Chapter 360: Wild Profits

As of January 1990, the Gulf region's proven oil reserves accounted for 65% of the world's total, supplying 43% of the daily oil demands globally. Even after decades of extraction, Iraq and Kuwait's reserves still rank among the top ten globally.

Understandably, any turbulence in the Gulf region would significantly impact global oil supplies.

When news of Iraq's invasion of Kuwait hit on August 2nd, international oil prices began to skyrocket. By the close of trading on Friday, August 3rd, the price per barrel had surged to $27.63, marking a 29% increase since the outbreak of war.

And this was just the beginning.

In Simon's memory, the Gulf War pushed oil prices to a peak of $41.07 per barrel. Despite the unpredictable changes due to Simon's significant influence, he still believed that oil prices reaching around $40 was very feasible.

**New York:**

Even though it was Sunday, the headquarters of Cersei Capital in Midtown Manhattan was bustling. Except for some profit losses due to not liquidating short positions just before the war's outbreak, the arrangements in various oil futures contracts had largely met expectations.

By August 2nd, the day the war broke out, Cersei Fund Management had established enormous long positions in mainstream Brent crude, WTI, and other derivatives like heating oil, unleaded gasoline, and high-sulfur fuel oil, totaling $25 billion.

Cersei Capital began building these positions at the end of June, with entry points spanning from as low as $13 to $20 the day before the war erupted.

Starting next week, Cersei Capital planned to gradually liquidate these long positions. This process, in fact, had already commenced on the day the war began due to necessity.

Ideally, Simon would have preferred to start liquidating when oil prices neared or reached $40, but this wasn't realistic.

As known, futures trading is a zero-sum game: one party's gain is another's loss. For instance, if Cersei Capital had incorrectly positioned itself with $25 billion in short futures, a price spike from $20 to $40 per barrel due to the war—a 100% increase—would theoretically mean paying out $25 billion to the counterparty.

However, Cersei Capital's accounts held less than $6 billion.

If the longs insisted on not settling within Cersei's loss capacity, Cersei would be forced into default.

Defaults in futures trading are rare but not unprecedented, such as during sudden market disruptions caused by wars.

In such cases, futures brokers and the exchange itself provide two layers of protection. If a trader's account cannot cover the losses, the broker will cover the difference to ensure trades proceed. If the broker's funds are also insufficient, the exchange uses its emergency funds to cover gaps.

In the worst case, to prevent a system collapse, national interventions might occur, like during the 1987 stock market crash when U.S. banks provided massive funds to the Chicago Mercantile Exchange on Black Monday after federal intervention.

Due to the abrupt onset of the Gulf War, oil futures trading also involved the exchange this time.

That means if $5 billion was bet against another $5 billion, the winning side would collect not only from the traders but also any additional funds posted by brokers and the exchange to ensure delivery of the contracts.

In the boardroom of Cersei Capital, as the day concluded, Janet, having dismissed everyone else, sat in Simon's lap, exhausted from the day's efforts.

Simon, massaging her shoulders, remarked, "With this market movement reaching the exchange level, a lot of brokers are probably going to close up shop, huh?"

Indeed, many intermediaries would need to cover significant funds to ensure contract fulfillment. While the longs profit, brokers earn only their commission, hardly enough to cover massive outlays.

"Probably hundreds," Janet lazily responded, squinting her eyes. "Aside from large brokers backed by corporations like Goldman Sachs, Morgan, and Citibank, many smaller independents will likely close."

Most traders work through brokers, who vary greatly in size. Large brokers are often part of major investment banks. However, there are countless smaller brokers throughout North America and globally.

Simon remembered that this market turmoil led to numerous broker bankruptcies worldwide, with the industry struggling for many years afterward.

This also caused a significant contraction in oil futures trading. For a long time, the market lacked short sellers, preventing Cersei from taking large positions and shifting focus to other areas.

As the war erupted, global stock markets plummeted. On August 2nd and 3rd, the S&P 500 fell from 371 to 356 by the week's end, likely to drop to around 300 before the war ended. Cersei had not set up shorts in the S&P 500 futures due to focusing on oil markets.

The plan was for Cersei Fund Management to complete its liquidation next week. However, due to

 the depressed trading market, despite a significant increase in reserves, it was unlikely to make large trades soon.

As trading resumed on Monday, oil prices continued their steep climb, and geopolitical tensions escalated.

On August 7th, the Bush administration formally approved Operation Desert Shield, deploying federal troops to Saudi Arabia to counter potential Iraqi aggression.

