One Step to Danger

by John Gubert

  “We have some large ones as well,” said my father with a laugh. He acted as if he was astounded that Fucquet had not realised the scale of his operation. “We have several billion on advisory contracts. It’s all private money and the funds are only open to a select few. But we make money. Sometimes we have discretion. At others we manage with the investor. This is one of them.”

  That was a good story as it brought us back into a profile that Pierre could accept. We did not look like a fund management company moving billions. But we could easily be the hybrid. A small fund manager who advised a group of the super rich. That sort of discrete entrepreneur was not uncommon. Pierre consulted his colleagues about our proposed deal. The people at Fucquet would need to work with their people in the Far East. The way the system worked, Fucquet would look for other banks willing to take on a good part of the risks involved. They were never going to take on all that risk themselves. So they would not accept the deal until they had found some willing partners. They would then run their portion of it for a bit and lay off a bit more, gradually taking their profits as the market moved until they had little or nothing left. The whole process was dependent on the markets moving as they expected. And we had plans that would ensure that did not happen. In that case they would be exposed and lose money.

  My father had only mentioned that we had a client who wanted to hedge his substantial Far East portfolios. He did not say whether he wanted to protect against a fall or a rise in the market. That was sensible, as Fucquet would be forced to quote two fees. One would protect an investor who felt he had too little invested in the markets from a rise in the market. The other would do the reverse. And my father was betting on the hope that Fucquet would misread him and therefore give him a low fee for taking on the risk of a fall.

  He chatted with Fucquet. They questioned him. He extolled the virtues of the market and expressed the opinion that they were now starting to recognise the real worth of companies in the area. But he assured that he felt there was a bit of a way to go yet. He grinned broadly as he put down the phone.

  “They think I represent someone who is under-invested in the area and that I need to protect myself against the market rising as I put more money into the region. The indication is that the cost of insurance against a rise could be five to ten percent, while the cost of insurance against a fall is only two to two and a half percent. They will talk to London and I will call them back in an hour.”

  He then picked up the phone to Hochzeit and spun them a not dissimilar story. But he concentrated on a fund investing in Korea when he talked to them. He implied it was a vulture fund. It would invest in companies. It would build up stakes in them. And the hope was that would flush out possible bidders. That would cause the prices to soar. The fund would then make super profits. It was pure manipulation of the markets. If it worked, it would be super-profitable.

  I turned to Jacqui and said, “Everything is based on fear and greed. It’s easy to panic people when that’s the case. And that’s what he is starting to do.”

  The conversation with Hochzeit went on for some time. It was obvious that they were willing to deal over the phone. I heard my father talk of two hundred million dollars. Ten minutes or so later, after much haggling, he put down the phone with an air of triumph. “That was hardly a challenge. They have agreed to hedge a two hundred million dollar fund for four percent for a month from today’s close.”

  He saw Jacqui was looking puzzled. “I’ll pay them four percent. That’s eight million dollars. And they will guarantee to pay me compensation for any fall in the market from today’s level during the next month. It’s just as we said before. If the fall is less than four per cent, they make money. When it is more, we make money.”

  “You need to remit the balance to them. We have only two million in our account,” I said.

  “I’ll send them the other six when we next talk to Fucquet,” he said. “It’s like the old times except this is for us and not for clients.”

  He called Fucquet later. There was quite a lot of haggling and he had a hard time to complete the deal. But he did, and when he had put down the phone this time, he punched his fist in the air with a triumphant “Yes! Yes! Yes!”

  This time, he explained that he had hedged a fund of a billion dollars for just two and a quarter per cent. The fee to Fucquet would be twenty-two and a half million dollars.

  We had spent just over thirty million dollars but had opened some one point two billion of positions.

  “Jacqui start the New York rumours. Charles will have to wait several hours before he starts his. He’ll be working into the early hours of the morning,” said my father.

  Jacqui was very good. She played her part perfectly. She called all the big banks; one after another while my father monitored the screens. We ate sandwiches and drank bottled water. Otherwise the ‘do not disturb notice’ kept out all visitors.

  The bank trading rooms swallowed every word Jacqui fed to them. There were two reasons. The first was that she sounded great on the phone. That was not training. She just sounded great and the traders liked that. The second was that she was convincing. She managed to spin a story that became credible because of her uncertainty about it. It’s no use telling the market something is happening. We were asking the market to confirm that something had happened. And in the end they believed it actually had.

  The market was not living in a real world. It was make believe and opinion. And we gave them something to believe in. They lapped it up.

  “Look the won is falling a bit. It’s starting to come under pressure,” called my father.

  The won was the Korean currency. I looked at the screen. He was right. It was a small movement as yet, but it was there. Jacqui continued her calls.

  “Oh hello, I have been given your name by your corporate people. They said you follow Korea closely. We are just putting a story to bed on Korea. We are being told that there is concern that they may default. It appears that there is also trouble on the border. Have you heard anything?”

