Sila's Fortune (22 page)

Matt babbled on, increasingly agitated.

‘They reject me. They all reject me. Because I didn't get a degree, because I act like a waster, because I fuck all the hot girls while they have to screw the slags. Because there's always something about me that's wrong, something they don't like
the look of. But I'll tell you something, Simon, the real reason they reject me is because I
know
. I was the one who said we needed to be where the money was, and in your case at least I was right. And what I'm telling you now will happen too. It's just a matter of observation and logic. Being on the lookout for the thousand little signs all over the world that signal the beginning of the crash. The tower will collapse. They brush me aside, they make like they're so aloof and superior but I'm telling you they won't be laughing so hard when the banks collapse, when they're digging their graves. The distinctive feature of these cretins is that they're just technicians, little men who've seized power in an unpredictable era. I may be nothing, but I
know
. It's not a matter of intelligence, or not the way they think, it's a matter of
vision
. Make money, Simon, make as much as you can, don't hang around in that underpaid job you've got, get yourself promoted, get out there, start earning big bucks. And I'll do whatever I can to earn money. To protect myself, to protect us. Because we're brothers. Blood brothers since the first time we met. We've pooled our blood, we'll pool our money. I'll have an estate built that will be like a Tower to protect us, with a private army, with high walls. We'll be our own State, our own protection, our own private utopia. But to do that we need to earn money, lots and lots of money. By any means possible. We'll build a tower of marble and steel which will be the witchcraft of the new world, impervious to crime, to violence, to misfortune. A tower raised against the apocalypse, impregnable, so powerful that the waves of destruction will break against it. Yes, they'll break against the walls and we'll be inside, brothers, twins, with all the women and all the servants
we could ever need. United against everyone. This is what we need, by any means possible.'

And as abruptly as he had begun, he fell silent, like a drunkard collapsing suddenly. But Matt wasn't drunk, he was simply desperate – and his despair had the power of the greatest revelations, like some prophet struck dumb by a vision that overwhelms and engulfs him. He had seen; he had spoken. Ridiculous and prophetic all at once. He might be mad, eaten away by his lust for power, but weren't his friend's crazy flaws why Simon loved him?

Simon went off to set the table. He reheated the cold pasta, made a little sauce to which he added
herbes de Provence
, got out a bottle of red wine which he decided they needed to drown his friend's sorrows and set out the best plates and the best glasses. It was a festive dinner, celebrating failure and the predicted apocalypse while trying to come to terms with it. They had to boost Matt's spirits and get back to real life, away from the visions, the dreams and the madness.

The horsemen of the apocalypse ate their pasta in silence. Not because they had nothing to say, but simply because they were comfortable that way. Mute friendship. It was one of the best dinners, not as good as the one at Lemerre's restaurant, perhaps, but without the distractions of thugs like Ruffle and waiters with broken noses.

Simon's concern was all the more remarkable because at the time he had a lot of worries at the bank. The white carpet in the communal hallways was still beautiful, and when he stepped out into the calm, tree-lined square, wearing one of his designer suits, he was still a gangster, but just now being a gangster
wasn't easy, and he would rather be a researcher as he had once been.

To date, he had proved a diligent quant, stringing together his equations, conscientious in his work. Zadie was satisfied, which was more than enough for Simon, who was still in awe of the head of the trading desk. But he had taken a dangerous initiative: he had taken a risk. The magic word, this word used to justify imbalances, was now a part of his world, which was specifically intended to model risks and thereby tame them. He had become interested in the concept of the ideal price, a concept similar to the pot of gold at the end of the rainbow.
The ideal price
: the thought horizon of every quant, indeed the very reason for his labours. In fact one of Simon's chief tasks was to create models which helped traders forecast commodity prices. But with the complex commodities he was dealing with, pricing was anything but straightforward.

