Free to Trade

by Michael Ridpath

  I sat and waited. Phoenix Prosperity’s annual report rested on the low table in front of me. Under the caption ‘Bringing you Prosperity from the Ashes’ was a picture of Phoenix’s office building set against an unnaturally azure sky. I leafed through the document. There was lots of worthy coverage of work Phoenix Prosperity had done in helping to build the community. The savings and loan had twenty branches throughout the Phoenix region.

  The chief executive, one Howard Farber, had written a statement. In it he referred to the financial difficulties that had been faced by the institution two years ago, but then mentioned a substantial capital injection which had strengthened the balance sheet. No mention of where this capital injection had come from.

  I took a look at the balance sheet. Capital had grown from $10 million two years ago to about $50 million. This must reflect the new funds. Assets too had grown sharply, from $100 million two years ago to $500 million now. The report was studiously vague about what all these assets were. Perhaps Jack would be able to enlighten me.

  He came into the waiting area just then. ‘Hi, Paul, good to see you,’ he said, holding out his hand.

  I shook it, ‘Nice to see you too,’ I said.

  ‘Come on through.’ He took me down a narrow passageway and into a spacious office with four fully equipped dealing desks in the centre of it. ‘This is it,’ he said. ‘Take a seat.’

  ‘So, tell me what you do all day,’ I said.

  ‘Do you know how a savings and loan operates?’ asked Jack.

  ‘Isn’t it a bit like one of our building societies?’ I said.

  ‘Well, that’s how many of them started out,’ he said. ‘Small community savings banks, raising money locally to lend for local mortgages. Everything very conservative, everything very boring.’

  ‘You don’t look like the kind of chap who writes mortgages all day,’ I said.

  Jack grinned. ‘I’m not. Several years ago, savings and loans were deregulated. Now they can invest in all kinds of things: speculative real estate, eurobonds, even junk bonds. We can make all kinds of interesting investments.’

  ‘But why would depositors place their money with you if all you are going to do is gamble with it? What if your investments went wrong? Local people would lose everything.’

  ‘That’s the beauty of the whole thing,’ Jack said, smiling. ‘All deposits are guaranteed by the US government through the Federal Savings and Loans Insurance Corporation. We can borrow as much money as we want, to play with however we want. The depositor doesn’t care because he can rely on Uncle Sam to bail him out. It’s easy.’

  ‘But what happens to the shareholders? They may lose everything, surely?’

  ‘Yes, that’s true. But the potential returns are huge. For every $10 million they invest, they can borrow another $90 million, government guaranteed. That means, if they invest well, they can earn several times their original investment. As long as they can afford to lose the original stake if they are unlucky, then it’s great odds for a bet.’

  So, that was it! Uncle Sam’s Money Machine was a savings and loan! The $40 million investment on Waigel’s diagram referred to Tremont Capital buying a savings and loan. Using a government guarantee to borrow money, it could turn the initial $40 million into several hundred million dollars. And if the savings and loan got it wrong, well, then Tremont Capital would just have to default on its bonds. It was just the kind of innovative financing technique which Marshall Mills himself would be proud of. I had a pretty good guess which Money Machine Tremont Capital had bought. I hoped Jack would confirm my suspicions.

  ‘I was reading your annual report outside,’ I said. ‘It mentioned a sizeable capital injection a year or so ago. Where did that come from?’

  ‘I’m sorry, I’m afraid I can’t tell you that,’ said Jack.

  Oh well, I thought. I could probably check it up later.

  ‘What are the more interesting things you invest in?’ I asked.

  ‘Oh, real estate, junk bonds, a theme park, even a casino.’

  ‘A casino. That sounds fun. Is it one I might have heard of?’

  ‘Well, it’s this really neat place in Las Vegas,’ Jack began. Then he cut himself off. ‘I’m sorry, I think some people would be quite upset if they knew I talked about it. Let me just tell you it’s big. Real big.’

  I was sure Jack was sorry too. He was dying to brag about his investment.

  ‘Sounds interesting. I’m sure you can tell me something about it. No need to tell me the name,’ since I could guess it already, I could have added.

  ‘It’s a great deal,’ he said. ‘We teamed up with a top-class operator to build one of the best, if not the best casino in the country. The project is almost completed. All we need to do is wait for the junk bond financing to be closed and we will get paid out.’

  ‘What sort of return will you make?’ I asked.

  ‘Oh, double our money,’ Jack said, smiling.

  ‘Whew! Not bad, not bad at all,’ I said. So Uncle Sam’s Money Machine was taking government guaranteed money from local depositors and using it to buy a piece of Irwin Piper’s Tahiti. The question was, who was behind Phoenix Prosperity’s investments? It was obvious Jack Salmon wasn’t the brains behind the operation. ‘Are you given guidelines on what you can invest in, or can you do what you like?’

  ‘It varies,’ said Jack. ‘Sometimes they tell me what to buy. Sometimes they just accept my suggestions. I think they value my judgement. Hey, tell you what. I’ve been thinking about that Fairway deal. Do you want to help me buy some bonds? I’d like to pick up five million.’