  “Look lady. Oh shit. Sorry, I shouldn’t say that. The market’s all over the place. It seems they must be doing something. Someone in the Pentagon has made a comment about monitoring the situation. The Koreans have kept quiet. Look all hell’s starting to break lose. I’ll have to go.”

  She called another desk. This time, the response was better, “We sure think so. The market says that’s the case. It’s always a good indicator. Yes Mam, it’s bad out there.”

  That was a standard monosyllabic and meaningless comment from a trader able to worry governments. And he, and hundreds like him, as planned fed the flames that we had started.

  My father smiled broadly as the won began to ease. “Excellent,” he said. “I think you should call the US banks in Hong Kong as well. That could put the skids under the currency. Then we’ll see the markets really move.”

  He picked up the phone to United in Geneva. Their dealers there would have already gone home but we were switched through to New York. I had not realised, but my father must have arranged lines for foreign exchange with them.

  He asked for a price in won for one month forward. He calmly said “I’ll buy a hundred million dollars and sell won for one month.” He then added, “There’s five million cover in my account. I’ll remit a further five million tomorrow to give you extra cover.”

  They had obviously agreed to deal with him as long as he left some cash in his account. If the deal went wrong, as usual they would ensure he had enough in his account to allow them to reverse it. They believed the money in the account would cover any possible loss.

  By now the screens were showing the market getting nervous. A story flashed up on Reuters about concerns emerging about the stability of the won. The unsuspecting Koreans were fast asleep and did not know what was happening. But the market gave all the traditional indications of panic and rumour breeding panic and rumour.

  My father had been busier than I thought. He seemed to have a w
hole number of new contacts. He checked out the position with them and grinned each time a new rumour appeared. As most rumours are by word of mouth and dealers are inventive, the original rumours became part of a bigger machine. As time moved on, it was going to be more difficult to stop the fears that were now taking hold of the market.

  He turned to me and said, “You’re going to have an easier time with your Sebo rumour. In any event it may become a reality. He must be watching these markets for signs of a turn. It would be logical for him to sell other regional markets at a time like this.”

  We carried on monitoring markets through the evening. We needed to be ready for the Asian openings. This was after all only the first phase of the exercise. In time we would be attacking the Hong Kong dollar, and if that worked, our killing would be complete.

  I saw that my father had done his calculations. “We are still in loss,” he said. “But the market has moved three per cent in our favour in Korea. That means that we have clawed back six million of the eight million fees we paid. The Fucquet business is less in our favour. On average we have clawed back half a percent. That’s around five million of the twenty-two and half we paid them. The sale of won has moved in our favour and we are up just over a million on that trade.”

  I added those figures up in my head, “That means that we are twelve million up against an outflow of thirty point five. Our timing has been perfect.”

  My father nodded, “It is really now up to you and Jacqui to get those rumours going. The journalist story can only hold for the next twenty-four hours at the most. We need the market to get into a panic. Otherwise the stories won’t hold. That is unless we fall lucky and the papers actually run them.”

  As the Far East markets opened later that day, Jacqui and I hit the phones. The markets in the US had been sufficiently volatile to unnerve many of the traders in the Far East.

  I called one major house and hit the speaker phone button so that all could hear the panic in their trader’s voice. “The place is unhinging. The stock markets are down. The red chips are falling like a stone. The cash market has gone crazy. Nobody can afford those rates. They’re going through the fucking roof. I tell you there is a load of longs out there and some big names are going to take a bath. It’s going to be in billions. There’s no liquidity in the market. You can’t sell your positions. It’s going to fucking collapse.”

  I did the same with another, “The foreign exchange markets are falling. Of course they’re fucking falling. You can’t sell for love or fucking money. Shit the won’s crashing again. And the ringit’s falling out of bed. Shit it’s 1997 again. We’re fucking shafted.”

  Then we couldn’t even get through to the traders. They couldn’t answer the phones. They were overwhelmed. One, in a panic, accidentally left us on hold and we put it on the loudspeaker. The voices rose to a panic crescendo in the dealing room. The language got fouler. The fear was more open.

  “I can’t cover dollar spot,” yelled one voice.

  Another responded, “Then don’t answer the fucking phone. They only want to sell. I don’t want to take a position.”

  A third shouted, “We’ve got one. I’ve over a billion on the book and it’s the wrong way.”

  A new voice came in. “You’re fucking fired then. Bugger off out of here. The prick. The goddam fucking prick. He’s taken the sodding won and yen on the book and sold the sodding dollar. What an arsehole. That’s blown the bloody bonus, I’ll tell you.”

  Another voice yelped in panic, “If he’s long, let’s find someone we can short against. There must be a government or central bank who’ll take us on. We can’t lose the fucking bonus. I’ve spent it. I bought that motor. That bloody Ferrari.”

  Someone came to the phone, “We’ll sell you anything against the dollar but we’re not quoting to sell dollars. The only thing that’s holding now is the peg. And I don’t know how long that’ll be for.”

  By the peg, he was talking about the Hong Kong dollar. It was pegged to the US dollar. I knew my father planned to smash that one too. I looked at him.

