On the Edge

by Michael Ridpath

  Worst of all, urged on by their governments, French and German banks had begun to buy BTPs in an attempt to crush speculators like Martel. Following the Wall Street Journal piece there had been a rash of articles about him in the Continental press, most of them unfavourable. The message was that the EU would not let such irresponsible capitalists destroy their currency.

  Martel was feeling crushed. His unrealized losses had now mushroomed to nearly a billion euros – he was almost wiped out. It was just like 1998 again, when he had desperately passed margin payments from broker to broker to support his yen position. Except this time the sums were much larger. This time, when the music stopped and he finally ran out of collateral to post, the collapse would be spectacular. There would be nothing left of the Teton Fund, it would be wiped out. As the market had moved against him, he had done what he had always done in the past, gambled more. Until there was nothing left in the kitty.

  He studied the cash-flow forecasts on his desk. He had to stay in the game for just another three weeks, until the election. It made no economic sense for Italy to stay in the euro. The election would prove it.

  There was one problem staring out at him from the forecasts, a big problem, a massive problem. The IGLOO notes.

  He swore to himself, grabbed the spreadsheet and walked out of his office, tripping up the easel on the way. The painter was sensible enough to keep quiet.

  The Teton Fund’s twenty or so traders and analysts worked together in a small dealing room expensively kitted out with all the latest technology, allowing them instant access to a digital torrent of information on any market in the world. Vikram was studying tiny blinking figures on one of his three flat screens.

  ‘What’s this number?’ Martel jabbed his finger on the spreadsheet.

  Vikram cut off his conversation and put down his phone. ‘That’s my estimate of what we will have to pay Bloomfield Weiss as collateral for the IGLOO notes at month end.’

  The last business day of the month, the twenty-seventh of February, was only a week away.

  ‘Surely that can’t be right? You’re showing that we’ll have to find a hundred and fifty million euros. We haven’t got that.’

  Vikram looked at his boss and shrugged. ‘The IGLOO notes are so damned complicated that they’re revalued once a month, at month end. I’ve plugged in the numbers, and my estimate is that with the market where it is today we’ll be a hundred and fifty million down. Bloomfield Weiss will want us to cover that loss.’

  ‘Are you sure about that number?’

  ‘No. It all depends what assumptions they use for volatilities. And of course the wrinkle that the redemption price is based on whatever currency replaces the euro in Italy, a currency that doesn’t even exist yet, makes it even more difficult. But I’ve run the numbers the way I would if I were them. And that’s the result.’

  Martel blew air through his cheeks. ‘You know we haven’t got it. We could maybe scrape together twenty or even fifty million, but a hundred and fifty? No way. The whole thing would come tumbling down. Game over. Nothing left. Rien. Nada.’ Martel expressed this eventuality through a series of rapid arm movements that threatened to decapitate Vikram’s assistant. She ducked for safety.

  Vikram nodded unhappily. He had his life savings in the Teton Fund too. ‘I know. But there’s no way around it.’

  ‘There has to be!’ Martel shouted, slamming his fist on Vikram’s desk. A box of pens and pencils bounced off, spilling all over the floor. The other traders in the room stared.

  Vikram met Martel’s bulging eyes. ‘I can’t perform a miracle, Jean-Luc. Unless the market craps out again by next week, we’re screwed.’

  Martel glared at his subordinate. He was a clever man and ambitious, Martel knew, but he played by the rules. At times like this, you had to make your own rules. Martel tried to explain. ‘I’ve told you many times before that the key to success is staying in the game. This is a classic martingale situation: as long as we can keep placing bets we will win eventually. That’s where you have to be creative. If you can’t do that, I’ll have to.’

  He began to pace up and down in front of Vikram’s desk. ‘All right. Let’s think this through.’

  ‘OK,’ said Vikram wearily.

  Who does the revaluation? Bloomfield Weiss or someone else?’

  ‘For deals as complicated as this the only place to get a price is Bloomfield Weiss.’

  ‘OK. And they use their own model to come up with that price?’

