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

Lu Ze's posture remained unchanged. He was still relaxed, half-reclining on the sofa. However, he slightly adjusted his manner of speaking, slowing down his pace and making his wording more specific.

Let me give you an example.

Lu Ze said, "On Tuesday, the SEC issued a ban on naked short selling, and Paulson announced the bazooka plan for Fannie Mae and Freddie Mac. Financial stocks surged that day, with Lehman Brothers rising 16%."

"I see," Goolsby nodded. "The market reaction is positive."

"The stock market's reaction has been positive."

Lu Ze said, "But on the same day, Lehman Brothers' five-year CDS spread narrowed by less than two percent."

Goolsby's brow twitched.

"You mean…" Goolsby spoke a little slower than usual, "the stock market thinks Lehman Brothers is better. But the credit market disagrees."

"Yes. The same company, on the same day, gave completely opposite opinions in two markets."

Why?

"Because the participants in these two markets are different."

Lu Ze elaborated, "The stock market is made up of retail investors, mutual funds, and ETFs. These people read the news and the headlines. When the SEC says it will ban naked short selling, they hear 'the government is protecting us.' When Paulson mentions bazookas, they hear 'the government will bail us out.' So they buy."

"But the participants in the CDS market are only the trading desks of large investment banks, top hedge funds, and a few sovereign wealth funds. These people don't look at the headlines. They look at whether Lehman's overnight repo rate continues to deteriorate, whether the assets Lehman used as collateral have been rejected by counterparties, and how much Lehman's commercial real estate exposure has depreciated this week."

"The SEC's injunction won't add a single cent to Lehman's net assets. Paulson's bazooka was aimed at Fannie Mae and Freddie Mac, not Lehman. Those people in the CDS market know that. That's why they're not doing anything."

Goolsby's coffee cup sat untouched on the coffee table for a while.

Retail investors are celebrating. Professional players are holding back.

When Goolsby delivered this summary, his voice was half a octave lower than before.

"Moreover, this divergence is not accidental. Over the past month, almost every short-term rebound in financial stocks has failed to narrow the CDS spread. The gap between the two markets is widening little by little."

"So which market is right?"

"Austan, in your class, if there's a question where retail investors choose A and professional traders choose B, who would you tell your students to listen to?"

Gursby shook his head and let out a short laugh. "Alright."

He leaned back on the sofa, his arms crossed in front of his chest.

"So the question becomes, just how bad was Lehman Brothers as seen in the CDS market?"

Lu Ze nodded.

"Do you know how the big banks on Wall Street are interconnected? I'm not talking about the connections you see in annual reports, through equity investments or joint ventures. I'm talking about a more fundamental, 24/7 interconnectedness."

Goolsby didn't speak. His listening style changed, shifting from conversational listening to a more focused state.

"Every morning, Lehman's finance department needed to borrow tens of billions of dollars in the overnight repurchase market to keep operating. The method involved pledging their own assets—bonds, MBS, and CDOs—to counterparties in exchange for cash. The next day, they would repay the loan and redeem the assets."

"How is this any different from a bank accepting deposits?" Goolsby asked.

"The difference is that deposits are federally insured. If you deposit money into a Citibank retail branch, the FDIC will insure you for $100,000. So unless the bank actually goes bankrupt, nobody will line up to withdraw their money."

"But overnight repurchase agreements offer no insurance. You lend Lehman Brothers 10 billion today, and Lehman repays you tomorrow. If you wake up one morning and feel that Lehman might not be able to repay—not necessarily that they actually can't—just because you think they might not be able to repay, you don't lend them the money."

"Furthermore, your decision not to lend will make other people who lent money to Lehman hesitant. They'll think: if you don't lend, Lehman's cash pool will be smaller, and its ability to repay will be weaker. Should I also not lend?"

Goolsby loosened his crossed arms, leaned forward, and placed his hands on his knees.

"A bank run," he said. "But it's not depositors lining up. It's investment banks withdrawing loans from each other."

"Yes. And it's much faster than a bank run. A bank run requires people to drive to the bank and line up, taking days to spread. A bank run only requires one trader to reject a phone call at nine in the morning."

Lu Ze paused for a moment, then changed direction.

"But that's just a liquidity issue. There's something deeper."

He looked at Goolsby.

