Trigger Point (15 page)

19

THE PRESIDENT HAD just come out of a meeting with the Syrian prime minister and was supposed to be debriefing with Bob Livingstone and his chief Middle East negotiator. Instead, he found himself listening incredulously to what Susan Opitz was telling him on the phone from New York.

‘I don’t even think I want to save these bastards,’ he said.

‘Mr President, we have no choice. You let a bank like Fidelian go, and the losses ripple all the way through the system. It’s going to be bad.’

‘How bad?’

‘It’s not 2008, but the whole sector will take a hit. Lending between banks is going to slow if not stop completely. The banks won’t know who they can trust so they won’t trust anyone. The actual value here isn’t enormous, Mr President, it’s the effect on confidence. We’ve said for the past two years, ever since we took office, that the sector is back on track. We’ve made a big play of keeping a tight grip on it, and if something like Fidelian falls over at the first wobble then in terms of confidence we’re back to square one.’

‘I think what the secretary is trying to say,’ said Abrahams, ‘and if you’ll excuse the French, sir, is we’ll be screwed.’

The president glanced briefly at Abrahams and shook his head in disbelief. Roberta Devlin had made sure that Marty Perez was in the room as well. Ron Strickland, who had already been briefed by Opitz and Rabin, was on a line from the Fed.

‘There are two immediate steps we need to take,’ said Strickland. ‘First, we need to make sure this bank can survive until the situation’s resolved. We’re putting together a short-term special liquidity facility they can access at commercial rates. They deposit assets in exchange and we’re first cab off the rank if they go bust so the taxpayer’s protected. Other banks will be able to access the facility on the same terms if we deem it necessary. Now, the second step, Mr President, is resolving the situation. The liquidity facility keeps Fidelian going in the short term, but once they announce their writedowns, they’re finished. So we need a buyer. In order to get a–’

‘Mr Chairman,’ interrupted Abrahams, ‘when you say the short term, how long are we talking about here? Days? Weeks?’

‘Days,’ said Jerry Rabin.

‘What makes that the time scale?’

‘There are too many rumors now. No one’s prepared to lend them any money, and anyone who’s got money in there is trying to get it out. They’re literally bleeding to death. They need to make a statement and any statement they make is only going to confirm what the market has already guessed. If they don’t make a statement – it’s just as bad. In this situation, silence is guilt.’

‘And to be absolutely clear,’ said Abrahams, ‘they’ll be at this point, where they’re forced to make this statement, within days?’

‘They’re there now. They can hold off a little longer as long as we’re giving them liquidity. Without that, they’re dead.’

There was silence.

‘By announcing the liquidity facility we also help stem the panic in the market,’ said Rabin. ‘Everyone knows the Fed’s there if they need us. We don’t have to say who’s using it.’

‘And Jerry,’ said the president, ‘let me understand this. You’re saying we can get a deal done for someone to buy this bank in a time frame of days. Is that right?’

‘If we get right on it. It’s going to take a hell of a lot of work from us and possibly some pressure from you.’

‘Can’t we wind them up?’ Knowles glanced at Marty Perez as he was speaking. ‘Wasn’t that part of the package Obama brought in about winding up bankrupt investment banks in an orderly manner?’

‘This’ll be the first time,’ said Rabin.

‘Well, there’s a first time for everything.’

‘It won’t appease the market. This isn’t like a retail bank that goes bust where the FDIC takes it over and it keeps running. These guys shift billions in short-term finance each day and they’re a counterparty in trades to just about every other bank on the Street. No matter how you do it, the so-called orderly wind-up is going to be damn messy. In the meantime, every other investment bank is going to be looking around to figure out who’ll be hurt most by Fidelian’s failure until the wind-up’s complete. Then they don’t lend to
them
. Then they’re under pressure, and so on. It’s a bunch of dominoes. The only way to stop Fidelian falling against the next one is either to get the cash from its shareholders or sell it so everyone’s happy they’re covered.’

‘And we don’t think we’re going to get the cash from the shareholders?’

