Chapter 60
Translator: Dreamscribe
“Jho Low seems to be more connected with Korean businessmen than we thought. I also heard he’s a well-known investor in the entertainment industry.”
“Really?”
“Yes. They say he’s spending money like water in the entertainment sector… It kind of feels like he’s playing the role of a bridge connecting the Southeast Asian entertainment world with Korea.”
“I see.”
“…CEO-nim. You’re not really interested in Jho Low, are you?”
Jho Low had long since fallen out of my area of interest.
“Was it that obvious?”
“Yup. CEO-nim, you tend to stay quiet when it’s a topic you’re not interested in.”
Lee Hye-rin let out a soft chuckle.
And I still haven’t gotten used to the title ‘CEO-nim’.
“What do I do when it’s a topic I’m interested in?”
“Then your eyes light up and you start ordering all related materials to be brought in. So I brought something you might be interested in. Hehe.”
It was none other than material on Deutsche Bank.
I had been getting a feeling about this for a while and decided to look into it.
“As you know, Deutsche is one of the leading financial institutions in Europe. The derivatives tied up here alone amount to several thousand trillion won.”
In Europe, there are three financial companies known as the TOP3.
First is HBC of the UK,
Second is ANP Paribas of France,
And third is Deutsche Bank of Germany.
Its market capitalization is 18 trillion won.
On the surface, it’s just Deutsche Bank, but it is actually Germany’s largest financial group, exerting strong influence across all of Europe.
The assets under management are estimated to be close to 2 trillion dollars, but the market cap is lower than expected. This is true for other financial firms as well.
Due to the composition and quality of the assets, and also issues with capital soundness, even large asset holdings are often classified as derivatives or risky assets.
Also, the return on investment is low relative to the amount of assets under management, so the overall market capitalization tends to be low.
“Also, Deutsche has long been involved in accusations like money laundering, which is part of why its stock price is lower than other companies.”
Currently, Deutsche Bank’s stock price is 30 euros.
Because the company is so large, it has been involved in various illegal matters and has paid a lot in fines.
“But even with all the related incidents, it’s still going strong. You know that, right? That Deutsche Bank is TBTF.”
TBTF.
Too big to fail.
In Korean terms, it means a company too big to collapse.
A company that will never fail.
Because if Deutsche Bank collapses, not only Germany but the whole of Europe would be shaken.
It would have the same impact as the Lehman Brothers crisis in 2008.
“There are a lot of criticisms saying that Deutsche Bank is becoming bolder in its shady dealings because it knows the government will step in if they’re in trouble.”
You might wonder why one of Europe’s top 3 financial groups would do such things.
The reason is actually simple.
“To become number one in the industry. In fact, the chairman of Deutsche Bank openly expressed ambition to become the number one in Europe and dominate the global market.”
In terms of sheer size, Deutsche Bank’s asset scale was larger than that of Gold Reagan.
But there was a trap in this.
Deutsche Bank’s assets were said to be twice that of Gold Reagan’s, but that was only because they forcibly inflated their size.
“Gold Reagan is an investment bank, meaning their self-capital is substantial. On the other hand, Deutsche Bank recklessly expanded their size through derivatives and risky assets, and they don’t have much self-capital.”
What makes Gold Reagan famous is the investment firm they operate.
Not only do they manage clients’ money, but the amount of assets Gold Reagan itself holds is massive, giving them influence across various countries.
Moreover, when a specific risk arises, Gold Reagan has solid risk management and the ability to respond to any crisis.
But Deutsche is the complete opposite.
They focused solely on selling derivatives and succeeded in expanding their size, but they are widely criticized for lacking the capacity to respond when specific crises hit.
However, because the collapse of Deutsche Bank is considered unthinkable, it is still regarded as safe.
“Just by looking at the recent credit rating evaluation, they’re maintaining an A rating, so the CDS spread is expected to remain at 300bp.”
I reviewed all the materials related to Deutsche Bank, but nothing really struck me. However, just now, something in what Hye-rin said felt like it shook my eardrums.
“CDS?”
“Yes. It used to be AAA, but with so many incidents and accidents, it dropped to A. It’s a company with a lot of risk, but one that absolutely won’t go bankrupt, so I think that’s why the credit rating came out that way.”
CDS.
Simply put, it’s bankruptcy insurance.
In other words, if you think a specific company is likely to go bankrupt, you pay a certain percentage of the contract amount annually.