  ‘That’s right.’

  ‘And that model is totally dependent on what assumptions they plug into it?’

  ‘Yes.’

  ‘Bon. Then we need them to plug in the right assumptions.’

  Vikram shook his head. ‘We might have been able to fix that a few years ago, but not now. These investment banks have departments whose sole job is to make sure the prices in their systems are real prices, not made-up ones. Compliance units, risk-management units, credit control, multimillion-dollar computer systems. You can’t get around them. And if you try and you get caught, you’re in big trouble.’

  Martel stopped his pacing and smiled. ‘You know, Vikram. There’s a way around any system. A human way. It’s called greed. With the right incentives any system can be corrupted.’

  Vikram closed his eyes. He knew what was coming next.

  ‘I want you to get on a plane this afternoon and give the right person the right incentive.’

  9

  Perumal was early. No matter how hard he tried, he was always early. Especially when he was nervous.

  He scanned the cavernous restaurant, which had once been a banking hall. Already the loud chatter of the diners was creating a wall of reverberating sound all around him. But it was cool. Cool black-clad waiters and waitresses serving cool Pacific/French cuisine on cool plates to bankers in cool suits. He guessed it was the kind of place that Vikram would appreciate.

  Vikram Rana had gone from nowhere to become Perumal’s best client in a matter of weeks. Although Bloomfield Weiss in New York dealt with the Teton Fund on the bond side, the Derivatives Group had never done any business with them. When Vikram had called up out of the blue, Perumal had been the lucky man on the end of the phone. After the IGLOO deal, Carr-Jones had tried to muscle in on the client, but Perumal had advised against it. It was an Indian mafia thing. A touchy-feely relationship that could easily be disturbed.

  Of course, it was nothing of the kind. Vikram was to all intents and purposes American. Perumal guessed that originally he must have come from the north of India, from a high warrior caste. Perumal’s family was lower caste, from the southern state of Kerala. When Vikram and Perumal met they ignored the shared sub-continent of their background completely.

  The big question was, could Perumal conjure up another elephant like the IGLOO deal?

  ‘Ah, Perumal, sorry I’m late.’

  Vikram was elegantly dressed in Italian suit and silk tie. At six foot three, he towered over Perumal, and even under the suit it was obvious that Vikram’s muscles were finely honed. Perumal instantly felt that spark of inferiority. I’m at least as bright as this guy, he told himself as he sat down with his menu. He had come in the top one tenth of one per cent in his country in the national exams. He had been granted a place at the Indian Institute of Technology in Madras. His parents hadn’t bought him a good education, he’d earned it, in competition with tens of millions of others throughout India.

  ‘Bit loud in here, isn’t it?’ said Vikram, looking round.

  ‘Yes, I’m sorry. Shall we go and find somewhere else?’ said Perumal, making as if to stand up.

  Vikram smiled at him with just a trace of condescension. ‘Don’t worry. We’re here now. I’m sure this will do fine.’

  The waitress came. Somehow Perumal managed to order a starter, a heavy main course and a bottle of wine, while his guest stuck with a salad and a bottle of sparkling water.

  Perumal tried to think of some small talk. ‘Do you think
that implied volatility is going to remain at these levels?’ he began.

  Vikram frowned. Perumal suddenly panicked that he should have said something about the weather or Vikram’s flight. Then, to his relief, his guest replied. ‘I think it will last into the summer. It’s dollar volatility that’s driving everything else. But I think actual vol will remain well below implied.’

  Vikram and Perumal discussed the intricacies of option pricing through Perumal’s first course. Things seemed to be going well.

  There was a lull. Then Vikram asked the question Perumal had been praying for.

  ‘I wonder if you would be able to construct something for us. Something a little unusual?’

  ‘We can try,’ said Perumal, pulse quickening.

  ‘We’ve been studying the correlations between oil prices, the yen, gold and the weather. We think there’s an arbitrage there. But we’d have to do something in really big size to take advantage of it.’