  He shook his head. “In the second wave,” he muttered, “the run there hasn’t started and they’ll defend it to the end.”

  The voice on the phone called to me, “Who are you in any case?” He’d forgotten I was an alleged journalist and thought I was some other trader. I killed the phone. We had enough and needed to watch the screen.

  My father was doing another calculation. The Korean index had gone into free fall. It was down twelve per cent. That made a pay out for us of twenty four million dollars less the eight million cost. The big fund index was down seven per cent and that brought in seventy million dollars against our outlay of just over twenty. On the currency side the won had fallen six per cent. That was a massive fall for a day. We had made a further six million on the currency.

  “There’s more to come,” said my father. “They will fall right out of bed, but we need to keep our nerves, It’s going to be a roller coaster market.”

  We stopped working the phones but watched the screens. Rumour followed rumour. The markets tried to rally but failed. There were onerous warnings from the brokerage houses. Economists started talking again of a global slump. Commentators saw the threat of unrest, as soaring unemployment would surely follow the inevitable series of bankruptcies. Politicians muttered half-hearted words about the fall not being justified.

  But in situations like that nobody listens to commentators. Nobody ever listens to economists. And most of all nobody believes politicians. And Finance Ministers or central bankers came to the screen. They claimed unconvincingly that the panic was ridiculous. The market ignored them. It fell further. They all lacked credibility. The market was falling and therefore it had to fall.

  We called Fucquet and Hochzeit. They sounded scared. And it was inevitable that they would be. For they were in a serious loss making position. Although they would have laid off a large part of the position, the reality was that they would have carried a good part on the book.

  We sympathised and commented on our client’s lucky timing. That did not make them any happier. But we did not expect it to. When we saw their anxiety, we pushed in a few more rumours. Some were unbelievable but they believed them. There was nothing that the market would not believe. It had reached the stage of total panic and bad news just topped up the reality of the mess.

  The markets went on in steep fall for several days. At times they staged a rally and we held our breath. But then they hit the downward track again. For the odd day they stabilised and then fell further.

  We all monitored the screens closely day in day out. Our day started with the opening in Asia and ended as the markets closed in New York. That was almost a twenty four-hour cycle.

  We staggered our exercises. Nobody thought that strange. The role of those monitoring the positions was to brief my father as he returned. He was the mastermind. Jacqui also got into the swing as we got the feel of markets and realised how simple it was to make them work as we wished. As we had thought, those who do not fear losses were able to stand above it all and make the gains.

  This drama continued for nearly three weeks. We knew that we would soon close. We had to do something over the coming week as our positions would come to an end. All the markets had been in a fifteen-day free fall. The only stable areas were the Hong Kong dollar and the Japanese bank stocks.

  Then one evening, we had a meeting to review the position. Once again it was my father who led the debate.

  “I’ve assessed our position. The Korean market has actually fallen less than we hoped although their currency has gone through the floor. The market last night closed fifteen per cent below our base level. That gives us thirty million dollars, less the eight we paid up front. That’s a net of just twenty two million dollars. We sold a hundred million dollars of their currency on the foreign exchange and that’s down thirty two percent. So we should be able to close out at a thirty odd million profit on that position.”


  “I thought we’d make more there. In total we just made fifty four million net of costs. I suppose the locals supported the market.”

  My father nodded, “I underestimated the problems they are facing. They couldn’t let their markets fall too far or all their corporate lending would have been called. The banks have all taken security in the form of shares; so the companies must have bought their own stock through some cartel arrangement. I guess it’s quite easy to do so in a pretty liquid market like Korea. Still the good news is that we have made an absolute killing on the big fund.”

  My mother said, “Last time we talked we were nearly four hundred million dollars up on that one. What was the status at the close? Given the free fall last night, I would have suspected we are close to five hundred million now.”

  “You’re pretty close,” replied my father. “The total fall has been fifty two percent on the basket of markets we insured through that option. When you see what the downside risk was, you have to agree that Fucquet and their friends were crazy to even consider pricing it like they did. I can’t believe how short sighted they were.”

  “That puts us five hundred and twenty million up, less the twenty two and a half million fee,” I noted. “We’ve cleared just over five fifty million on the whole scam.”

  “It’s just crazy,” observed Jacqui. “It was the rumours that moved the market. And we fabricated them to move the markets our way. And we haven’t any big, big money. After all we only risked twenty to thirty million. But in the end they actually believed the garbage that Charles and I fed them down the phone.”

  “Yes,” said my father, “if things swing too far one way and markets lose touch with reality, they’ll believe anything. Even a lousy story told by a journalist they have never heard of.”

  Jacqui laughed happily and said, “It’s a great way to make money. It’s so different from my father. You don’t hurt anybody.”

  But that was not strictly true. People would lose their jobs. Countries would become poorer. But we did not see that. It wasn’t like drugs or murder. The harm was lost in the normal sea of human misery. Statistics don’t make you feel ashamed. At least not until you’ve made your money. I did not contradict her. And I noticed my father didn’t either. We secretly exchanged looks and I felt a bit ashamed that I had let her easy words pass.