Alfredo had been advised that it was more economical to have the boat towed to Croatia, and renovated there, than in Italy. The small boatyard in Split had subsequently transferred the boat to a dry dock. With a steady supply of funds, the old Paxman diesel engines had been replaced by two gleaming new Caterpillar 3516Bs. The hull and superstructure had been blasted clean and bow thrusters had been added to aid manoeuvrability. He had been savouring his decision about the interior design of the boat and furnishings when the deal of his life began.
The tip off, from a long-time friend, was too good to let pass. The insider information was that extremely bad news would soon be announced about the financial viability of Bear Stearns, the second largest underwriter of mortgage backed securities in the US. It seemed the number of people defaulting on mortgages in the US was increasing, hence concern in the market. His friend expected the news to cause the entire mortgage backed security market to dip as it did back in 2007. He expected, like before, that after a few months the stock would rebound and they could make a financial killing. It would be a case of holding one’s nerve until the market recovered. His friend had told him to “bet his shirt” on Lehman Brothers, on the US stock market. He also said that Alfredo would need to be prepared so that when the stock hit its trough he could buy a significant amount of existing mortgage contracts they held.
Alfredo wasn’t really a gambler. He had amassed his current portfolio by hundreds of small transactions, fractions of a percentage between the buying and selling price of stock. As such he began his review of the US residential and commercial market and Lehman Brothers in particular. It appeared that between 2004 and 2006 Lehman Brothers had expanded on a massive scale. They had secured US$146 billion of mortgage-based assets in 2006 and announced record profits in 2006 and 2007. Indeed, in February 2007 their stock hit a record high of US$86.18 and they had a net income of US$4.2 billion. As his insider friend had indicated, in the first quarter of 2007 there had been concerns over the US housing market and on 13th March the stock had its biggest drop in five years. At the same time Lehman Brothers reported record profits, yet again, and the price of their stock rebounded. If there was to be repeated concern over Bear Stearns then one could expect the market to react and to fall. This would be his chance.
With all caution thrown aside Alfredo liquidated his existing portfolio, combined it with all his personal funds and borrowed a total of €2.1 million from four separate banks for ninety days and was poised for an ‘all in’ gamble. He knew the timing of his profit taking would be crucial. He had already decided not to be too greedy but estimated he could make twenty to thirty percent profit, perhaps even more, inside the ninety days with all expenses covered. The only problem was that this audacious gamble reduced him to a spectator over the days leading up to the news about Bears Stearns and the period afterwards. It was an odd time for Alfredo, being so inactive, but he filled the time tidying up computer files, studying the American property market and savouring the details of his renovation of the MV Sultano.
On 17th March 2008 he picked up news reports that Bear Stearns was near collapse and that the price of Lehman Brothers’ shares was dropping like a stone. He bought all the stock he could when it had fallen to forty-eight percent of its starting value. It was now a waiting game. About a month later Alfredo read that the company had raised US$4 billion and the stock recovered a little, but not enough. He had to wait a little longer. The problem was that the interest was due on his loan of €2.1 million!
Alfredo had committed all his immediate resources to the original purchase. He had to raise €120,000 just to service his loan and allow it to be carried over for another ninety days. He sold his beloved blue Maserati for about one-third of what he had paid for it a year earlier. He mortgaged his apartment and was able to meet the repayment date. It was a case of keeping his nerve.
Two days later, on 9th June, Lehman Brothers reported a loss of US$2.8 billion for their second quarter of trading, but announced they were raising US$6 billion from investors. Alfredo was now focusing all his attention on Lehman Brothers and the US house market. He saw that Lehman Brothers were selling off assets, reducing their exposure to residential and commercial property and to mortgage underwriting by significant amounts. But he was getting concerned. In July and August Lehman Brothers had not bounced back. Indeed, over the summer the market was flat and another loan repayment was due in early September. He put his apartment and boat on the market; there were no buyers. He reduced the price of each, desperately trying to raise money. He even got a friend to feign interest in the apartment in the hope that anyone who was interested may be pushed into an offer. There were no offers.
Alfredo was now working eighteen hours a day. With limited funds available he had reverted to his previous practice of monitoring shares and trying to buy in a trough and sell at a peak. But there was little or no movement in the market. He was functioning at subsistence level. The few successes he had barely generated enough money to cover his costs. He had lost his appetite and wasn’t eating. He was starting to sleep in his office so he could react immediately to some fluctuation in a share price. He wasn’t sleeping well, wasn’t showering nor changing his clothes.
In the first week of September 2008, the US market plunged seventy-seven percent; the listed price of Lehman Brothers shares fell dramatically. On 10th September 2008 they reported a US$ 5.6 billion loss and their stock plunged to rock bottom on 11th September.
