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

"I don't think Lehman Brothers will go bankrupt."

Isabella offered a judgment in May 2008 that aligned with the consensus of all top Wall Street institutions:

"The death of Bear Stearns has made the entire market extremely nervous. Lehman Brothers was much larger than Bear Stearns and was the fourth largest investment bank in the United States."

If it truly reaches the point of liquidity depletion, the Federal Reserve and the Treasury would absolutely not dare to watch it collapse directly, triggering a systemic crash.

"Under extreme pressure, the government will definitely step in, or force a major bank to acquire it at a low price, just like JPMorgan Chase acquired Bear Stearns."

She looked at the LEH on the paper and said calmly, "If Lehman Brothers is acquired, its debts will be assumed by the acquiring company. If we spend a lot of money to buy Lehman's CDS, it will most likely become a pile of worthless paper because no substantial 'default event' has been triggered."

CDS is essentially a fire insurance policy for someone else's house.

Investors pay an annual "premium" to the institution. If the underlying asset (such as Lehman Brothers) "crashes" (defaults or goes bankrupt) during this period, the institution will, according to the contract, fully compensate for the face value of the defaulted assets.

So if you pay a premium of $100 million, the face value of the assets you insure might be $1 billion, and the institution would have to pay you $100 billion.

Even if you don't actually hold these assets—that's the magic of CDS.

The office fell silent.

This is precisely the core reason why the vast majority of hedge funds dare not heavily invest in Lehman Brothers in the CDS market – everyone is betting that the government will definitely bail them out.

Lu Ze listened to this analysis without saying anything.

He stared at the three letters "LEH" on the paper and fell into a brief silence.

As a time traveler, he certainly knew the correct answer to history: Lehman died and was not saved.

But he was also aware that the "death" in history was full of absurd coincidences.

It was because of Fuld's flip-flopping, because of Chancellor Paulson's momentary lapse in judgment, and because at the last minute, British regulators suddenly refused to approve Barclays' acquisition.

Now, Farstar Capital is no longer the obscure little player it once was.

When he takes a huge amount of capital and heavily drains or shorts Lehman Brothers this summer, will it trigger a butterfly effect?

Could this cause Lehman Brothers' stock price to collapse prematurely?

Will this force Fuld to back down in July and accept investment from a consortium ahead of schedule?

If any one variable deviates from its expected path, Lehman Brothers could either survive or be successfully acquired.

This is the most real and cruel aspect of the financial market. Even if you have the script in your hand, the script has already been rewritten when you become a huge force within it.

Lu Ze turned his gaze from the paper to Isabella.

"Your logic is very sound and aligns with the current pricing consensus on Wall Street."

He said calmly.

"So, are you still going to short its CDS?" Isabella asked.

"want."

"But what about the expectation of a government bailout—"

"Wall Street models can calculate the holes in balance sheets, but they can't calculate politics and human nature."

Lu Ze interrupted her, his tone devoid of arrogance, only an objective detachment from emotion.

He picked up the glass on the table and took a sip of water.

"Isabella, this is an election year."

Isabella was slightly taken aback.

"The current Treasury Secretary, Paulson, came from Goldman Sachs. In March, he used taxpayer money to bail out Bear Stearns, and he was already being criticized on Capitol Hill as an accomplice of Wall Street. Now it's May, and when September and October come, when the election campaign reaches its most intense stage, do you think either candidate from either party would dare to support the government spending tens of billions more to bail out another greedy investment bank?"

Lu Ze put down the water glass with a soft sound.

"And then there's Richard Fuld. He was CEO of Lehman Brothers for fourteen years and was known as the 'Bulldog of Wall Street.' The kind of person who, as long as he's not on his last breath, will never accept being acquired for a humiliating price of two or five dollars. He'll keep dragging it out until he gets a price he considers decent."

"So, this is a time difference."

Lu Ze lightly tapped the paper with the tip of his pen.

"Fuld believed that the government would eventually save him, so he refused to back down now; but the government, under political pressure in an election year, ultimately did not dare to save him at all."

"When extreme arrogance clashes with political avoidance in an election year, the result is that all the lifeboats will be missed in the process of testing each other."

The office was quiet, with only a very low hum from the air conditioner vents.

Isabella stood there, listening to this simulation, devoid of a single financial term, yet more chilling than any Monte Carlo simulation.

This is not about hedging risks.

This is an extremely cold-blooded calculation of human weaknesses.

"But that's also a possibility, isn't it?"

Isabella was silent for a moment, then asked softly.

"If Fuld concedes defeat early, or if the Fed really steps in under pressure from the election... our heavily invested CDS will be wiped out."

"Incomplete".

Lu Ze raised his head.

He looked out the window at the dazzling Manhattan sunlight, his eyes extremely calm.

"As long as there are variables, there is no absolute certainty. But CDS does not necessarily have to wait until bankruptcy liquidation to realize its benefits."

He turned his head and looked at Isabella.

"Do you remember Bear Stearns?"

Isabella was stunned for a moment, but quickly realized what was happening.

"You mean, when it's in crisis, we can sell it off instead of actually waiting for Lehman to go bankrupt?"

Lu Ze casually folded the piece of paper with his name on it and threw it into the paper shredder next to him.

"At that time, those panicked big money investors needed to hedge against the huge risks of Lehman Brothers, and they were willing to pay a lot of money to buy the 'fire insurance' we had."

Isabella was persuaded.

"So this is the definite direction of the trade. It's just a matter of whether you make 5 times or 50 times."

"right."

Lu Ze recalled his conversation with John Paulson.

Paulson also said that this is the definite part.

He just needed more ammunition at the time, so he turned to oil first.

In any case, the goal has been set.

In the quiet office, Lu Ze and Isabella quickly shifted their focus from grand historical deductions to precise tactical execution.

"Now that we've identified Lehman Brothers as our primary target, we need a multi-layered defensive strategy."

Isabella switched into COO mode, speaking faster and more clearly:

"The first layer is the on-exchange defense. We can use some funds to buy Lehman Brothers put options in batches on the open market through decentralized brokerage channels."

"Regardless of whether Lehman Brothers ultimately fails or is sold off cheaply, as long as its stock price falls from the current $40 or so, these standard exchange-traded options can be cashed out immediately, providing the most basic liquidity profit."

This part doesn't require signing complicated off-site agreements, making it the safest option.

"Yes. Diversify your positions to cover up any signs of order execution."

Lu Ze nodded.

"The second layer, and the main event, is credit default swaps (CDS)."

Isabella frowned slightly.

"But this is an over-the-counter transaction, which is very troublesome. If we directly take hundreds of millions of dollars to an investment bank and specifically ask to buy Lehman's CDS, it's equivalent to shouting on Wall Street that we want to take down Lehman."

They will immediately become alert, and not only will they demand exorbitant premiums, but they might even refuse to accept the application altogether.