  ‘I’d love to,’ I said. ‘But I think I should just watch. You go ahead.’

  ‘OK. Just a minute while I call the boss.’

  Jack dialled a number and drew away from me so that I couldn’t hear. Up until then he had been all braggadocio, but now he took on a sort of submissive posture, rather like a naughty puppy expecting a beating from his master. After a few minutes of solemn conversation in which Jack did most of the listening, he put down the phone, his eyes shining.

  ‘Wow, he really liked that one,’ he said. ‘He doesn’t want me to buy five million, he wants me to buy twenty million. At last these guys are beginning to appreciate my ideas. Let’s get to it.’ The puppy was wagging his tail. His master had given him an unexpected bone.

  I watched as Jack set to work to purchase his $20 million of Fairway bonds. For all his claims of extensive experience, he did a lousy job of it. Buying $20 million of bonds in the junk bond market requires extreme delicacy. I knew how Hamilton would do it. He would subtly nose around the market trying to find dealers who owned the particular issue he was looking for. He would disguise his enquiries by throwing in several red herrings, so none of them could be sure what he was about. Then, when he had found the dealer who seemed to be able to provide him with the most bonds at the cheapest price, he would open up to him, telling him exactly what he wanted to do. The dealer could then work hard to try to buy the bonds from his customers quietly without disturbing the market.

  But Jack wasn’t Hamilton. He started off by asking ten brokers for prices in the issue. He bought two million each from those three which had the lowest prices. So far, so good. The problem was that when Jack tried to buy the rest, lo and behold, the price had gone up three or four points. All the dealers had worked out what he was trying to do, and what was worse, they knew that every other dealer knew. Jack spent most of the rest of the morning shouting at dealers for putting up their prices against him. When I left him, he still had eight million left to buy and was in a thoroughly bad mood.

  I took a taxi back to the hotel. Before checking out I made a quick phone call to Tommy in New York.

  ‘Good to hear from you,’ came Tommy’s voice, relaxed as ever. ‘I trust you are sporting a nice tan after your vacation in the sun.’

  ‘If I hear one more smug chief executive talking about operating synergies and enhancing shareholder value, I think I will exp
lode,’ I said. ‘How are you getting on?’

  ‘Nothing, yet. The police aren’t very co-operative. Also, it’s difficult to get hold of Shoffman’s files. But don’t worry, I haven’t given up. Have you found anything?’

  ‘Yes, I have done rather well.’ I told him about my chat with Jack Salmon and my discovery of what Uncle Sam’s Money Machine was. ‘I wonder if you would do me one more favour,’ I said.

  ‘Sure,’ said Tommy.

  ‘See if you can find out who it was who took over Phoenix Prosperity sometime in the last two years. They paid forty million dollars. Some of the press-cutting databases may have something, although I suspect that the deal was kept private. I bet Bloomfield Weiss had something to do with it. They could have been advisers to either Phoenix Prosperity or the purchaser. See if you can find anything about it there.’

  ‘It’s tricky stuff snooping through corporate finance files like that. You can go to jail for that sort of thing.’

  ‘I know. I can have a good guess who the purchaser was, but I need evidence. Sorry, Tommy. If you don’t want to do it, I will understand.’

  ‘Oh no. You can’t get rid of me that easy. This is fun. I’ll have the information for you. Where can I get hold of you?’

  ‘I’ll be at the Tahiti for a couple of days,’ I said. ‘You can get in touch with me there. Good luck.’

  I was glad Tommy thought the whole thing was a lark. I felt bad about asking him to do something which carried so much risk, but he seemed genuinely eager and willing. It gave him a chance to get his own back on Bloomfield Weiss. He had been fired, what else did he have to lose?

  I was not quite so happy about the whole thing. Whoever was behind it all was dangerous. Debbie and Greg Shoffman had both died on the trail of Tremont Capital. I didn’t feel at all safe following in their footsteps. But I was getting somewhere, especially with the discovery of what Uncle Sam’s Money Machine was. If Tommy could get answers to my questions, I would be a long way towards figuring it all out. I was doing well; it would be impossible for Hamilton not to concede as much. I would show him he had been right to place his trust in me.

  16

  We travelled to Las Vegas in style. Irwin Piper had laid on his own private jet for certain valued investors. To my surprise, I was one of them. Jack Salmon and Madeleine Jansen were there. There were also three or four other investors from some of the biggest money managers. Cash and Waigel were also present. So was Cathy.

  Cash was having a whale of a time. The plane was kitted out to cater for the ‘high-rollers’ that Piper wanted to transport to his casino. There was a bar, including several bottles of chilled champagne. Cash lost no time in breaking into these, forcing everyone to take a glass. Within a few minutes the plane was buzzing with chatter and laughter; Cash had started his party.

  Much to his delight, Waigel found himself a TV with a selection of pornographic videos, which he hastened to try out on the machine. Cathy, whom he had jammed himself next to, stared out of the window in disgust.

  I was sitting next to Madeleine Jansen. The champagne made its way up the plane to us. Madeleine lifted her glass. ‘Cheers.’