"You just mentioned CDS. A CDS is essentially an insurance contract. I pay you a premium, and if a company defaults, you pay me back. But this contract isn't traded on an exchange, there's no central clearing, and no public reporting. It's a private agreement between two institutions. It's over-the-counter, bilateral, and completely opaque."

"I'll give you a number."

Lu Ze said, "Yuanxing Capital, a hedge fund whose assets under management don't even rank in the top 100 on Wall Street, currently holds CDS with a notional insured amount of approximately 25 to 30 billion US dollars."

Goolsby's expression didn't change immediately. Lu Ze could tell he was processing the number, comparing it to the scale of Farstar Capital's operations that he knew.

"Wait a minute," Goolsby said, "What is the total amount of money you manage?"

"Currently, it's less than three billion."

Goolsby raised his eyebrows.

"You used less than three billion in principal to buy insurance with a nominal coverage of nearly three hundred billion?"

"That's how CDS leverage works. You only need to pay the premium; you don't need to put up the full notional principal. So I've spent far less on CDS than three billion."

Lu Ze continued downwards,

"But that's not the point. The point is, I'm just a small fund. Goldman Sachs, Morgan Stanley, Deutsche Bank, Barclays—these institutions handle dozens, even hundreds of times more notional amounts of my CDS trading desk every day. And they're not just buyers; they're also sellers. A buys insurance from B, B then buys insurance from C to hedge, and C then buys insurance from D. It's a nested, intertwined web."

Lu Ze looked at Gursby.

Guess what the notional total value of the global CDS market is?

Goolsby didn't guess. He was waiting for Lu Ze to say it.

"Approximately sixty trillion US dollars."

Goolsby didn't speak. His mouth opened slightly, then closed again.

"Sixty trillion."

He repeated the number, his voice very soft, "What is the GDP of the United States? Fourteen trillion?"

"almost."

"Therefore, the nominal size of this market is more than four times the US GDP."

"And there's nobody there,"

Lu Ze said, "Without the Federal Reserve, without the SEC, without the Treasury Department, no regulatory agency knows exactly how the risks within these sixty trillion dollars are distributed. Who owes whom how much money, who is providing guarantees for whom, which contracts are genuine risk hedging, and which are just speculative bets. It's all a black box."

He paused for a moment, a slight smile playing on his lips.

"I'm in this black box. I don't even know who my counterparty has signed or what agreements with. All I know is that if my counterparty goes bankrupt, my 30 billion insurance contracts will become worthless. And who are my counterparties? They're the big investment banks. They're the same group of people who borrow money from each other in the overnight repurchase market every morning."

Goolsby leaned back on the sofa, his hands resting on the armrests. His expression was no longer that of academic curiosity.

So you're telling me,

Goolsby slowed his pace. "These institutions not only borrowed from each other through overnight repurchase agreements, but also guaranteed each other through CDS. The two pipelines were intertwined. If one went bankrupt, it wasn't just its problem. All the CDS contracts it had signed would default, and the other institutions holding those contracts would suddenly find their hedging ineffective, their risk exposure exposed overnight."

"Then, when these institutions' counterparties see their risk exposure exposed, they will start withdrawing loans in the overnight repo market."

"Then it's that loop you just mentioned."

Lu Ze didn't speak. He didn't need to. Gursby had already walked the entire chain on his own.

"That's how Bear Stearns died."

Goolsby said, speaking at half the speed of before, "not because its assets were truly worthless. It was because one morning, too many people simultaneously decided not to lend it their money."

"right."

"And the speed at which it died—"

"From the initial liquidity problems to the acquisition by JPMorgan Chase, it probably only took about a week?" Goolsby recalled.

"Less than a week. The bleeding began on Wednesday, the Federal Reserve intervened on Friday, and JPMorgan Chase bought in for two dollars on Sunday. Five days."

Goolsby tightened his grip on his knees.

"What if the same thing happened to an institution larger than Bear Stearns?"

Lu Ze looked into Gursby's eyes.

He didn't need to answer that question. Because Goolsby already knew the answer in his mind. And that answer was giving him a real, adrenaline-fueled unease.

Very good, that's right.

It wasn't him who told Goolsby "the sky is falling." He provided a few puzzle pieces, and Goolsby pieced together the picture himself.

It is far more profound for a person to frighten themselves than to be frightened by someone else.

Lu Ze did not pursue at this moment.

He simply sat there quietly, giving Goolsby's brain room to process the information.