Dr. Cooper’s expression was incredibly peculiar, a strange blend of a smile and a grimace, the kind that made one want to prostrate themselves and beg for mercy.
Dr. Cooper had just called a friend at the exchange to clarify why the over 400 billion in assets were frozen. It turned out these assets had been lent out, or rather, bought by short-sellers.
Although he had suspected this outcome, confirming it personally sent shivers down his spine. How dare these people do such a thing behind his back!
While it was common and legal in the investment industry to collateralize one’s shares and securities with short-sellers for substantial monthly interest – something Goldman Sachs did daily – Dr. Cooper had issued a strict order at the beginning of the year. Assets related to subprime mortgages were absolutely forbidden from being handed over to short-sellers. Otherwise, situations like today would occur, where Dr. Cooper, intending to sell these assets and flee, found them frozen and untradeable.
Short selling, as explained many times before, was a practice where investors, anticipating a future stock price drop, borrowed shares from financial institutions using funds as collateral. They would then sell these borrowed shares on the market, converting them to cash. When the market did indeed fall and the stock price dropped, they would buy back the shares at a lower price before the loan contract expired, return them to the institution, and thus complete the transaction, profiting from the price difference.
As borrowing required high interest, institutions earned interest without doing anything, which was a very profitable arrangement.
Clearly, Goldman Sachs’ assets had been lent out for short selling. This meant these securities and stocks were not actually in Goldman Sachs’ possession; they had been borrowed. Naturally, Goldman Sachs couldn't operate on them.
So, the question arose: if these securities and stocks had already been borrowed, why were they still listed in Goldman Sachs’ own accounts?
This involved another investment method unique to the United States, known as naked short selling.
Naked short selling, as the name suggests, was a rather aggressive approach.
Naked short selling meant one did not need to actually borrow shares. By registering with the stock exchange, one could sell shares on the market without possessing them. The only requirement was to buy back the corresponding shares with money before the agreed-upon deadline to complete the naked short sale.
Wasn't that incredibly aggressive and unbelievable? Selling on the market without owning the shares. This wasn't a case of borrowing a chicken to lay eggs; it was borrowing air to lay eggs. And this was a legal practice in the United States, of all places.
Of course, the U.S. securities regulators weren't entirely without safeguards. If an entity wished to engage in naked short selling, there was one step required: finding corresponding shares and securities to serve as collateral for the transaction.
For example, if one wanted to sell short a hundred thousand shares of a certain stock out of thin air, they would need to find a hundred thousand shares of that stock as collateral. This way, if any problems arose, there would be a hundred thousand shares as a fallback.
This seemed like a redundant step, and indeed it was. Even if the investor failed and lost everything, they wouldn't be able to produce the hundred thousand shares. However, as a collateral provider, one only needed to pay a small penalty to walk away clean.
Conversely, for providing collateral to help others, the collateral provider could earn more transaction fees, typically two to three times the penalty. Thus, providing collateral for naked short selling was a guaranteed profitable venture with no loss whatsoever.
Readers might wonder why such collateral was necessary if it didn't involve deducting shares. Wasn't this like taking off pants to fart?
Yes, it was precisely like taking off pants to fart. The primary reason was that when Wall Street conceived this innovative financial tool, it faced opposition from many stock investors and the public across the United States.
So, Wall Street devised this pretense of collateral to protect the interests of ordinary investors.
However, behind the scenes, through complex rules, this collateral merely became a pair of pants requiring only a small penalty to remove, a mere deception for ordinary investors, a fig leaf.
Naturally, this collateral wasn't entirely without cost. Besides paying a small penalty, the shares and securities used for naked short selling were frozen in the account and could not be traded. This was the situation Goldman Sachs was currently facing.
In other words, someone else was engaging in naked short selling of these subprime mortgage-related stocks, using Goldman Sachs’ shares and securities as collateral, thereby locking up Goldman Sachs’ assets and making them immobile.
“Sir, the situation has been investigated!” hours later, the secretary returned to Dr. Cooper’s side, trembling, and whispered.
“Who did it?” Dr. Cooper’s voice was as cold as the South Pole.
“It was the head of the Operations Department, Corby, the head of the Technology Department, Jervis, and…” the secretary rattled off over twenty names, involving nearly a third of Goldman Sachs’ senior management.
“Corby?” Hearing the name, Dr. Cooper felt his legs buckle.