However, the initiation of Desert Shield immediately sparked an anti-war movement within the U.S. Both media and the public were concerned that Bush might drag the country into another protracted conflict like the Vietnam War.

The direct confrontation between U.S. and Iraqi forces in Saudi implied that America's initial promise of non-intervention in the Iraq-Kuwait dispute was effectively void.

Meanwhile, from August 6th to 10th, Cersei rapidly completed the liquidation of its long positions. The ability to settle over $20 billion in contracts so swiftly was due mainly to the desperation of short sellers, brokers, and exchanges, whose losses increased with each day's price rise.

By August 11th, when Cersei Fund Management finalized all its financial settlements, the hedge fund's net assets had grown from an initial $3.5 billion to $12.637 billion. In less than eight months, Cersei achieved an investment return of over 260%.

Although Simon only held a $1 billion share of the initial capital and the fund's commission rate was fixed at 20%—with 30% of that commission shared with other partners—the profit and commission Simon earned beyond his initial $1 billion investment amounted to $3.367 billion.

Even if Cersei's profits for the remainder of the year were zero, by year-end, Simon's cash reserves overseas would nearly reach $8 billion.

Such a vast sum, even considering capital gains taxes for repatriation, would fundamentally enable Simon to finance the MCA acquisition with his own funds.

Furthermore, while Simon only received a third of Cersei's profits, this substantial profit share significantly mitigated potential risks associated with his rapid rise in recent years.

And, with over $9 billion in profits, although a large part was distributed, aside from the Johnston family, which took another significant slice due to their $500 million capital contribution, other Australian and American investors received much less than a tenth of Simon's earnings.

Simon remained the investor who profited far more than any other.

After another week in New York, Simon and Janet returned to Los Angeles.

The next phase for Cersei's team was "free hunting," and the couple no longer needed to monitor every move.

With a 30% stake in Cersei, the team's six partners were poised to receive dividends exceeding $100 million each this year, and even regular staff anticipated substantial bonuses, making for a highly motivated team.

Back in Los Angeles by Monday, August 13th, the North American summer movie season was drawing to a close, largely unaffected by the war.

On July 27th, Daenerys Entertainment's collaboration with Disney, "The Hand That Rocks the Cradle," opened across 1,632 screens in North America. In its first week, it earned $21.18 million—not as much as "Sleeping with the Enemy" but still a blockbuster by any standard.

In its second week, "The Hand That Rocks the Cradle" saw a 23% drop in revenue, adding another $16.33 million.

With a cumulative total of $37.51 million against a production and marketing budget of $17 million, the film began turning a profit within half a month. Though reaching $100 million seemed challenging, a projected final gross of around $80 million in North America alone was considered a success for both Disney and Daenerys.

On August 10th, New World Pictures, a subsidiary of Daenerys Entertainment, released "Poltergeist III." Opening at the tail end of the summer with 1,329 screens, it grossed $6.13 million in its first week—a modest success likely to net a total of $15 to $20 million in North America, ensuring a profit for Daenerys.

However, due to the moderate performance of two sequels, New World Pictures planned to release subsequent sequels directly through video and cable TV. This would save costs and free up slots for other films.

"Ghost," Daenerys's early summer hit, had amassed $149 million by August 9th, maintaining a robust weekly intake of around $7 million and steadily heading towards a $200 million total.

"Sleeping with the Enemy," a collaboration with Fox, reached $93.81 million in its eighth week, soon to break $100 million and potentially climb higher.

"Teenage Mutant Ninja Turtles," released just five weeks earlier, had already broken $100 million by August 9th, reaching $103.53 million and outpacing "Sleeping with the Enemy" to the milestone. However, with substantial weekly drops, it was projected to garner less than $20 million more.

Despite these substantial cinematic successes, Simon was also looking to diversify

 his investments, especially considering the large cash reserves he had accumulated abroad.

With such wealth, even without considering further investments, Simon was well-positioned to complete the acquisition of MCA, especially given the global stock market downturn triggered by the Gulf War.

From August 6th to 10th, MCA's stock fell 9%, dropping below $40 per share. By August 13th, it had slipped further to $39.25, unaffected even by positive rumors of Panasonic's potential acquisition.

Though Panasonic's interest in MCA was an open secret following Michael Ovitz's trip to Tokyo, the bursting of Japan's economic bubble had made Japanese corporations more cautious, slowing their overseas expansions.

Sony's costly lessons in Hollywood over the past year had also made Panasonic wary. Despite having over $12 billion available for acquisitions, industry predictions suggested Panasonic's approach to acquiring MCA would be more conservative than Sony's aggressive spending.

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