So far, he had failed to come up with anything groundbreaking in this area. His models were much like those of his counterparts at other banks and he had never managed to give the traders at his desk a particular advantage. Then came POL, an oil-based derivative devised by a couple of structurers at Kelmann, had been something of a success. It was a structured product designed to protect oil producers against unanticipated fluctuations in barrel prices which, in 1998, were in freefall. Simon had been carefully considering the product for some time. But however much he studied, he did not come to the same conclusions as the other quants: he felt the price was overvalued, everyone else thought the price was undervalued. And even if the product was a success, all the banks would sell it and
profits were slim since they had to be spread out.

‘Zadie,' he approached his boss timidly one day, ‘I've got a suggestion to make about POL.'

‘Oh?' she said distractedly.

‘I think we should drop the price.'

‘Drop the price? You're kidding.'

‘No, I really think we should. In my opinion we can sell it cheaper, the maturity price will be lower than we've calculated.'

‘The traders have calculated the maturity price based on models provided by the quants,' Zadie said curtly, ‘we were following you.'

‘I wasn't involved in those models. But I drew up a new model: I think the risks were overestimated. I really think we can lower the price.'

‘You realise what that means? If we're wrong about the model and the price ends up being higher, we'll lose millions.'

‘Yes, but I also know that if we set a lower price, we'll corner the whole market. And in oil, even for a single derivative like POL, that's big.'

‘And you're absolutely sure of your model?'

‘We can never be absolutely sure, you know that. But I did something new,' said Simon with a hint of pride, ‘something I think no one's ever done. I didn't just estimate the volatility, I estimated the volatility of the volatility.'

‘What are you talking about?'

A flicker of interest appeared in Zadie's eyes. Her inner mathematician was stirring.

‘I read a research paper about it,' explained Simon. ‘It's never been applied to markets before, but I'm convinced it's sound.
We make do with factoring in volatility, meaning the standard deviation of the asset return. But that volatility in turn can be modelled; it's possible to measure the volatility of the volatility.'

Zadie nodded. ‘Standard Brownian motion?'

‘Exactly. Simple as that,' said Simon.

Zadie called a meeting. Structurers, quants and traders all gathered around the table. She explained Simon's suggestion. All the quants were indignant. They were confident of their models. In fact everyone in the market was agreed on the price.

‘That's not the issue,' said Simon in a barely audible voice. ‘I think everyone has overvalued the risks. I realise this might sound conceited but …'

‘It is conceited. What, you think you're cleverer than everyone else?'

‘Not at all. But on that point …'

‘It's not a point, it's a financial model we all worked on here. You didn't lift a finger to help and now you start pissing all over it. I'm sure you're wrong about this and this bullshit of yours is going to lose the team a shitload of money.'

‘I don't think so,' said Simon, his eyelids fluttering desperately. ‘I estimated the volatility of the volatility and I can tell you that …'

‘The volatility of the volatility? What sort of bullshit is that?'

‘Not at all, not at all,' said Simon feebly, ‘it's stochastic calculus, a Brownian model. It can be done, I assure you, there are papers on the subject going back to 1993 and even if no one has ever applied it to markets, I'm convinced …'

‘Look, we're doing serious work here, if you want to do experiments, go back to your lab.'

‘I tested it,' cried Simon, ‘I've run simulations using figures for the past two years. It works, I'm telling you.'

There was a deafening silence. Simon could feel the hate-filled stares of everyone. It was at this point that Samuel joined the conversation, smiling and relaxed.

‘The volatility of the volatility … It has a nice ring to it, doesn't it? I'm not against the concept. If you're right, we'll corner the whole market.'

Samuel was the best trader on the team and one of the best in the room. What he said carried decisive weight.

‘We're all aware of that,' interrupted Zadie, ‘that's why I called this meeting. What we need to do is put personal egos aside and make the best decision.'

This comment was redundant. If Simon was right, it would be a complete humiliation for the other quants. They had been too vehement in their opposition.