Alfredo was now sitting in front of his computer screen hour after hour, day after day. He knew what was happening. Many of the major investors used computer programmes to monitor stocks and shares. Often they were set to buy or sell when a certain price was hit. They also monitored the rate of change and if too extreme would do nothing until manually overridden. He guessed the actions of tens of thousands of investors were simply frozen as they watched the drama unfold. He had tried to re-mortgage the apartment but was unable to do so. He had reduced the price of the apartment and boat in a frantic attempt to raise money. He had begged friends to help him but none responded. The due date for the repayment of his loans from the four separate banks arrived.
At one time Lehman Brothers had assets of US$600 billion. They filed for bankruptcy on 15th September 2008. The office cleaner found Alfredo sitting, slumped by his computer, on the morning of 16th September 2008. There was an almost empty bottle of cognac on his desk together with an empty bottle of sleeping tablets. Seven years later the Italian authorities succeeded in unravelling the financial web that Alfredo had left behind and began selling off assets to pay creditors.
Chapter 4
Overstretched
Jack and Sandro were having second thoughts about their decision to buy the old Italian patrol boat and refurbish it as a floating platform for exploration, diving and salvage. The problem was that they were now legally committed to the deal and it wasn’t turning out as planned. The delays in completing the refurbishment were frustrating and it now seemed an ambitious, almost rash decision.
Months earlier, when the news broke that they had recovered gold and silver bullion from a seventeenth century Spanish Carrick, and had been attacked by alleged drug smugglers, they were mobbed by reporters from newspaper and TV stations. Fortunately, Lesley, the company secretary, fielded all the calls to the office, but the press got hold of their mobile phone numbers and even stopped them as they left and returned to their apartments. At first it was novel, even exciting. However, after a couple of days it became a nuisance and irritating. It was when the questioning turned to how they would spend the countless millions, as the questioning always did, that Jack got particularly irritated. The reporters wouldn’t take a guarded reply for an answer. They weren’t interested in the legal process, nor the significance of the find. They were just after a sensational headline and a few column inches that were easy to write. It became worse when some of the reporters didn’t even bother to speak to them. What’s the maxim, “make it simple, make it sexy, make
it up!” The only consolation was the interest generated in the salvage world. Their fluke successes became carefully considered judgements. Their shoe-string operation became a lean and efficient outfit. Almost overnight their decision making and salvage skills were being praised. The Marine Salvage & Investigation Company was being elevated in importance and mentioned alongside the industry leaders. It was heady stuff. When this was combined with enthusiastic emails and conversation from Dan Harvey, the Fort Lauderdale lawyer who was progressing their salvage claim, it seemed they were in the big league; they weren’t.
Within days the news flurry was over. The phone calls stopped and the reporters disappeared. It was then back to reality. The reality was that they had the reflotation fee for the Patricio Giton but after all their expenses that wouldn’t sustain the company for very long. They did have a healthy bank account but no prospect of future jobs. They were back to searching for tenders and the mundane day to day jobs that would sustain the company.
It didn’t take them long to realise that the jobs they were equipped to undertake were neither attractive nor financially worthwhile. Hull inspections, damage assessment on leisure craft, retrieving items lost overboard, consumed time and effort with little financial reward. In contrast, the tenders they would like to submit depended upon having a boat, specialist kit and technical skills they did not have. The cost of hiring the boat, renting the kit and employing people they needed, if they could get them, made their tenders uncompetitive. They were faced with an uncomfortable decision; to resign themselves to “bottom scrapes” and “tuppenny-ha’penny” jobs or invest in a boat, kit and people that would let them compete for worthwhile tenders. It was probably one of the encouraging emails from Dan Harvey, in Fort Lauderdale, that persuaded them to visit the accountant and consider their options.
A couple of hours with the accountant convinced them that, if they were prepared to take a risk and stretch themselves, they could become more competitive. They had an impressive track record to date, their credit rating was good and there was the prospect of huge financial resources being made available if the US authorities found in their favour. As such they could take out a twenty year loan on a modest salvage boat. Their current funds would be enough to refurbish it, assemble the necessary kit and crew. They could give themselves a year and reassess the situation at that time. If the worst came to the worst they could sell the boat and kit.
They had previously employed Kev Donnelly and Shaun Docherty and persuaded them to join their Marine Salvage & Investigation Company on a full-time basis. They needed an experienced dive master and qualified skipper. They needed someone they could rely upon whilst they were under water. They didn’t come much better than Kev Donnelly. Also, if they were going to join the boat owning fraternity they needed experienced marine engineers, not only for their boat but for any vessel they were attempting to salvage. Shaun had proved his worth in getting the engines of Patricio Giton operational. What he didn’t know about engines, and keeping a boat working, wasn’t worth knowing. He was a major asset to the company. It was Shaun who recommended his long-time friend Patrick O’Regan as a second chief engineer. Patrick had also served for twenty-five years with the Royal Navy and later on a variety of commercial ships. Shaun convinced them that their experience and skills complemented each other.
