Shadow Banking

by C. M. Albright

  The call that Al had from Miles was unusual for two reasons. Firstly, it was the urgency in Miles’s tone. Al had never heard him sound so agitated. Gone was the measured tone which he usually employed and there was a strain to his voice. ‘We need to have a chat. Face to face.’ Need? Miles didn’t usually need anything. And secondly, it was Miles’s choice of venue, The Cellar Bar of Balls Brothers in Moorgate. Al had suggested a couple of new restaurants that he thought Miles might like to try but he was adamant that he wanted to meet in The Cellar.

  Al arrived first and was shown to his table by a waiter. He went to check the markets on his Blackberry but there was no reception. When Miles arrived, he was dressed immaculately as always but Al was surprised by his appearance. He looked gaunt. The Miles of old never carried any fat. If he thought that perhaps he was carrying too much weight, he ensured that it was burned off on the treadmill or in the swimming pool. But Miles’s weight loss didn’t look as though it was the result of an increased cardio-vascular regime. It looked as though he hadn’t been eating, hadn’t been looking after himself. His usual skin colour had grown paler.

  ‘Hey Al.’

  ‘Miles.’

  The handshake was perfunctory. Miles took his Blackberry out of his jacket pocket. He looked at the screen. ‘No reception?’

  ‘No,’ said Al. ‘There’s none down here.’

  Miles accepted this information with a nod as though it confirmed an existing assumption. There was no small talk. Despite this being the first time that they had met up in months, any social niceties were dispensed with. They had more important things to discuss.

  ‘I need you to book a wash trade for me with Moscow Clearing Corporation,’ said Miles after they had ordered a bottle of sparkling mineral water from the waiter. As soon as Miles had said it, he broke eye contact and looked down at the knife at his place setting. Al knew better than to ask why Miles couldn’t book the trade direct. ‘I need you to book it; there’ll be no market risk. I’ll let you book a million USD of risk free profit as well.’

  With or without the sweetener, Al knew immediately that this trade was going to be a problem and by the look of Miles, he knew it too. This was extraordinary. Miles would never usually say this, especially the offer of free money. Why would he do that?

  ‘Miles, I’m not sure if I can get a direct trading line set up for MCC. We struggle to trade with some of these Russians direct in a normal market let alone the current climate.’

  ‘You need to do this for me.’

  This was new territory for both of them. Al suddenly found his own abilities to maintain eye contact at a loss. Miles Ratner’s constant zen-like control of his own destiny appeared to have deserted him and Al found it acutely unsettling.

  ‘What’s going on, Miles?’

  Miles glanced over his shoulder before he said: ‘Al, you’re the only person that I can turn to. I’ve got nowhere else to go.’

  Al could see the desperation in his eyes; he could sense his fear. Whatever might have happened between the two of them in the past, Al knew that he would help his friend. He couldn’t deny that there was a certain twinge of Schadenfreude as he heard Miles admit that he was in trouble. These were strange times. Had Miles overstretched himself? There were a lot of people out there who were panicking. All around the globe there were conversations taking place like this one. People all over the world were waking up to the fact that things had changed. The landscape had altered. Miles had to know that a trade of this magnitude was going to be difficult or he wouldn’t have offered such a sweetener to Al.

  ‘You know I’ll do absolutely everything that I can, Miles, but I can’t promise that I’m going to get it through.’ This response served to agitate Miles yet further.

  ‘You don’t understand, Al, if you can’t do this for me, I’m a dead man.’

  Al stared at him, momentarily lost for words before he said, ‘Don’t be melodramatic, Miles.’

  It was an unusual volte-face in the mechanics of their relationship. Miles was usually the one who was cautioning Al against overblown emotional statements and yet here he was cautioning Miles. But before he could ruminate on this situation any further, Miles said, ‘That’s not hyperbole, Al. If you don’t manage to do this trade for me, there’s every reason to believe that I’m going to be killed.’

  ‘Come on, Miles, you’re not serious.’

  ‘I’ve never been more serious.’

  Al leant back in his seat as the waiter returned to the table with the bottle of water and poured them both a glass.

  ‘Are you ready to order?’ asked the waiter. Al shook his head and wore an expression of such distracted severity that the waiter immediately retreated.

