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******
Caron looked back at the mixing console, staring at the DAT tapes holding the masterpiece.
"Because when the Academy Awards roll around next year," Caron murmured softly, "that boy is going to be sitting on the sa row right next to us."
---
As sumr blazed on in California, ti flew by swiftly.
The IMF announced the Thailand bailout package on August 5th, 1997.
The numbers, when they were published, had the quality of a figure that has been designed to impress and simultaneously fails to fully impress the people who understand what it is being asured against. Seventeen point two billion dollars in ergency financing, assembled from the IMF itself, the Asian Developnt Bank, Japan, Australia, China, Hong Kong, Malaysia, Singapore, South Korea, and a dozen other contributing parties. It was the second-largest IMF bailout in history at that point, exceeded only by the xican peso rescue of 1994-1995.
The accompanying conditions — fiscal austerity, financial sector restructuring, interest rate increases, closure of the sixteen most severely distressed finance companies — were, the IMF's chief economist explained at the press conference, designed to restore investor confidence and stabilise the baht at a level consistent with Thailand's economic fundantals.
The baht imdiately fell another four percent.
Markets did not receive the announcent as confidence-restoring. They received it as confirmation: the situation was serious enough to require the second-largest IMF bailout in history, which was not the ssage the Thai governnt had been sending in its public communications over the previous three months, which ant the previous communications had been inaccurate, which ant the actual condition of the Thai economy was worse than the communications had suggested, which ant there was more correction to co.
This was exactly the sequence Marvin had described to his father on the afternoon of the fourteenth of July. Grant had noted, at the ti, that the sequence was the standard response pattern to an IMF announcent in a crisis economy and that predicting it was not especially difficult for soone who had been paying attention to the history of such programs. Marvin had agreed. He had also noted that the standard response pattern was exactly why it could be relied upon.
In Jakarta, the Suharto governnt responded to the Thai IMF announcent with a statent of reassurance. The Indonesian economy was fundantally sound. The rupiah's recent weakness was a temporary contagion effect that did not reflect Indonesia's underlying economic health. Bank Indonesia had the tools and the will to maintain stability.
The statent was issued on August 6th. On August 7th, the rupiah fell to 2,660 against the dollar — the weakest level it had reached since the float of the Thai baht — and Bank Indonesia raised interest rates by three percentage points in an effort to make rupiah-denominated assets sufficiently attractive to stem the capital outflow.
The rate increase did not stem the capital outflow.
Marvin's daily briefing on August 8th, prepared by Sophie Chen from the overnight reports filed by the Jakarta team, contained the following assessnt: *Bank Indonesia has burned through an estimated $1.2 billion in reserves over the past six trading days in currency market interventions. The forward book position represents a further estimated $1.8 billion to $2.4 billion in contingent reserve commitnts. Effective usable reserves are approaching $11 billion against our estimated short-term corporate foreign currency debt service requirent of $60-70 billion. The defense posture is not sustainable. Our assessnt is that the probability of a material rupiah devaluation within the next 60 days exceeds 85%. Recomnded entry window for short rupiah NDF positions: current to August 15.*
He read it at seven-fifteen in the morning. He called Elena Marchetti at seven-twenty.
"Begin the rupiah program," he said.
---
The first rupiah NDF positions were entered on August 8th through the Singapore entity — a private investnt vehicle registered under Singaporean law, capitalised with Zenith Trust funds through a properly docunted inter-company loan structure, holding no other assets and no other positions, existing solely to participate in the offshore Indonesian rupiah non-deliverable forward market.
The instrunt was specific and required explanation even among financial professionals who were not currency specialists. A non-deliverable forward, or NDF, is a contract that settles in a freely convertible currency — in this case, US dollars — rather than in the currency being traded. This is necessary for the Indonesian rupiah because the rupiah is not freely convertible; its physical transfer across borders is restricted by Indonesian capital control regulations. The NDF market allows offshore participants to take positions on the rupiah's exchange rate without needing to actually hold or transfer rupiah.