‘Doesn’t look like it,’ said Rabin. ‘And there’s no way they’ll get it from the market, so we have to sell it to someone who’ll put that money in.’

The president calculated. The midterms were on Tuesday week, November 6. That gave him twelve days. ‘Realistically, at the quickest, how long does it take to do a deal?’

‘It’s been done overnight, Mr President, if you’ve got the buyer. That’s what you need. You don’t have a sale if you don’t have a buyer.’

‘Do we?’

‘Not yet. We haven’t started asking. The Fidelian board has told the CEO, Bill Custler, not to go looking for one yet, but he’s going back to talk to them. In the meantime, we’re going to start looking anyway. Apparently Goldman was interested in Fidelian’s fixed income business a while back. At one point Barclays was looking at their brokerage. Ideally I’d like to be able to sell this thing as one piece but it may be we have to break it up. We’re just going to have to figure it out as quick as we can.’

‘What if no one wants it?’

‘I’m hoping they’ll see it’s in their own interest to make a sale happen. You only have to mention Lehman.’

‘And is there no possibility that their shareholders might agree to bail them out?’ asked Abramans.

‘I wouldn’t bank on it, but when they’re actually faced with the prospect of having to sell, they might find the money. As I said, Custler’s going back to talk to them.’

‘And don’t forget,’ said Marty Perez, ‘those same shareholders will have got the message Bob Livingstone gave them.’

The president nodded. He didn’t know how much good that had done. All that had come back from the Chinese government was a combative statement about the PIC only ever having acted as a value-driven investor.

He looked around. ‘Okay. And we’re going to try to keep this quiet. Is that right?’

‘At least until we have a buyer,’ said Opitz.

‘The worse things seem to be,’ said Rabin, ‘the more the value drops to a buyer. We’ve got a much better chance of selling this bank if it’s still doing some business.’

‘Well, that’s fine. We’re going to have a buyer tomorrow, right? Overnight, isn’t that what you said?’

‘I don’t think it’ll be quite overnight, Mr President.’

‘I don’t need to remind you about what’s happening in twelve days,’ said Knowles.

‘No, sir.’

‘Okay, thank you. Keep me informed.’

He cut the line.

‘Stay here,’ he said to the others in the Oval Office. He put his head out the door and asked his personal secretary to get Gary Rose.

ED ABRAHAMS GAVE Rose a summary. The president stretched back with his hands behind his head. ‘What do you think?’ he said.

The national security advisor considered for a moment. ‘There are a number of ways to interpret it.’

‘Give me the best.’

‘The best? It’s a market event. Simple as that. We’ve got a bank with a bunch of bad loans, the market sniffs a bad smell, that infects the rest and … we have what we have.’

‘Give me the worst.’

‘I’m not a finance expert, but I’d say … the Chinese are killing this bank on purpose.’

The president looked at Perez. ‘Is that possible?’

‘Sure. Technically, yes, it’s possible. If you refuse to do what’s necessary to stop a bankruptcy or to sell the company then obviously you’re killing it. Would they be doing it? What’s the rationale?’ Perez shrugged. ‘An entity like the PIC has enormous numbers of investments. Theoretically, they could have a whole bunch of bets placed on the market going down and they’re using this one company to help make it happen. They sacrifice the value at stake in Fidelian for the money they make out of everything else. Is that possible? Yes, absolutely, it is.’

‘That couldn’t be legal,’ said Devlin.

‘No. It would be market manipulation on an absolutely massive scale.’

‘You know, Gary,’ said the president, ‘I don’t think that’s the worst case.’

‘That they’re doing it on purpose? You don’t think that’s the worst case?’

‘No, not that they’re not doing it on purpose, but that they’re not doing it for money.’

‘That’s true. But that was part of the message we gave them, right? If they’re doing this to influence our political process, they’d better stop.’

‘Why would they be trying to influence the midterms?’ said Abrahams. ‘Why now? Why these ones?’