  ‘What exactly were you thinking of?’ asked Perumal, trying to restrain the eagerness in his voice.

  Vikram then proceeded to describe what was probably the most complicated derivative Perumal had ever heard of. He listened closely, working out in his head how Bloomfield Weiss could lay off the risks involved one by one as Vikram enumerated them. For Bloomfield Weiss’s Derivatives Group, complicated was good. Complicated meant plenty of opaque formulae where a few million could be filched from a deal without the customer noticing. Vikram’s transaction was teeming with possibilities.

  ‘Well? Can you do it?’ Vikram asked when he had finished.

  ‘I’m sure we can. When you said big size, what did you mean?’

  ‘Up to a billion.’

  ‘Dollars?’

  ‘Dollars.’

  A billion! Carr-Jones would love this. And he, Perumal, could do this deal. No doubt Risk Management, the department within Bloomfield Weiss responsible for monitoring these things, would need to be ‘educated’ to accept yet more risk on the Teton Fund, but Carr-Jones could handle that.

  ‘I’m sure we would have that capacity.’

  ‘Excellent,’ said Vikram, his teeth flashing. ‘I’ll send you some written details of the kind of thing I’m thinking of as soon as I get back to Jackson Hole.’

  ‘I look forward to them,’ said Perumal. ‘Are you talking to anyone else about the deal?’ He tried to ask this casually, but it was key. It was always much easier to gouge big fees if Bloomfield Weiss wasn’t in competition with another investment bank to come up with a keen price.

  ‘I don’t see the need,’ said Vikram. ‘You guys did so well on the IGLOO transactions that I’m sure we can trust you on this one.’

  ‘Of course,’ said Perumal.

  ‘Speaking of the IGLOO notes. They must be tough to revalue. What with redemption linked to a currency that doesn’t even exist yet.’

  ‘Not really,’ said Perumal. ‘It is hard to squeeze it into the back-office systems, but on the desk we’ve built a model that can do the job.’

  ‘They’re due to be revalued next week, aren’t they?’

  ‘Yes. You’ll be showing a bit of a loss at this stage.’

  ‘Do you think so?’

  ‘Oh, yes. You’ve seen how strong the Italian government bond market has been. But it doesn’t make sense. I’m sure the trade will come right in the end.’

  Vikram picked at his salad. ‘Hm. That’s true. We are looking at this over a one-year horizon. It seems a pity to revalue it every month.’

  ‘I’m afraid we have to,’ said Perumal, blithely tucking into his meat. ‘If nothing else, Risk Management will insist that we receive more collateral from you. If they had their way it would be revalued every day, but the IGLOOs are too exotic for that.’

  ‘Hm.’ Vikram nibbled a lettuce leaf. ‘I think we’d rather they weren’t revalued at all.’

  Perumal stopped chewing. ‘I’m sorry. I have to revalue them.’

  ‘I understand. But can’t you revalue them at par, or ninety-nine and a half or something?’

  ‘But our model – ’

  ‘Your model will say what you want it to say.’

  Perumal started chewing again. Now he knew what Vikram wanted. He wanted Perumal to plug a false number into the Bloomfield Weiss system. It was a simple request: only a question of typing three or four digits. But the consequences could be far-reaching. The Teton Fund wouldn’t show a loss on their trades, and wouldn’t have to provide collateral to Bloomfield Weiss to cover that loss. And if no one found out, that would be fine. But if they did find out…

  People had lost their jobs and been drummed out of the City for mispricing derivatives.

  ‘I don’t think I can do that for you, Vikram,’ said Perumal. ‘We have strict internal controls.’

  ‘Oh,’ said Vikram, all friendliness evaporating. ‘I was sure that you would be able to work around those …’ he hesitated, ‘… formalities. It’s only a revaluation, after all. When the notes mature we’ll know whether we’ve made or lost money, and if we’ve lost, we’ll pay.’

  ‘I’m sorry,’ said Perumal.

  ‘So am I.’ Vikram stood up, leaving his napkin on the table. ‘And I thought Bloomfield Weiss wanted our business.’