And if that company really does go under?
Then the CDS contract is immediately triggered, and the insurer must pay the amount specified in the contract to the policyholder.
“…….”
I quickly flipped through the materials to check the current CDS on Deutsche Bank.
Just as Hye-rin said, it was 300bp.
That means they’re paying 3% of the contract amount annually as insurance premium.
If it’s a company with high bankruptcy risk, the rate can shoot up past 1,000bp.
“The CDS market has shrunk a lot compared to before, right?”
“Yes. Before the Lehman Brothers crisis, the market was as big as 1 quadrillion won in Korean currency, but after taking a huge hit then, it shrank to about 8,000 trillion won. Still, it’s quite large.”
And of course, it is- because it’s so easy to make money with CDS.
For example, you can keep issuing CDSs on companies like Kangseong Electronics or Microsoft, firms that are TBTF, and just rake in hundreds of billions or even trillions of won in annual premiums.
Because there’s no way those massive corporations would go bankrupt.
That exact overconfidence is what caused the massive damage during the Lehman Brothers crisis.
Companies everyone thought would never fail started going bankrupt one after another, and the insurance payouts that had to be made via CDS ballooned to astronomical levels, leading to a domino effect that closed down financial firms across the board.
If it weren’t for CDS, the Lehman Brothers crisis wouldn’t have spread so disastrously.
And yet, even now, many financial institutions continue to issue CDS.
Aside from the rare major crisis, there’s no sweeter honey pot.
“…….”
But this is bad.
When I first got a intuition about Deutsche Bank, I thought maybe I needed to go short or long on it.
But this was something different.
What my instincts were reacting strongly to right now was none other than CDS.
And that meant only one thing.
‘This means Deutsche Bank is going to go bankrupt, doesn’t it?’
One of the top three financial firms in Europe going bankrupt.
It was unthinkable.
And yet, my intuition was screaming, emphasizing the letters ‘CDS’ louder and louder.
As if telling me to prepare for the financial catastrophe that was about to crash in like a tsunami.
“…Can you find out how much Deutsche Bank CDS is currently available on the market?”
“What? C, CDS?”
Normally, Hye-rin would follow my orders without question or hesitation.
But this time, she seemed frozen in place, blinking in shock.
She knew it too.
She understood what CDS meant.
“I-I understand!”
Hye-rin stiffly turned and clicked her heels as she walked out.
It wasn’t the kind of situation to laugh at, but I couldn’t help but let out a short chuckle.
“But… this can’t be, right?”
No matter how recklessly they’ve expanded and how many risky assets they hold.
The idea that Deutsche, one of Europe’s top three financial institutions, could collapse.
It was supposed to be impossible.
But suddenly, I remembered the chaos of 2008.
Even though I was young back then, every media outlet kept repeating the same thing.
[Lehman Brothers will never go bankrupt!]
***
Kang Sung-ho had a routine.
He always exercised in the morning.
While doing cardio on the treadmill, he watched the morning news on the TV in front of him.
That way, he could also check international updates from overnight.
“!?”
Then Chairman Kang Sung-ho nearly stumbled off the treadmill at the very first news story of the morning broadcast.
“Wait a second. That bastard…”
The face of the man on the morning news looked extremely familiar.
“Jho Low?!”
It was Jho Low, the person responsible for 1MDB who had previously approached Chairman Kang Sung-ho and the Kwangwoon Group.
Funds that were supposed to be used for Malaysia’s national interests had actually all been funneled into money laundering, and using U.S. dollars, were spread across various sectors, Hollywood, U.S. real estate, luxury yachts, and more.
The U.S. authorities had detected this and found that the money had been scattered across numerous areas, triggering violations of the Foreign Corrupt Practices Act and laws surrounding asset acquisitions for influence within the United States.
Due to this, the U.S. government officially released Jho Low’s identity and took the lead in informing the world about the 1MDB scandal.
“This crazy-”
His heart sank for a moment.
No one knew just how much this crazy bastard had stolen, but the U.S. government was clearly furious.
Just the embezzled amount alone was over 7 trillion won.
And when factoring in the money laundering, the total amount skyrocketed even further.
If he hadn’t listened to Jung Jin-ho’s advice and instead gone along with Jho Low’s proposal to invest in 1MDB…
“Just thinking about it is horrifying.”
How much did Jung Jin-ho really know?
No. This wasn’t the time to be leisurely exercising.