‘There’s any number of reasons,’ said Rose. ‘Uganda. South Africa. A general desire to throw their weight around.’

‘Because they can, is that what you’re saying?’

‘Maybe. Like those aircraft carriers they’ve built over the last few years. What are they going to use them for? Why do they need a blue ocean navy? But they want to have them. And they want us to know they have them.’

‘This isn’t aircraft carriers,’ said Abrahams. ‘This is our economy.’

‘And maybe they want us to know what they can do to it.’

‘But it’s their economy as well,’ said Devlin. ‘We hurt – they hurt. You think Zhang would take a risk like this? He’s all about stability, right?’

‘Absolutely.’

‘Then if it is political, and if they got the message, they’ll stop. They’ve made their point. I guess … What will they do?’

‘They’ll find the cash for Fidelian,’ said Perez.

‘Let’s say it’s not the worst case,’ said the president, ‘and actually we’ve got this Chinese investment fund acting like a genuine investor and they don’t want to throw good money after bad. Let’s say that’s what the issue is.’

‘Then Susan needs to find a buyer.’

‘Can we really do it in the time? We’ve got twelve days.’

‘We need it done
way
quicker than twelve days,’ said Abrahams. ‘We’re not waking up the day before the election with this still going on.’

‘Half of Wall Street got sold in ’08 and it took about twenty minutes,’ said Perez. ‘You can do it if you’ve got a buyer.’

‘What gets us a buyer?’

‘Greed,’ replied Perez. ‘The chance to pick up a rival operation in a fire sale.’

‘What if the operation’s too bad for that? What if a fire sale price isn’t even cheap?’

‘Fear. Fear by other bankers that their own businesses will be hit. You get them afraid enough of that, they’ll buy it in an hour.’ Perez smiled. ‘Those are the only two emotions bankers know, fear and greed. Build up one or the other and they’ll do whatever you want.’

Knowles thought about it. ‘Okay. Even if we get this sale done, it’s not going to look like good news, no matter how we sell it. At best, it’s going to look like less-than-bad-news. We need some good news. Every damn day it’s the markets. Dean can’t get hold of the agenda.’

Tom Knowles’ approval rating had fallen with the markets over the last couple of weeks. He was down to around fifty per cent, the lowest point in his presidency. Every Republican in a tight race was taking a hit on the president’s behalf. Some had asked the president to cancel trips to speak with them. They were finding they did better in the polls if they weren’t identified with him.

‘What we need is a foreign policy crisis,’ said Rose, only half-jokingly. ‘We should talk to the Pakistanis.’

‘
Good
news,’ said the president irritably. ‘For Christ’s sake, Gary, I said good news, not some explosion in outer fucking Waziristan.’ Knowles drummed his fingers impatiently on his chair. He could feel time ticking towards the midterms, day by day. And cancellations by Republican candidates were embarrassing. His crowded campaign schedule had been the subject of public discussion and suddenly there was a bunch of gaps that had to be accounted for without admitting that Republican candidates didn’t want to be seen with him. ‘What about Jungle Peace?’ he said suddenly. ‘What the hell’s happening with Jungle Peace?’

Abrahams nodded. ‘Score a big hit. Get that on the front pages.’

‘It’s about time we had some kind of a win over there.’ Knowles looked at Rose. ‘They must have enough intelligence by now.’

‘I’m sure if we tell them to do something they can make it happen.’

‘I don’t want to interfere with the operational stuff but Pressler’s acting like he’s got years to do this. It was meant to be quick. Bam! Let’s get rid of these evil guys.’

‘I’ll talk to the defense secretary.’

‘I don’t want John to think this is about publicity or anything, but we’ve got to start doing something. When are we meeting on this again with the military guys?’

‘I’ll check.’

‘Make it tomorrow. And see if they can bring some ideas for things they can do.’

‘And otherwise, we wait to find out,’ said Abrahams.

The president looked at him. ‘What?’

‘Whether it’s the best case or the worst case. Custler’s going back to talk to the shareholders, right?’