The fourth staff appointment was Will Mayor, a young commercial diver. He had spent the last two years as part of a team maintaining the submerged parts of oil rig platforms in the North Sea. It had been monotonous, gruelling and unrelenting work in difficult conditions, every day working in the cold and dark with severe currents. The money they paid was fantastic, but Will came to the conclusion that there was more to life than just eating, sleeping and working. He brought a level of deep diving experience that neither Jack nor Sandro possessed.
A “round the table” discussion generated a long list of requirements for the boat they needed. They knew the general specification of the boats others in the business were using. It wasn’t an accident they had similar characteristics. So, the first job they gave Kev, Shaun, Patrick and Will was to find them such a boat, but one they could afford to buy and to refurbish.
The initial enthusiasm soon mellowed. There were lots of boats for sale but few that satisfied the specifications they had agreed. One by one of the boats for sale were dismissed. They were too big or too small, too expensive to buy or a liability. It was almost by chance that they found the MV Sultano. The four of them were totally frustrated after over a week of trawling through adverts and uncovering the half-truths displayed. As a complete break they decided to enter a description of the Sentinel, the boat that Jack and Sandro had rented in Panama and which had been their base for the re-flotation of the Patricio Giton. It had been their favourable experience of the Sentinel that led them to consider old naval patrol or customs boats.
The MV Sultano was a forty-seven-year-old decommissioned Italian patrol boat that had patrolled the Italian waters of the Mediterranean and Adriatic Seas. It was the third boat the search engine listed. Later they discovered this was because the boat had only been advertised that morning and this triggered a prominent listing. Shaun had spotted the advert and clicked on the link to show a photo of the boat and brief description. The first impression of the grey monochrome image was so powerful that Shaun had dismissed it as a derelict! It looked like a pale rusting shell. The portholes in the hull seemed to be intact but the windows in the superstructure had been knocked out. It wasn’t possible to tell if the streaks on the upper deck were rust or bird droppings. It was a forlorn sight. Shaun had moved the mouse to cancel the link but had inadvertently clicked for more information. In frustration he was about to cancel the link when something caught his eye. It was a thumb-nail colour photograph amongst a strip of photos at the bottom of the screen. He paused, moved the cursor over the photo and clicked. Up popped a photograph of a small engine room with the characteristic bright yellow paint of Caterpillar engines! ‘What are they doing there?’ Shaun asked himself. He started to read the further information with growing interest.
The Sultano, besides being affordable, offered several attractions. At the time it had been built to a stringent naval specification, it had a steel hull, shallow draft and was offered with a detailed independent inspection report. It stated that seven years previously the vessel had been in dry dock in Croatia where the hull had been completely scraped and repainted. The original engines had been removed and replaced by Caterpillars. At eighteen hundred revs they would generate over 2000bhp and push the boat along at twenty-eight knots – impressive stuff. New running gear, props and sleeves, seals and gaskets, as well as bow thrusters, had been installed as part of this refit. However, it seemed the previous owner had suspended the work at this point. No work had been undertaken on the boat in almost seven years. The report concluded that whilst the basic structure of the boat and its propulsion system were sound, considerable work would be needed to renovate the superstructure, work and living areas as well as replacing all electrical, plumbing, navigation and communication systems. Shaun returned to the colour photograph of the boat that was anchored in a backwater close to Split, Croatia. It wasn’t a pretty picture. Shaun enlarged the picture and the years of neglect became evident. Shaun printed out two copies of the summary report and the two pages of the advert.
Between them it took almost forty-eight hours to review the report and to calculate the cost of the work done to date and to estimate the cost of completing the refurbishment. What was immediately apparent was that the asking price was about the same as the cost of the engines and work done so far. It looked as though the owner, which turned out to be a bank, was simply trying to get rid of it. A hastily arranged trip to Split convinced them that, within budget, they could acquire a very special boat from which to conduct their marine investigation and salvage work. Furthermore, the boatyard that had undertaken the previous work was more than happy to quote for completing the work they had started.
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The finance had been arranged surprisingly easily. Meeting the repayments should not be a problem and they would have a sound working base. The bank, which had taken control of the assets of the bankrupt owner, had even given them his refurbishments plans! The plans were elaborate but the MV Sultano would be a working boat and not a luxury cruiser! However, the idea of cutting through aluminium bulkheads, and converting small cabins into much larger accommodation with an en suite, was attractive. Other spaces could readily be converted into a workshop and dive equipment store. The working relationship with the Croatian boatyard had been excellent and the refurbishment had progressed smoothly. Indeed, the previous inspection visit had been so good that when the handover date had been agreed Jack had booked flights for the whole team to travel to Split for the final open water trials and the trip back to the UK. As such he and Sandro were less than pleased to discover that in the intervening weeks a series of labour problems had arisen. On arrival they discovered the boat was more than a week short of being completed! The decision was whether to “kick their heels” for a couple of weeks or return to the UK and come back later. They decided to stay on and push the job along.
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