  ‘What the hell’s going on, Miles?’

  ‘It’s a long story.’

  ‘It’s Aden, isn’t it?’

  ‘I can’t go into it now but yes, of course it’s Aden.’

  ‘And you’re sure that you’re in as deep as you think you are?’ Miles nodded. ‘You’re not being paranoid?’

  ‘Al, this has been brewing since I joined them. And now, with all that’s going on, it just makes the whole thing completely out of control.’

  Al had wondered when the right time would come along to break their bi-lateral silence over Felix. The time was now.

  ‘Before I try and do this for you, Miles, you have to promise me one thing otherwise the whole deal’s off. Whatever happens between you and me and whatever the fall out of what I’m going to try and do for you, Felix is taken care of. Nothing bad will ever happen to him. It’s a deal breaker, Miles.’

  ‘Of course. You have my word.’

  And that was it. No accusations, no recriminations, no argument.

  Al looked at his watch. ‘I’d better get back to the office.’ He stood up, took his jacket from the back of the chair and left Miles sitting alone at the table.

  5yr Xover Credit spread: 605bps

  VIX: 22

  Gold: 825

  Al spent the afternoon with the credit team and the account opening team. He had a lot of good will to call on. He had been at Hartmann Milner for eleven years. Despite his sometimes corrosive relationship with Melody and the rest of the senior management team, he was trusted implicitly by the staff in the credit and back office areas. There was no question that he always had the bank’s best interests at heart. A couple of calls established that another department in Hartmann Milner was trading cash bonds with MCC and this helped him convince the credit guys that it was safe. It would be a big trade. Nice P and L would be made. By early evening, Al had approval to deal with MCC. But rather than providing him with any sense of relief, it only served to make him even more sick with fear and ensured that when he went to bed that night, sleep proved elusive. Krystina was away, filming some Italian horror movie in Naples and when Felix tottered through from his own bedroom and climbed into bed with him in the middle of the night – as had become habitual of late – Al didn’t take him back to his room as had been agreed with Krystina and the nanny. Instead, he let him stay there, enjoying the sound of gentle breathing on the pillow next to him.

  When he arrived at the bank in the morning, Al booked two trades. He bought one billion US dollars against selling Japanese Yen with Moscow Clearing Corporation settling two days hence. Against that, he sold one billion US dollars and bought Japanese Yen with Aden Partners. He used different rates on the trades to capture one million dollars of profit for Hartmann’s while leaving the bank’s position flat. He used an old trading book that was dormant so that the Hartmann spot trader wouldn’t see the instant P and L impact on the bank although the P and L would show up nevertheless against Al’s name. Whichever way he tried to spin it in his own mind, what he was doing was wrong. The only reassurance he could cling to was that he was protecting his friend. But that itself provided him with troubling thoughts. What sort of friend behaved the way that Miles had done? How could that behaviour ever be deemed worthy of friendship let alone a pot
entially career-wrecking – for Al – gamble? If it went wrong, he would be seriously in the shit. Yet even as he considered this, he couldn’t help but recognise a hint of masochism in his motives. Maybe he wanted to press the self-destruct button? Maybe that was his true motive for carrying out this trade.

  Two days later and the call that Al had been expecting but dreading nonetheless came through from Becky in the back office. Becky was one of the stalwarts of Hartmann Milner, someone who had been at the bank even longer than he had and commanded an enormous amount of respect across the firm. She told Al that the Yen leg of the trade had been paid out to MCC by Hartmann Milner in Tokyo time but the US dollars had not yet been received. The Aden legs of the trade, however, were all fine and booked.

  ‘Have the dollars gone to Aden yet?’ asked Al. ‘Because if they haven’t, we need to withhold payment.’

  ‘Sorry Al,’ said Becky. ‘They’ve already been paid.’

  ‘Oh shit, you guys are too efficient. Can you call the US dollar agent bank for Aden and get them to kick the funds back?’

  ‘I’ll find out.’

  In the two minutes that it took for Becky to call him back, Al stared at his computer screens but he wasn’t taking in any of the information that they contained. A sweaty feeling of déjà vu was descending upon him. This scenario was something that his mind had constantly taunted him with over the past two days.