20

ED GREY SCANNED the screens on his wall, looking at the data from the trading session that was under way in New York. He ran down row after row of numbers, searching for an answer.

Was it time to close out? The Fed’s notification of short-term liquidity support had been sent out Friday morning. Stocks were largely flat through Friday trading, including Fidelian. Now it was Monday. Overnight, Asian markets had been quiet, waiting to see what Wall Street would do. The European markets had opened tentatively, holding fire until they saw what direction the Street would take. Along with hundreds of other fund owners and mangers, Grey was one of the people who would decide.

The decision wasn’t straightforward.

Right now, he was a quarter billion up on Fidelian alone. Red River was another two hundred million up – or close to it – on a number of other bank stocks that Boris Malevsky had been shorting, together with additional bets that Tony Evangelou had laid in other sectors. Set against that were paper losses approaching three-quarters of a billion in a bunch of pre-existing long positions Red River had been holding on the assumption that the market was going up. Things had gone way, way further than Grey had anticipated. He had thought he was setting the cats among the banking pigeons and would make a little money in the sector – instead, the whole market was correcting. Yet Grey still believed there would be a fairly swift recovery. He was pretty sure that in six months from now, or a year at the outside, the Dow would have recovered its losses of the past four weeks and then some. So the trick, which was always the trick in running a DIV during a period of volatility, was to know when to take the gains as the market swung one way and then to take them again as it went the other way. Sell at the high, buy at the low. Or in other words, know when the top’s the top, and the bottom’s the bottom.

Until that moment, until you closed out your positions – until you bought back the stocks you had shorted, or sold the stocks you were holding – you had no profit. It was all on paper. And what was on paper, no matter how solid it looked, could disappear in a puff of smoke.

If he closed out his short positions now, buying stock to return the stock he had borrowed, it was copper-bottomed profit. Four hundred fifty million or thereabouts, a little over half from Fidelian. If he waited, and the market bounced, that profit could be gone. On the other hand, if the market plunged further, that profit could be doubled in a day. To Ed Grey, who was worth a couple of billion in his own right, the thrill was in making enormous, staggeringly outsize profits. A few tens of millions did nothing for him. Four hundred was nice. But eight hundred, say, or a nice round billion, that was something different. There was something special in being able to say you had made a figure with nine zeroes on the end.

Grey had another reason to have those short positions intact if the market plunged. It wasn’t just the thrill of the kill. If the market dropped, he would need that extra profit to offset the additional paper losses he would make on the long positions he held. If he didn’t have that offset, the losses would start to reach a size when the banks that had lent money to Red River would come knocking. They held his stocks as collateral and marked his positions to market – which meant that they calculated the value of his positions against market prices – on a daily basis. That was how they assessed the value of the collateral they held. It didn’t matter that losses were notional unless he actually sold the stocks – as long as he held them, the banks treated them as if they were worth their market value on any given day. If his notional losses reached a certain level they would demand additional cash on the margin he had borrowed. If he couldn’t provide it, they would sell his stocks from under him until they had what they wanted.

In a word, his short positions had turned into a hedge against the notional losses he had incurred from the very same market correction that had notionally made him so much money.

Yet if the market bounced, and he hadn’t closed out those same short positions, the four hundred fifty million he had on paper would be gone forever, the market would be back where it started and the entire exercise would have yielded nothing.

He scanned the screens, gazed at the sporadically flickering numbers. Were they going to rise or fall? He was reaching into the void, into the great collective unknown that was the market, straining to find a direction.

That was what everyone was doing, he knew. He could almost feel it, smell it. People were waiting. Prices were drifting in narrow ranges. Volumes were low.

Was it a lull, or had the Fed put a floor under the market? Was the market sitting temporarily on a shelf on the way down, catching its breath before the slide continued, or was it about to get a grip, turn around and start climbing?

Ed Grey believed the banking system was fundamentally sound. He believed stock prices had been somewhat overvalued but were now heavily oversold. Both of those beliefs argued for a bounce. But timing, as always, was everything.