“…Is there anyone here who received money from Jho Low? Or went around with him and received entertainment or anything?”
Chairman Kang Sung-ho urgently called the executives together.
As rumors spread that the infamous swindler Jho Low had stayed in Korea and met with many businessmen and even hosted them, the controversy in Korea was growing rapidly.
“No one? Speak up now. That way we can prepare ourselves too.”
“…….”
No one responded.
It was clear that Jho Low had probably made moves on a few of them to get investment from Kangseong Group, but no one was coming forward to confess.
“Very well. I’ll trust everyone here. But, I gave you a chance today, if anything comes to light later on, you’d better be prepared.”
In other words, he was telling them to hide it well, whether from the inside or outside.
“So, how far is this thing connected?”
“Jho Low went around from the U.S. to all over Asia, suggesting investment into sovereign wealth funds, or handing out money while entertaining people. Because of that, the U.S. has now issued a wanted notice to hunt him down.”
“Did they catch him?”
“No, not yet. His whereabouts are still unclear. What’s certain is that the U.S. is absolutely determined to hit the companies involved in this incident with full force.”
At that, Kang Sung-ho let out a heavy sigh of relief.
If Jho Low had been exposed as a scammer in another country with no connection to the U.S., he might’ve just brushed it off.
But the problem was, it was the United States.
If the U.S. finds someone or some group that causes them massive damage, they’ll chase them to the ends of the earth and utterly destroy them, no matter what country they’re from.
That’s why companies were trembling right now.
Any company of considerable size was inevitably connected to the U.S. in some way, and if the U.S. imposed a fine, the resulting losses would be enormous.
“We’re not exposed to any risk, right?”
“Yes. If we had invested in the sovereign wealth fund at that time… we would be getting crushed right now like those other companies.”
The executives also let out a sigh of relief.
It was fortunate that Kang Sung-ho firmly stood his ground. If they had gone along with the executives’ advice, they would’ve been royally screwed, no exaggeration.
“Anyway, this situation is favorable for Kangseong. Ever since we rejected the sovereign wealth fund, the Malaysian government started putting pressure on us, but now that this scandal is tied to their current Prime Minister, Malaysian public opinion is in complete uproar.”
What escalated the scandal was the fact that the current Malaysian Prime Minister was involved in the money laundering and fraud using the sovereign wealth fund.
He used money that was supposed to serve national interests to fatten his own pockets.
In other words, he had slapped the entire Malaysian population in the face.
“So the Malaysian government could actually change?”
“There’s a very high chance. The current Prime Minister might even resign.”
Above all, with the United States involved, the Malaysian government couldn’t just turn a blind eye.
“We need to maintain good relations with the next administration. For our own sake.”
“Yes. The next administration will know we’ve been at odds with the current government, so we’ll try to leverage that as much as possible.”
“Good. Whether it’s for our electronics or our semiconductor business, we absolutely have to push into Malaysia. Otherwise, we’ll never catch up to TSMC.”
TSMC.
Taiwan’s largest foundry semiconductor company.
While Kangseong was number one globally in the DRAM sector, TSMC held an overwhelming lead in the foundry sector.
“What about Europe? Is Deutsche still blocking us?”
“Yes. We tried to establish a headquarters in Frankfurt and collaborate with several semiconductor companies, but Deutsche owns the land we want, and more importantly, it seems they have absolutely no intention of letting us in.”
It was a frustrating situation.
If only Deutsche would step aside, they could move forward rapidly and break into TSMC’s stronghold, dominating the market with superior semiconductor technology and production capacity.
“Chairman. May I speak?”
It was the CEO of Kangseong Securities, who rarely spoke during executive meetings.
“Go ahead.”
“There’s a strange rumor circulating about Deutsche Bank right now.”
“What kind of rumor?”
“There’s talk that Deutsche Bank might go bankrupt.”
“……?”
Chairman Kang Sung-ho wasn’t even surprised.
It sounded far too unrealistic.
“Isn’t that just nonsense?”
“Normally, yes. But wasn’t it recently revealed that Deutsche Bank is involved in the 1MDB case?”
“Those bastards have been caught laundering money more than once, haven’t they?”
Other banks were no different, but Deutsche Bank had been especially tied to many financial crimes. And yet, they continued to operate just fine, which was honestly absurd.
“Yes. That’s why the U.S. recently announced they would be imposing a fine on Deutsche Bank, probably around 1 billion dollars.”