  Throughout the thousands of conversations that he and Becky had had over the years, Al had come to understand the nuances in her tone of voice as well as a husband might understand those of his wife. He knew things were bad even before she told him, ‘The dollars have gone out of Aden’s account already and our calls to MCC in Moscow are going unanswered.’

  ‘Leave it with me Becky,’ said Al and rang off. While he waited for Uri, his contact at MCC, to pick up on the automated Reuters dealing system, his mind raced. Of all the scenarios that he had explored regarding this trade, the one that he hadn’t thought of was that he would be caught out by ‘daylight risk’ – making a payment in the morning in one currency in one part of the world and not getting the counter-currency back in a later time zone. Uri didn’t pick up his call. Al tried to call him on the phone but there was no answer. Al’s next call was to Miles.

  ‘Where are the fucking Russians, Miles? I can’t get hold of them.’

  ‘Call you back in two,’ said Miles and the line went dead. As the minutes ticked by and his sense of panic and nausea increased incrementally, Al knew that he would never get that call.

  Al grabbed his phone and his car keys. Opening up the top drawer of his desk, he took out possibly the only possession that he kept at the office – a small framed photograph of him and Miles and Fergal dating from their days at Trenchart Colville. He slid it into the side pocket of his jacket and made his way towards the lift. As he waited for it to arrive, he glanced back over his shoulder to Melody’s side office, clearly visible through a glass partition. There she was, buttoned up head to foot in Gucci, sitting at her desk and looking up as she was joined by two people that he knew only so well – the bank’s head of compliance and the head of risk – two men wearing very serious expressions. There was only one cause for their grave demeanour and it was stepping into the lift and pressing the button for the ground floor.

  SP500: 1295

  EUR/USD: 1.4655

  3mth EUR/USD implied vol: 14.55

  ‘Something’s happened.’

  Krystina didn’t even look up from her magazine. Something was always happening. She obviously thought she was going to get another one of his boring moans about life at the bank. The fact that it wasn’t gave him a strange sense of power.

  Just then, Felix ran to him and hugged his legs. Al picked him up and his tense expression momentarily left him as he smiled.

  ‘It’s going to mean the end of my career at Hartmann, in fact, the end of my career in the City.’

  That got her attention. She looked up at him while Felix tried to push his finger into his nose. Al put Felix down on the carpet where he made his way back to his mother.

  ‘You’re not joking are you?’

  ‘Absolutely not.’

  ‘Is it fraud?’

  Al emitted a bitter chuckle. ‘If it was fraud, don’t you think I’d have managed to make something out of it? No, it’s not fraud although it might be seen as such by some.’

  ‘I don’t think we should talk about this in front of ...’ She gestured at Felix.

  ‘It’s fine. So long as no one loses their temper.’

  Krystina flashed him a look and he could see her hackles rise. ‘It’s clearly something you’ve done deliberately because you want to escape. Your self-destructive streak is just so obvious, Alistair.’

  ‘I’m sure you’re right but in this instance, I was trying to help out an old friend. The trouble was, he stitched me up.’

  ‘How bad is it?’

  ‘About as bad as it can be. There will be an investigation by the authorities. I could even go to jail.’

  That he would rather go to prison than continue working in the City was something that gave him a sense of euphoria.

  ‘Christ Al.’ He knew she was furious; she never blasphemed or swore in front of Felix. ‘I can’t believe you would take such a risk with your life and freedom.’ She fixed him with a defiant stare and said, ‘And your family.’

  ‘OK, so maybe now is the point where we save this for later,’ said Al. Krystina ushered Felix out of the door and through to the nanny. While she was gone, Al poured himself a large whisky and downed half of it in one gulp. When she returned, she saw him with his drink and poured herself one, as though he might have had an unfair advantage otherwise.

  ‘Seeing as this seems to be the time when we tell each other the unvarnished truth, there’s something that I need to tell you.’

  ‘Hold on Krystina, let me guess. I know, I’ve got it. Felix isn’t my boy. He’s Miles’s. You had an affair. Is that what you were going to tell me?’