Fidelian was the one that was worrying him. It accounted for a quarter billion of his paper profit. How much lower could it go? There were rumors that credit lines to Fidelian were being rapidly shut down and that investors were pulling anything they could get out. Grey didn’t know how Bill Custler was resisting the demands for him to release a statement. By now the rumor that Fidelian would need to come to the market for cash was all over the Street. People were saying crazy things. Eight billion. Ten billion. One wild rumor even talked about fifteen billion. When people started saying things like that, the reality never turned out to be as bad. If that was the case, when Custler finally broke his silence, the stock would bounce. After the hit it had taken it would bounce big. If that happened, a good part of that quarter billion in paper profit would go up in smoke right in front of his eyes.

Ed Grey had heard another rumor that there was interest from a number of parties in buying Fidelian. That gave him additional confidence in his hunch that the stock had been oversold. Buyers come in when they can sniff a bargain. If that was what was attracting them, they had detected a floor and would likely pay above the current price.

He watched the numbers on the screens a little longer. Then he called Evangelou and Malevsky into his office.

‘What do you think?’ he said.

‘We’re going to bounce,’ said Evangelou.

‘And then? We coming down again?’

‘Depends on what else is out there.’

‘What else
is
out there?’

Evangelou shrugged. ‘Who the fuck knows?’

Grey glanced at Malevsky. ‘What do you think?’

‘We could bounce.’

‘How much?’

‘Some. Not all the way back.’

‘How much is your cut now?’

‘Twenty-two million.’

‘That’s money. Huh, Boris?’ said Evangelou. ‘You want to take it? Go and retire in Florida.’

Malevsky laughed.

‘So you’re saying we close out?’ said Grey. ‘Is that it?’

Evangelou nodded. Malevsky nodded as well.

‘You’re both wimps.’

‘Ed, you want to keep going? You’re fucking crazy! You want to do that, I’ll bet you a thousand to the mil on our position we go up. What do you say?’

‘Tempting.’

‘I thought you had a pair of cojones.’

Ed Grey grinned. Then he was serious again. ‘Alright. What about Fidelian? What do we think?’

‘Oversold,’ said Evangelou. ‘Largely because of us.’

‘The whole market’s spooked on it now.’

‘Where’s the money they need going to come from?’ asked Grey.

‘I heard there’s a buyer.’

‘What if there isn’t?’

‘Depends how much they need.’

‘Who’s going to buy those bonds? Look at their stock price. Who’d put anything into that company?’

Evangelou shrugged. ‘Their shareholders will put in.’

Malevsky nodded.

‘They’re fucked if they don’t.’

‘So what if they’re fucked?’

‘No way they’re fucked. The Chinese own, what? Twenty-five per cent. Plus who knows what else. They’re not going to watch that investment go down the tube. Pulling out five, ten billion’s not going to be an issue for them. The other shareholders get diluted but if they want they can put in as well. If you’re the Chinese, what’s your alternative? Less is better than nothing, right?’

Grey leaned back in his chair. ‘So we’re done?’

‘Aggressively,’ said Malevsky, ‘let’s assume Fidelian needs to raise ten billion. If it’s ten billion, and nothing else has changed from six weeks ago, that values them around seven per cent above where they are today. The rest of the downside is noise.’

‘As soon as things calm down a little, those are the figures everyone’s going to do,’ added Evangelou.

Grey nodded. In about a thousand offices all over the city, those were probably the exact figures that were being crunched already. Provided everyone felt some kind of a floor had been put under the sector by the Fed’s actions. If not, the noise would get louder and the downward pressure would continue.

‘Okay,’ said Grey, ‘let’s pretend like we’re smart for a second. Everyone’s saying the same thing. At a cash requirement of ten billion, Fidelian’s seven per cent undervalued so we close out our short positions now and say thank you very much. What if we’re wrong?’

‘That’s an aggressive case,’ said Malevsky. ‘If the cash requirement is less, the undershoot is even greater.’

‘What if the cash requirement is more?’

