May 2, 1997.

Russia declared a moratorium.

[Russia Declares Default, Shocks Global Financial Markets]

[Breaking: Russian Ruble Plummets... FX Markets Halt Trading]

[Russia Announces Foreign Debt Suspension... Panic Sell-Off on Wall Street]

It was absurd.

Everyone thought so. They weren’t even dollar bonds—weren’t they ruble-denominated?

Why not just pay them back? At the very least, couldn’t the central bank run the printing presses and pay off the debt? Sure, the ruble’s value would nosedive, but that was already happening anyway.

But in the end, it happened. No amount of analysis or foresight mattered.

Russia. Moratorium.

As that global economic disaster unfolded, the financial center of the world plunged into uncontrollable chaos.

When a tsunami hits, survival comes first. And Russia, inheritor of the Soviet Union’s legacy, was still a heavyweight in the ring.

“Just dump the Russian bonds and rubles right now!”

“Bond yield at 200%? Insane. Absolutely insane....”

A 90-day moratorium and a declaration to devalue the ruble by as much as 35%...

The bond market went berserk. Any place even remotely tied to Russia collapsed one after another like dominoes.

.

.

.

And... at that moment, LTCM thought this:

The market’s frenzy had caused a severe mispricing in the bond market, but once time passed, things would correct themselves.

“If we just survive this—just this month, that’s all we need...!”

Fund managers with bloodshot eyes were trembling as they scrambled to scoop up those worthless scraps of paper masquerading as bonds. Just the face value promised 200%—if creditworthiness recovered, the yield would be an incredible asset.

And they were right. Given time, the price would rebound.

That is, if they could endure it.

***

Wall Street gold diggers had always loved Russia.

No—perhaps it was more accurate to say they desired it. How tantalizing the remnants of that superpower, once toe-to-toe with the United States, must have seemed.

Even if he knew the country intimately—hell, even if he came from its local ruling elite—if the director of Alpha Fund had gone all out to strip some backwater Eastern nation bare and reaped billions doing it, how much more alluring were the bones of the Soviet Union itself?

Even Robert Rubin, the current U.S. Treasury Secretary and former Goldman Sachs chairman during the Soviet collapse, had paid dearly to become an advisor to the Yeltsin government.

Tap, tap.

Henry Paulson, who had succeeded Rubin as chairman of Goldman Sachs, tapped his desk as he sunk into thought.

Despite rising to a place of reverence on Wall Street, his mind was filled with something very human:

‘Shouldn’t have gotten involved.’

Why? Why had he stuck his head back into a market they’d already stripped clean?

Goldman had entered Russia ❀ Nоvеlігht ❀ (Don’t copy, read here) in 1992 with massive capital, but pulled out in 1994. That decision came directly from Robert Rubin himself.

–‘This place is too dangerous, and it’s not even profitable. Let’s just focus on East Asia instead.’

Exactly.

Goldman had withdrawn from Russia completely. He remembered clearly—Rubin had retired and been appointed Treasury Secretary (Goldman was often called a training ground for Treasury Secretaries), and one of Paulson’s first moves as the new chairman was shutting down the Russian division.

Just a few months ago, he’d revisited the frozen tundra with tear-soaked losses.

“Whew... I should’ve ended it then. Where the hell are my cigarettes....”

He lit one with trembling hands, grinding his teeth.

When John had suggested re-entering Russia, he should’ve declined, calmly and firmly, as chairman of the board.

[Russian GKO Bond Yields Hit 80%!]

—He couldn’t resist.

‘If I’d just waited a year....’

He had his reasons. They sound like excuses now, but back then, they made sense.

Goldman Sachs, shockingly, had been one of the most cautious banks on Wall Street when it came to Russia. Even after investing so much effort, they had withdrawn in 1994.

–‘Ha! A 50% return? Who needs a hedge fund? That’s better than Alpha Fund during its peak!’

–‘Already up to 60%... heh. Time to act. If we negotiate a bond swap as a condition for the loan, the fees alone... Oh, what’s wrong? Ah, right! You’re not investing in Russia. My apologies. Hahaha, 70% yield would make anyone nervous. Understandable.’

But then...

As those damn competitors flooded Russia like mushrooms after rain, even Paulson’s patience snapped.