Corby was his former personal secretary. After his successful European trip and great service, he had been appointed head of Goldman Sachs’ Operations Department, fully in charge of the firm’s asset operations.
Having been by Dr. Cooper’s side for over ten years, Corby was one of Dr. Cooper's proteges, possessing formidable capabilities and loyalty. It was for these reasons that Dr. Cooper entrusted him with such a crucial core department. He never imagined that the person leading the charge to betray him was him.
“How exactly did he do it?” Dr. Cooper asked.
“Yes, about twenty-five days ago, an institution approached Corby, requesting Goldman Sachs to provide collateral for a naked short sale. Because the offered monthly interest was as high as 2.4%, Corby deemed it profitable and impossible to refuse, so he agreed to provide the collateral.”
“He also signed a collateral cooperation agreement on behalf of the company. Since this was a collateral agreement for naked short selling, and all collateral funds were provided by the other party, there were no internal fund transfers within the company, only someone needed to sign on behalf of the company. Therefore, Corby was able to completely bypass the financial department’s monitoring and signed the cooperation collateral agreement on behalf of the company.”
“However, he knew the only issue was that once the collateral cooperation agreement was signed, the software would show these assets as being locked and frozen. Furthermore, you had issued strict internal orders prohibiting such actions. So, he colluded with the head of the technology department and others, using private tampering of the company’s software data to prevent the software from displaying these assets as locked.”
“That’s the entire process!” the secretary quickly explained.
“It’s that simple?” After listening, Dr. Cooper’s expression grew even more grim. “Are you telling me this guy simply signed on behalf of the company and then tampered with the software data, and that was enough to deceive everyone in the company?”
“No, sir, it wasn't that it deceived everyone in the company. It’s that all the high-level executives who could have discovered the problem colluded together, then suppressed their subordinates, and thus kept the entire matter hidden!” the secretary replied.
“Just tell me directly, his method could directly deceive me!” Dr. Cooper’s expression was at its worst. So, he had been kept in the dark the entire time.
“It’s remarkable you’ve investigated so thoroughly in such a short time. Thank you for your effort!” Dr. Cooper suddenly looked at his new secretary, wondering if this secretary was also deceiving him. How could he have investigated such a complex matter so quickly?
“Sir, it wasn’t I who investigated this; it was Mr. Corby himself who confessed. Mr. Corby remained in this office the entire time. As soon as I arrived, he confessed everything. He’s outside now; would you like to have him come in?” the secretary said.
“Have him come in, and you leave!” Dr. Cooper said through gritted teeth. The secretary nodded quickly, and then the former secretary, Corby, walked in. The office was now occupied by only the two of them.
“Corby, I never expected this. Your methods could completely deceive me. You’re impressive! The company has built over a dozen layers of information security networks, precisely to guard against people like you who deceive their superiors. Yet, you managed to keep me completely in the dark. You truly are impressive.” Upon seeing Corby, Dr. Cooper praised him thus.
“This is nothing!” Corby shook his head. “Firstly, the number of departments involved in the entire collateral agreement is not large. As long as one reaches an understanding with the heads of these departments, the matter can be kept hidden.”
“Secondly, while the company has over a dozen layers of security architecture, making it seem impossible for anyone to hide anything, because so many people are involved, anyone has the right to obstruct the flow of information. As long as one or two people within the entire architecture obstruct it, much information can be blocked.”
“In fact, there were hundreds of complaint emails from the grassroots, but they were intercepted by a few individuals.”
“As your secretary for over ten years, I would have been a terrible secretary if I didn’t understand these company architectural issues! After all, all the intelligence that ultimately reaches you is received by me. I naturally know where this intelligence originates and how to intercept it!”
“…” Dr. Cooper’s expression turned somewhat ashen. He hadn't expected that the regulations and restrictions he had designed would, in a way, entrap himself.
“What about my president’s reporting email? That’s the direct channel for reporting to me, and you blocked that too?” Dr. Cooper couldn’t help but ask.
“That, I did not. After all, according to the system you set up, I have no right to open that email. In this world, only you have the qualification to open your email!” Corby replied.
“Then aren’t you afraid of someone complaining there?”
“I’m truly not afraid of that!” Corby suddenly chuckled. “Having followed you for over ten years, I’ve never seen you open that email even once. I know you. You don’t even consider ordinary employees worthy of your attention. You even regard the act of ordinary employees reporting something as an act of betrayal or troublemaking. What do I have to fear?”
“…” Dr. Cooper didn’t want to speak.