  Al shocked himself, he sounded so cold and cruel. But he couldn’t help but also feel elated. The truth was finally emerging. Krystina downed all the whisky in her glass, gritted her teeth and said, ‘Actually, it was to do with my father. He wants to speak to you about some investments that you helped him with. Apparently they’re turning to shit. A bit like everything else.’

  ‘When were you planning on telling me, Krystina?’

  ‘What, about my father’s investments or about Felix?’

  ‘What do you think?’

  ‘Look, Al. It was something that just happened. If it’s any consolation to you, it was just fucking. Nothing else.’

  ‘Thanks for that. That makes me feel a whole lot better.’

  ‘You’re not seriously going to tell me that you haven’t been with anyone else during our marriage? Not once.’

  Al remained silent. Although he wanted to keep playing the truth game in which he and Krystina were taking part, he couldn’t help but reflect on Krystina’s father’s investments. It was pretty much all he had. A couple of million USD that Al stashed away for the past few years. If it all went tits up, then the old boy would stand to lose the lot.

  ‘Your silence speaks volumes, Al. How many have there been?’

  ‘Look, let’s just forget about the recriminations here. We need to think of the future. When I get thrown to the lions, you’ll still have your career and there’s some money I can probably let you have before I’m closed down entirely. All the overdrafts are in my name anyway. You and Felix should be fine.’

  ‘No thanks to you.’

  ‘Like I said, let’s keep this civil and it’ll make things easier. I’ve spoken to Miles and we’ve agreed that Felix will always be provided for.’

  There was another flash of anger in Krystina’s eyes as she glanced across at him. ‘So you’ve been discussing my future have you? My future and the future of my child, like I’m just some sort of trade that can be done between old friends
. How charming.’

  ‘It wasn’t like that.’

  ‘Fuck you, Al Denham.’

  5yr Xover Credit spread: 815bps

  VIX: 49

  Silver: 11.1

  The bag was from a camping store. It was a small hold-all. Black. In it, was a fake passport in the name of a Brazilian called Santos. Miles had paid 50,000 Swiss Francs for it. It was good. Or certainly good enough to get him through a few borders. There was also some cash, a hundred thousand in small denomination US dollar bills. There were some clothes, nothing flashy, another pair of jeans, a few shirts, socks, boxers, a pair of sunglasses. His only connection to who he once was was wrapped in a pair of socks – a very rare vintage Patek Philippe, so rare there were only two in existence and he had both. He knew it was possibly a risk but he didn’t care. Risk was something he had lived with almost all of his adult life. Besides, he liked the watch. No, he loved it. All he had to do was get into the house and get the bag. Then he would slip away and never come back.

  Miles had had the most hectic few months of his life. He had worked seven days a week, sometimes through the night. He was trading out of his skin. While he tried to close down as many of Ellwood’s obligations as he possibly he could, he knew that he was fighting a battle he simply couldn’t win. It just felt as though he was picking up the pennies in front of the steam roller, an expression that Rob Douglas had used in one of their training sessions at Trenchart Colville back in the day. Miles very quickly realised that a contingency plan was required. It was simply not possible to shut down Ellwood’s portfolio and take only a 25 per cent haircut which of course would wipe out Ellwood’s capital. Miles decided that attack was the best form of defence. He started frantically raising any capital he could out of Ellwood’s portfolio and opened up accounts all over the world. Miles decided that the only way out was to have an almighty punt on Armageddon hitting financial markets. Whether it would be enough to cover the losses, Miles simply didn’t know but at least he could be in control of the cash. The plan surpassed Miles’s aspirations. Miles Ratner was nothing if not a superstar trader. He managed to turn his five billion into fifteen billion but the crucial thing was that he opened up all the accounts in his own name. Aden was in trouble and while Artem was all over Miles like a cheap suit, he couldn’t watch him twenty-four hours a day. When the crisis started to hit in the summer of 2008, desperation situations called for desperate measures. He needed to buy just a bit more time. So he called Al and secured a billion dollars in collateral to keep the wolves from Aden’s door. Naturally, this was a last resort. He had no one else to call. It was clear that he wasn’t the only one under extreme pressure. Artem and Hans were fighting their own fires and while Ellwood’s death was a warning to Miles and a bargaining chip as much as anything else, it was also an example to them all of the reach of Vadim Titov. No one was safe.