80%! A whopping 80% return on government bonds! As chairman of Goldman Sachs, with close ties to the IMF, how could he ignore such a juicy prize?

Naturally, they weren’t buying the bonds directly. As an investment bank, they were merely brokering deals for “safety,” taking commissions. But even that amounted to contracts worth hundreds of millions—delicious enough for any Wall Street money fiend.

Surely, Russia wouldn’t reject the IMF. Even if it did, it had already received bailout funds, so the economy was relatively stable... or so they thought.

And so, Goldman Sachs ended up like this. Like a retail investor who sells too early, sees prices rise again, jumps back in—and gets burned.

If he had to draw a familiar metaphor... it was like during his idyllic college years at Dartmouth, sweating over an exam, erasing the right answer, and realizing it too late.

Tap, tap.

‘Retirement... isn’t an option. If I step down now, I’ll never even get near the White House.’

If only there had been more time. If only this nightmare had struck before they re-entered Russia.

Goldman Sachs was in dire straits.

[At Least 70% of Hedge Funds Expected to Face Severe Liquidity Crisis, 20% at Risk of Bankruptcy]

[Of $6.4B in Bond Swap Contracts, $800M Belong to Goldman Sachs—Most Are Short-Term, $600M in Projected Losses]

The only silver lining? JP Morgan had it worse. They joined later, so they signed fewer contracts...

‘Fewer, my ass.’

The visible losses alone were $600 million—and hopeless ones at that. On top of that, their effort to assist Russia in issuing new government bonds was now for nothing. And the press would tear them apart for helping a country that just declared a moratorium.

A nightmare. The kind of black swan event that happens once in a decade—except, for him lately, it was one after another.

“Damn it, those shameless... They could’ve at least warned me! How, how could those brazen bastards....”

Henry Paulson clenched his jaw and cursed the damn communists as he envisioned being dragged into congressional hearings and getting publicly flayed.

A bond swap is a mechanism where short-term bonds are exchanged for long-term ones to manage risk. And the Russian government had used this to dump its soon-to-be-worthless bonds before declaring default.

Insanity. Not even the U.S. pulled this kind of stunt. And now this toothless tiger had dared pull it on the second-most powerful bank in America.

Such a brazen move—demanding a swap of regular bonds for zero-interest perpetual bonds—was unheard of.

And while he was pulling his hair out, still fulfilling his duty as Goldman Sachs chairman by reading and signing documents...

Rrring!

A call came in. A familiar number, at a familiar time.

He didn’t even need to look. It was John Meriwether, founder of LTCM, and presumably someone who had just lost an enormous amount of money.

Click.

LTCM had borrowed significant funds from Goldman Sachs, so Paulson knew the portfolio well enough. He bit his lip and answered with a tired voice.

“...Yeah, what is it?”

–“Lend me some cash. Just $500 million—no, $600 million, and—”

Click.

Hanging up on LTCM like that—hell, hanging up on anyone like that—was far from gentlemanly.

But he simply couldn’t take it anymore.

.

.

.

Rrring!

–“I’d like to discuss something about LTCM.”

“I already said we’re not lending any— Wait, wait.”

His hand had started to hang up again, but the unfamiliar woman’s voice made it pause in midair.

‘...Alpha Fund?’

A woman. Alpha Fund.

The combination of those two familiar words rolled over his tongue like a sweet scent.

“Well, this is an honor. The youngest director of Alpha Fund I’ve heard so much about.”

–“Ahaha, it’s an honor for me too, Chairman of Goldman Sachs.”

Originally, someone of her “rank” would’ve been slightly beneath a conversation with one of the Big Four investment bank heads...

But right now, cash was king. And on Wall Street, a person’s status was defined by their liquidity.

And the director of Alpha Fund—rumored to have at least $3 billion in liquidity—was not going to miss this opportunity.

“So, what can I do for you? These days, you’re the biggest name on the Street.”

–“It looks like LTCM is in real trouble... and I think it might taste pretty good. Ahaha. We’ve been trying to step into this industry too, and since we’ve snagged a big one on our first cast... I thought I’d call and share it with a friendly neighbor.”

Ah.

This was it.

The chairman of Goldman Sachs cheered internally, his deeply furrowed brow smoothing out as he put on a calm, gentlemanly smile—

As always.