“That much won’t make them go bankrupt, right?”
“Correct. But the problem is that the U.S. is now hitting companies that contributed to the damage during the Lehman Brothers crisis with huge fines, several billion dollars each. Even Gold Reagan has already been fined several billion.”
Come to think of it, he had heard that Deutsche might also be fined by the U.S. for selling junk products and making profits off of them.
“According to the latest information, the U.S. is preparing to impose a fine of about 14 billion dollars. Initially, the fine was going to be lower, but when they found out about the connection to the sovereign wealth fund, they likely added punitive damages.”
“14 billion!?”
That was nearly 16 trillion won in Korean currency.
And it would all have to be paid just as a penalty.
“But… hold on. Isn’t Deutsche one of Europe’s top three financial institutions? You’re saying they can’t handle 14 billion dollars?”
“If it were HBC or ANP, the damage would be significant, but still manageable. But Deutsche is notorious for being bloated in size but lacking real capital strength.”
“What about the German government?”
“Yes. If Deutsche collapses, it would be a European-scale Lehman Brothers event, so the German government wouldn’t be able to sit still. But the problem is that the German government isn’t in a good position right now either.”
Germany had already conducted several bailouts and was still in the middle of others.
“During the Stummwagen crisis, some unknown forces appeared and swept through the market. Several securities firms in Germany collapsed because of it. Back then, the German government launched a large-scale bailout including Stummwagen.”
“And?”
“After Brexit, trade with the UK was cut off, and German shipping companies operating through the EU were shaken by China’s takeover of global shipping. They managed to hold on until then, but when energy prices soared and Kwangwoon took over all the contracts, they were practically wiped out.”
Germany’s shipping industry was second only to Switzerland in size.
Among the global top 10, multiple German companies had made the list.
“And then the Belt and Road Initiative hit?”
“Yes. That was the final blow. The Chinese government funneled all the shipping work to Chinese companies, and Kwangwoon took over everything else. The German government tried to salvage the situation with yet another bailout.”
Those once-massive companies had now all collapsed.
To mitigate the impact, Germany had no choice but to implement bailouts.
“But now, with Deutsche Bank on the verge of collapsing, the German government is in full crisis mode. The U.S. hasn’t made an official announcement yet, but it seems certain they’ll impose a massive fine today or tomorrow. And the most decisive factor is this, someone started buying up a huge volume of CDS a few weeks before all this blew up.”
CDS is traded over-the-counter.
That means there’s a degree of confidentiality, but it’s not absolute.
Because when someone buys CDS in large quantities, the securities firm, bank, or fund that sold them has to invest money elsewhere for risk management purposes.
That naturally leads to rumors spreading and the CDS spread rising.
Didn’t the price of CDS skyrocket before Lehman Brothers collapsed?
“A high CDS spread means the company has a high risk of bankruptcy.”
When investors see that, they fall into panic.
“Wait. So Deutsche Bank really might go bankrupt?”
“Normally, I’d say that’s impossible… but with a fine of over 14 billion dollars, plus the fact that the German government has already issued multiple bailouts, the odds right now are fifty-fifty. And on top of that, the CDS spread is skyrocketing.”
The idea that one of Europe’s top three financial institutions could collapse.
It was hard to believe.
And someone had bought up a massive amount of CDS to amplify that sense of instability.
If that fear spreads too far, customers who have money deposited in Deutsche Bank will start withdrawing funds, and that will trigger a bank run.
“Just who…….”
At that moment, a face flashed through his mind.
“CEO Kim.”
“Yes?”
“Didn’t you tell me during the Dieselgate incident that it was likely Kwangwoon who pulled off that big move in the German market?”
“Yes.”
“Then what about this CDS case?”
“I can’t say for sure either, but Stummwagen, the shipping takeover, the Belt and Road Initiative… all of them are linked to Kwangwoon. So if it turns out Kwangwoon was the one who bought up all that CDS…”
CEO Kim swallowed dryly at that point.
“It would mean Kwangwoon had planned all of this from the very beginning.”
“……!”
Chairman Kang Sung-ho stared blankly into space.
This plan wasn’t created by Kwangwoon.
It was entirely the roadmap designed by Jung Jin-ho.
He had simply borrowed the name ‘Kwangwoon’.
And that roadmap had a single destination.
The destruction of Deutsche Bank.
*****
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