‘Off the top of my head, if the requirement is thirteen billion, they roughly come into line with today’s price.’

‘Let’s take the extreme. What if they can’t get it?’

‘Then they get sold. From what I’ve heard, they probably get sold anyway and the Chinese don’t have to put in anything.’

‘What if they don’t? What if they fail?’

‘If they fail, everyone’s fucked,’ said Evangelou. ‘The government’s wind-up powers are bullshit. We’re in 2008. But what’s the probability, Ed?’

Grey nodded. ‘I agree, but we make our money on getting the low probability events right.’

‘But we lose it on getting the high probability events wrong. Look, if there weren’t any dominant shareholders involved here, I’d say this is a chance we might consider taking. But the risk-reward isn’t there. You’ve got the PIC with twenty-five per cent of the stock and effectively an unlimited cash supply from the Chinese government. If Fidelian can’t raise the cash anywhere else, that’s where they’ll get it.’

Grey agreed. He looked at Malevsky. ‘What do you think?’

‘It’s not a low probability event. It’s a zero probability event.’

Grey laughed. ‘Nothing’s a zero probability event. Stick around in the business for a while.’

Malevsky shrugged. ‘In the final analysis, the government can’t let this bank fail. We’re a week away from an election. We can create whatever scenarios we like about how much cash they need, and what the shareholders will or won’t do, or whether there’ll be a buyer or not, but in the end there’s no scenario in which it will fail because it can’t be allowed to happen.’

Grey agreed with that.

‘He wants his twenty-two million,’ said Evangelou.

‘I wouldn’t say no,’ quipped Malevsky.

Grey didn’t respond. Unusually, he found himself undecided. Normally he had a clear sense when a trade had run as far as it was going to run and it was time to get out. In this instance, he just wasn’t sure. His trading style was always to pile more capital into a trade that was going well, and that was what he had done in this case. That was one of the first lessons he had learned in the business, that it was almost impossible to overestimate how far a move could go. When a trade hit your target, it didn’t mean it was over. Often the move had just begun.

All of that argued in keeping the Fidelian position open, even increasing it. But you had to temper zeal with rationality. At some point you did have to close out. Gery didn’t believe the fundamentals were there to justify a further fall either in the banking sector or across the market generally. Other than rumor and panic, it was hard to see how it had even come this far. And that argued to get out. To take four hundred fifty million out of a market that should never have given him anything like that and be damn happy he had done it.

‘So what we’re saying,’ he said, ‘is that even on an aggressive case, Fidelian’s undervalued already. We’ve got two fifty in the bag and even on the aggressive case if we don’t act we lose it. On the other hand there’s a failure scenario where they can’t either recapitalize or sell this bank and we get a huge blowout, but we’re saying the probability’s virtually zero. And we believe the fundamentals of the sector are strong, so that says we’re going to bounce. And all of that says we close out. Now.’

Evangelou nodded. So did Malevsky.

‘And that means we lose the hedge against our long positions. And that means that if the market really crashes, the banks come knocking.’

‘But that’s the zero probability event,’ said Evangelou.

‘The
virtually
zero probability event – which wipes us out.’

‘No, it doesn’t,’ said Evangelou. ‘We close out Fidelian and we have the cash to meet the margin calls if that happens. Ed, it’s the perfect scenario. We take our profit. In the low probability event that the market keeps falling – and it’s probably no more than a one to five per cent probability – that cash covers the margins and we can hold the stocks until they recover. I’ve had one of the quants running the numbers with the market falling another twenty per cent from here. Worst comes to the worst, we survive the short term with the Fidelian cash.’

‘What if the market goes down fifty per cent?’

‘Now you’re not even talking about a one per cent chance. You know me, Ed. I’m a numbers guy. But this market’s going up. It’s corrected. It’s overcorrected. And if it hasn’t, we have the cash to cover any realistic scenario.’

It was decision time. This was how Ed Grey earned his money, making decisions. If you weren’t prepared to do that, you’d never get your profits off paper and back into your fund.