  ‘Will you call me about the yen–oil–gold deal?’ Perumal asked.

  Vikram didn’t dignify the question with a response. He turned to leave the restaurant and then hesitated. ‘Look, if you do think of a way to help me, call me at my hotel. I’m at the Strand Palace.’

  ‘I’ll do that,’ said Perumal as he watched his best customer walk out of the restaurant, leaving him with his half-finished lunch, three-quarters of a bottle of wine and a whole bill. He sat down and refilled his glass to the brim.

  What now? He couldn’t possibly do what Vikram had asked. Could he?

  Perhaps he should discuss it with his boss. That was what bosses were for, after all. But a moment’s reflection told him that was a very bad idea. It would raise the stakes considerably if Carr-Jones became involved, changing a simple revaluation error into a full-blown conspiracy. Even Carr-Jones wouldn’t go along with that. And what was worse, Carr-Jones would know that Perumal had let a billion-dollar deal walk out of the restaurant. A deal like that could make the derivatives desk ten million or more.

  If only there was a way to swing it. Then the Teton Fund would become the most profitable client in the Derivatives Group, probably in the whole London office. Although there would be no keeping Carr-Jones out of it, Perumal would receive a large chunk of the credit. And Bloomfield Weiss knew how to look after its revenue producers.

  He still couldn’t really believe that he was at Bloomfield Weiss. His family, his mother especially, had become so proud of him when he had been offered a job there a couple of years before. But even she had never expected him to do so well so quickly. Her elder brother, Uncle Achappan, had returned from ten years in Saudi Arabia a wealthy man. He had bought a big house with a swimming pool and several wide-screen TVs. Well, with a few Bloomfield Weiss bonuses, Perumal would be able to put him to shame. In fact, he would send some of the cash home to his family. A hundred thousand dollars would go a long long way in Kerala.

  What would his mother advise? She was an honest lady, she had brought him up well, but he knew she’d find a way if she were in his place. His father, perhaps not, but his mother never ceased to point out that her husband, a civil servant with the Ministry of Education, hadn’t the wit to make any serious money.

  Could what Vikram asked be done? Possibly. There were all kinds of systems to be got round, credit geeks to be pacified, risk-management groups to be hoodwinked. But Perumal could do it. It had been impossible to cram the IGLOO structure into the system anyway, so the revaluation would have to come from Perumal himself. If Risk Management asked him to back it up, he’d blind them with science. Say he was using a jump diffusion model, that should do it. He looked honest. They’d trust him.

  The only person who might find out was J
ustin Carr-Jones. He had an eagle eye and an intuitive feel for where the risks in his group were being run. That was a problem.

  Then Perumal smiled. No. That wasn’t the problem. That was the solution. Carr-Jones couldn’t risk conspiring with one of his traders to corrupt the system. But he could turn a blind eye. For the fees from another elephant transaction, he could easily turn a blind eye.

  Perumal took out his mobile phone and dialled Directory Enquiries for the number of the Strand Palace Hotel.

  10

  Much to Linda Stubbes’s horror, Calder insisted on giving his statement to Jen’s lawyer rather than Bloomfield Weiss’s own solicitors. Stephanie Ward was a tall, thin woman who worked from an office near the Tower of London. She was meticulous, and it took them two hours before they had agreed on a statement. Calder wanted to make absolutely sure that his version of the events wasn’t distorted in any way.

  In the trading room, the subject of Jen was avoided. It was dangerous ground. Saying the wrong thing to the wrong person could get someone into all kinds of trouble. Keep your head down and your mouth shut seemed to be everyone’s motto.

  Calder tried to phone Jen at home several times. He didn’t want her to think that he was like the others, pretending she had never existed. But she was using her answering machine to screen calls, and although he left a variety of messages, she never returned any of them.

  He did get a call from someone else, though. Tessa Trew, the only woman remaining in Carr-Jones’s Derivatives Group.

  ‘I need to talk to you,’ she said in an urgent whisper.