‘I calculate the optimum price to be forty-five,' Simon said in the utter silence, ‘rather than forty-nine, which is what we're currently selling at. If we drop the price to forty-seven, we'll corner the market and make a healthy profit.'

One of the quants got to his feet. He was a giant, a rugby prop from Oxford who considered himself king of the world.

‘Bullshit! I've always thought this guy was a fuckwit. You go with him and I'm out of here.'

Zadie's expression was electric. She remembered her interview with Simon. He had been good, really good. His English was terrible and he had absolutely no charisma, he had a weak, even fragile personality, but he was an outstanding mathematician … The volatility of volatility … It was a brilliant
idea. Pushing back the boundaries of risk. She glanced over at Simon. The tall quant's outburst had completely crushed him. His shoulders had slumped, everything about him seemed shrivelled, diminished, drained. It was obvious all he wanted to do was go home and hide away in his bed; in all probability he was sorry he had ever had the idea.

‘We're going with him,' she said, articulating each syllable. ‘The meeting is over.'

Simon lived in dread for the following months. The traders had offered the product at the price he had set; they had cornered the market and the model seemed to be working out. But it might still go pear-shaped.

After the rugby player had departed, slamming every door along the way, not a single quant had spoken to him except on urgent professional matters and then only to try and catch him out. Try as he might to speculate philosophically as to why working environments pushed people towards hatred and confrontation, the practical experience of being knifed in the back was so distressing that he found he no longer slept. His face became gaunt.

Through the brokers it became clear that other banks were in a panic. They no longer knew how to deal with their clients. New data models were being generated all over the place, quants worked through the night, but none of them could reproduce Simon's model. In the jargon of the trade, they weren't asking the right questions. There were widespread rumours of some new method of calculation based on the volatility of the volatility but no one knew how to use it.

Then, within a week, the market converged on Simon's
price. The shift on this single product was universal. The banks admitted defeat. They cut their risks and fell into line with Kelmann.

At 9.55 am on 29 July, Zadie came up behind Simon and said coolly: ‘The market's ours, Simon, all the other banks are following us. I think you'll be pleasantly surprised by your end-of-year bonus.'

At that moment he didn't give a damn about his bonus. As these words were uttered evenly, Simon felt his heart leap in his chest. He felt
justified
. His life had meaning. He had been so afraid, here in the closed circle of the bank where criteria unrelated to money no longer existed, that the ideal price seemed like a personal achievement, in fact, in that moment of euphoria, his crowning achievement: he had been the first quant to exploit the volatility of volatility.

‘Champagne tonight, Simon. I'm having a little get-together at my place. You will join us?'

It was common knowledge that Zadie never invited colleagues to her home. Occasionally she might invite Samuel to a restaurant, invariably with a group of old friends she'd known since Cambridge and who, for the most part, had nothing to do with banking. According to Samuel, they were terrifying (Samuel liked to play the hillbilly from Minnesota while underscoring this façade with a broad sardonic smile) because they were ‘horribly cultured and refined'. They were professors of philosophy or literature, artists or writers with that ghastly elegance particular to rich families of good birth. Their conversations were dreadful, they talked only about literature, art and politics and, worse still, what they said probably made sense.

‘Steel yourself, Simon! This is going to be tougher than anything you've ever been through,' said Samuel sympathetically, putting a hand on his shoulder.

In fact it was a signal honour, something Samuel was well aware of. That the famous Zadie, destined for a managerial position at Kelmann, should invite Simon Jude to her home, to her apartment where no one at the bank had ever set foot, was both incredible and humiliating for everyone. Samuel could joke about it because he did not feel threatened. He knew he would be a success, and his success did not depend on Zadie. In two or three years he would leave Kelmann and set up a venture capital fund. For everyone else, particularly for the quants who had laughed at Simon, the invitation was a snub. When they saw this shambling idiot, as drunk on alleviated tension as if he'd been drinking wine, leaving the trading room ahead of everyone else to prepare for the exceptional Zadie Zale's dinner party, their defeat was totally and utterly sealed.