Bernanke sat in that chair, facing dozens of senators and millions of television viewers, what was he really thinking?

Does he genuinely believe that "the core of the system remains solid," or does he know that the core is rotting, but cannot say so because he is sitting in that chair?

Lin Tao didn't know the answer.

All he knew was that if even the Federal Reserve Chairman couldn't tell the truth, then the truth could only come from somewhere else.

For example, an open letter from a hedge fund.

in the afternoon.

The upward trend is beginning to show signs of fatigue.

After a morning surge, financial stocks entered a period of narrow-range fluctuation. Lehman Brothers, after rising 18%, began to pull back slightly, fluctuating between 14% and 16%. Merrill Lynch and Citigroup followed a similar pattern.

The S&P 500 rose by about two percent, which looks like a decent "rebound day".

But Lin Tao noticed something that didn't rebound along with the stock price.

He looked away from the stock quote screen and switched to another window. That window didn't display stock prices, but rather CDS spreads.

Lehman Brothers' five-year CDS spread: 382 basis points.

He glanced at yesterday's closing data: 388 basis points.

It narrowed by only 6 basis points.

Lehman Brothers' stock price rose 18 percent today. But Lehman's CDS spreads remained almost unchanged.

Lin Tao stared at the two numbers for about ten seconds.

In his understanding, stock price and CDS spread should be inversely related. A rising stock price means the market believes the company has improved; a narrowing CDS spread means the market believes the probability of the company defaulting has decreased. The two should move in tandem.

But they didn't work together today.

The stock price is screaming, "It's all over now." CDS is saying, "Stop fooling yourself."

Two markets, looking at the same company, came to completely opposite conclusions.

Lin Tao gradually realized what this rift meant.

The participants in the stock market are diverse: retail investors, mutual funds, ETFs, and quantitative strategies.

Most of these people read the news, the headlines, the SEC's ban, and Paulson's statements. When they hear "ban on naked short selling," they think short sellers are being suppressed; when they hear "bazooka," they think the government is backing them up.

So they buy it.

The participants in the CDS market are extremely narrow: only large investment bank trading desks, top hedge funds, insurance companies, and a few sovereign wealth funds.

These people don't read news headlines. They look at balance sheets, collateral discount rates in the repurchase market, and the actual volume of overnight lending.

They knew that the SEC's ban on naked short selling wouldn't change the tens of billions of dollars in toxic assets on Lehman Brothers' books, and they also knew that Paulson's rocket launcher was aimed at Fannie Mae and Freddie Mac, not at Lehman Brothers.

So they don't buy it.

Retail investors are celebrating. Professional investors are sneering.

The rift between the two worlds has widened even further today.

4 PM. Market closes.

Financial stocks closed sharply higher. Lehman Brothers rose 16 percent. Merrill Lynch rose 12 percent. The S&P 500 gained nearly 2 percent.

CNBC's closing commentary adopted a cautiously optimistic tone: "The SEC's ban on naked short selling and Secretary Paulson's Fannie Mae and Freddie Mac proposals appear to have provided the market with much-needed confidence support. Today's strong rebound in the financial sector suggests that investors are reassessing previously overly pessimistic expectations."

Lin Tao listened to the commentary without saying a word. He turned off the CNBC audio and switched to the CDS data window.

Lehman Brothers' 5-year CDS closing spread: 380 basis points. It narrowed by 8 basis points throughout the day.

Two percent.

The stock price rose by 16%, but the CDS spread only narrowed by 2%.

Isabella compiled a briefing on the market data for the entire day, including the extremely glaring divergence between "surge in stock prices and sideways movement in CDS," and made herself a hot cup of coffee.

Then she stood up, took her tablet, and walked towards the main office.

The door was ajar, as usual. She knocked twice and then pushed the door open to go inside.

"Boss, the closing data is in. Financial stocks rebounded sharply today, but—"

She stopped mid-sentence.

Lu Ze sat behind his desk, his laptop screen turned towards him. He wasn't looking at the Bloomberg terminal, nor was he looking at any market data.

A video is playing on the screen.

The image shows a middle-aged man in a suit giving a speech on a stage. He uses expressive gestures and a humorous tone, and bursts of laughter can be heard from the audience.