The chanics are straightforward: two parties agree on a notional amount in rupiah, a forward exchange rate, and a settlent date. On the settlent date, the contract settles in dollars based on the difference between the agreed forward rate and the spot rate prevailing at the ti of settlent. If the rupiah has weakened against the dollar — that is, if more rupiah are required to buy one dollar than the forward rate specified — the short rupiah party receives the difference in dollars. The long rupiah party pays it.
Elena structured the initial position in three tranches across the August 8th and 9th trading sessions, entering through three separate counterparties to avoid moving the market and to maintain position privacy. The total initial notional exposure was sixteen million dollars — a modest entry relative to the eventual scale of the position, deliberately sized to establish the relationship with the counterparties and confirm the execution chanics before the position was expanded.
The entry level on the three-month NDF was 2,680 rupiah to the dollar.
The implied cost of carry — the annualised cost of holding the short rupiah position, reflecting the interest rate differential between Indonesian rates and US rates — was approximately twelve percent annualised after the Bank Indonesia rate increase, or about three percent over the three-month tenor. On sixteen million dollars, this represented a carrying cost of approximately $480,000. The position would begin generating positive returns once the spot rupiah weakened to approximately 2,760 per dollar, compensating for the carry cost.
Marvin's target exit level was 4,000 rupiah to the dollar at the minimum going up to 4,300.
---
The Korean situation, anwhile, was developing along a different tiline — slower, more opaque, and in several ways more dangerous to trade precisely because the Korean financial infrastructure was more sophisticated and the governnt's defence capacity was, at least initially, more substantial.
David Kim's morning call on August 9th was the most technically detailed of any the program had conducted. David was thirty-six years old, Korean-Arican, the son of a Bank of Korea economist who had emigrated to the United States in 1978, and he had spent his career building the kind of granular market knowledge that results from combining inherited cultural fluency with professional analytical rigor. He spoke Korean, he read the Korean financial press in the original, and he had spent four years trading Asian currencies at Citibank's Seoul desk before joining the program.
"The won is holding," David said. "USDKRW is at 889 this morning. The Bank of Korea has been conducting small interventions — the footprint is visible in the daily reserve changes if you know where to look — but nothing approaching the scale of the Bank Indonesia operations. The Korean external position is being cited by every bank research departnt as justification for Korean exceptionalism argunts."
"What's the current account looking like?"
"The current account is the good news story the BOK keeps pointing to. They ran a surplus in the first quarter, though it's narrowed considerably from last year and the trend is deteriorating. But the current account story is being used to obscure the capital account story, which is considerably less comfortable."
"Walk through the capital account."
"Short-term foreign borrowings by the Korean banking system and the major chaebols have been accumulating since 1994. The Korean banks — the comrcial banks specifically, not the chaebols directly — have been borrowing in dollars and yen at short tenors, typically three to six months, and lending the proceeds dostically in won at longer tenors.
Classic maturity mismatch. The asset side of the trade — the won-denominated dostic loans — has a three-to-five year average maturity. The liability side — the foreign currency borrowings — rolls over every three to six months. As long as the won is stable and the global dollar liquidity environnt is benign, the maturity mismatch is manageable. If either condition changes—"
"Both conditions are going to change."
"Both conditions are going to change," David agreed. "The won can't remain at 889 if the regional contagion deepens, and the global dollar liquidity environnt is going to tighten as risk appetite for EM assets deteriorates.
When the rollover risk on those short-term foreign borrowings becos acute — when the foreign lenders decline to roll at maturity — the Korean banks will face dollar shortages that they cannot cover from the dostic market."
He paused. "The BOK's foreign reserves are approximately thirty-three billion on paper. But a significant portion of those reserves are not liquid — they're tied up in long-dated foreign assets and in deposits with overseas branches of Korean financial institutions that are themselves experiencing funding pressure. The liquid, deployable portion of the reserves is closer to fifteen to twenty billion by most independent estimates. Against the short-term external debt of the banking sector alone — which is approximately sixty billion — that's insufficient."
"When does the rollover problem beco acute?" Marvin asked.
"My estimate is October to November. The third-quarter external debt rollover cycle is when the foreign creditors are going to start pricing in the regional risk more explicitly. If they extend the rollover period from three months to six months — which is the conservative response — the banking system can manage through year end. If they start declining rollovers or sharply reducing exposure, the liquidity crisis accelerates." A pause. "October is when I'd want to be fully positioned."
"We'll be fully positioned by the end of September."
"I'll begin building the NDF book in won from September 1st then. The one-month and three-month tenors."
"And the equity shorts?"
"KOSPI puts, structured through the Hong Kong entity. We want exposure to the index as a whole and to the financial sector specifically — Hanil Bank, Korea First Bank, Cho Hung Bank. The comrcial banks are the most direct vehicle for expressing the banking system stress thesis."
"Start building those from mid-September. Not before." A pause. "And David — I need your ongoing assessnt of the chaebol debt specifically. Samsung, Hyundai, Daewoo, LG. Not the equity, not yet — I'll tell you when. But I need to know the mont the rollover stress is showing up in those specific balance sheets rather than just in the aggregate banking system numbers."
"I'm tracking all four weekly."
"Good."
---
The world outside the yers estate baked under a relentless sun. But inside the cavernous, air-conditioned sanctuary of Marvin's master study, the temperature was entirely dictated by the cold, ruthless mathematics of absolute victory.
Ti was flying by in a blur of studio sessions, dia frenzies, and corporate restructuring and most importantly the Asian currency crisis.
By the middle of August, the full hundred and ten million dollars was confird in the Zenith Trust account.
The final tranche — Irving's Treasury maturity proceeds and the real estate partnership liquidation — had cleared on August 14th, as the old man had indicated. Charles Whitfield at Zenith had confird the full capitalisation to Grant, who told Marvin at seven in the morning on August 15th to deliver the news.
"You have one hundred and five million, three hundred and so-odd thousand dollars in confird available capital," Grant said. "Minus the sixteen million already deployed in the rupiah NDF program and the standard operating reserves, you have approximately eighty-eight million in uncommitted capital ready to deploy."
"Allocation schedule," Marvin said. He was at the desk, the notebook open to the page where he had been constructing the program's capital deploynt frawork for the past two weeks. "Thirty million to the rupiah program — build to the full position over the next three weeks. Ten million to the Malaysian ringgit program. Five million to the Philippine peso and Thai baht tactical positions. Thirty million to the Korean won program, to be deployed from September 1st through the end of September. And I want fifteen million held in hard reserve — cash and short-term T-bills — not to be deployed under any circumstances without my explicit instruction."
"That leaves about twenty eight million unaccounted for," Grant said.
"That's the opportunistic reserve. I'll deploy it as specific opportunities present themselves through the crisis progression. It's not assigned to a position yet."
"Understood." The sound of Grant writing. "I'll have the deploynt confirmations circulated to the full team by end of day."
---
On August 14th, 1997 — the day before the final tranche of Irving's capital landed in the Zenith account — the Indonesian governnt took a decision that it had been resisting for months.
Bank Indonesia announced the widening of the rupiah's managed float band from eight percent to a free float. It was a smaller and more gradual version of what the Bank of Thailand had done in July, and it was presented in the sa carefully managed language — the word *orderly* appeared twice — but the market received it as exactly what it was: a capitulation. The rupiah, which had been trading at approximately 2,660 to the dollar when Marvin had initiated the first NDF positions on August 8th, fell to 2,755 within hours of the announcent. By the close of Asian trading on August 14th, it was at 2,790.
In the ho office in Laurel Canyon, Marvin read the Bank Indonesia statent at four-thirty in the morning — the Los Angeles tistamp on the news that was breaking in the Asian morning — and felt the particular quality of confirmation that is different from satisfaction. Satisfaction is what you feel when sothing you hoped would happen has happened.
*****
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