  ‘Cheers.’

  We both sipped from our glasses. The bubbles danced around my mouth and tickled my nose. Champagne always seems more active at altitude.

  I looked out of the window down to the dry Arizona desert below. We were passing over a range of low mountains. Here the desert buckled up into folds of browns, yellows, oranges and blacks. Rock, sand and shadow from the strong sunlight. There was not a patch of green in sight. Just one dead straight man-made track bisected the landscape as far as I could see. Looking down from an air-conditioned aeroplane thirty thousand feet up, the landscape appeared cold and empty. The intense heat of the desert floor was difficult to imagine.

  Madeleine glanced over her shoulder towards where Cathy was sitting. ‘You seemed a little preoccupied in Phoenix,’ she said.

  My cheeks burned. ‘Yes, I’m very sorry. I was a little rude, wasn’t I? I hope you will forgive me?’

  ‘Yes, of course,’ she laughed. I was embarrassed that my absorption with Cathy had been so obvious. But Madeleine seemed to be no more than pleasantly amused.

  ‘Have you been to Las Vegas before?’ she asked.

  ‘No, this will be my first time. I’m quite curious to see what it’s like. And you?’

  ‘Once or twice.’

  ‘On holiday or as an investor?’

  ‘No, I haven’t been there on vacation,’ she said, ‘but I have been to look at a couple of investments in the city.’

  ‘Are these junk bond investments?’ I asked.

  ‘Mostly,’ she said, ‘although we do have a couple of equity investments in casinos.’

  ‘Really?’ I said.

  ‘Yes. In fact we own a piece of the Tahiti.’

  At last! Someone who was prepared to be straight about what they owned.

  ‘That’s interesting. What do you think of the deal?’ I asked.

  Madeleine looked at me, amused. ‘What do you think of it?’ she said.

  I shuffled uncomfortably in my seat. This woman obviously knew what she was talking about and I didn’t want to make a fool of myself. On the other hand I had never liked the deal, even before I had discovered Piper’s murky past. ‘I don’t know much about casinos, so I may be wrong, but I am afraid I don’t like it at all.’

  ‘And why is that?’ Madeleine said, a slight smile on her lips.

  ‘I’m not convinced that casinos are immune from a recession, especially those that cater for the family holiday. In a recession fewer people go on holiday, it’s as simple as that. And there isn’t much leeway in the financial projections for rooms and tables to be left empty.’

  She looked at me, interested. ‘Go on,’ she said.

  ‘Well, the other thing is Irwin Piper. Sure he’s a savvy investor. But I get the feeling this is an ego-trip for him. He wants to build the most spectacular hotel in the world, and will bend the finances to make it work.’ I sighed. ‘The real thing is I just don’t trust him.’

  She looked at me long and hard. ‘I think you are right,’ she said.

  ‘But, if you agree with me, why did you invest?’ I asked.

  ‘Amalgamated Veterans invested, not me,’ she said. ‘One of the people who work for me put the idea forward and fought for it very strongly. It has a lot going for it. It will be one of the most celebrated casinos in the world, and Art Buxxy has a good reputation for getting the customers in the door. But I didn’t really like the smell of it. There was nothing I could put my finger on. In the end my colleague insisted and we went ahead. It was, after all, only thirty-five million dollars.’

  ‘What do you mean, only thirty-five million dollars?’ I said. ‘That’s an awful lot to lose.’

  Madeleine smiled. ‘I am in control of over fifty billion dollars. It’s very difficult to find enough opportunities to invest that much. We make a host of investments of fifty million or less in projects like the Tahiti.’

  Although I was used to juggling with millions of dollars, I still found it difficult to comprehend the sheer size of the American insurance industry. Companies like Amalgamated Veterans Life, the Prudential and Aetna played with amounts that were bigger than most countries’ gross national product.

  ‘Anyway, it looks like we will be all right. We provided bridge-financing for the construction of the hotel. As long as the junk bond issue gets placed, we will get our money back, and make a nice profit on top.’

  ‘How much of a profit?’ I asked.

  ‘Oh we should make 80 per cent or so,’ Madeleine said. ‘Not bad for a one-and-a-half-year investment.’

  That 80 per cent matched Jack Salmon’s claims that Phoenix Prosperity would be doubling its investment, allowing for some exaggeration on Jack’s part.

  ‘So why are you going to see the Tahiti if you are going to get your money back soon?’ I asked.

  Madeleine paused. ‘I don’t
want to put you off, but since you seem put off already, it doesn’t matter. I am not sure that the new junk bond issue will get done. I think people have some serious questions about Piper. We shall see.’

  If investors knew what I knew about Piper, I thought, then they certainly would have some serious questions. And the shareholders in the Tahiti, like Amalgamated Veterans, wouldn’t double their money, they would probably lose most of it.

  ‘Who else has invested in it?’

  ‘There is one other institution apart from Irwin Piper himself,’ she said. ‘I’m afraid I can’t tell you who it is.’

  ‘It’s not a crazy savings and loan from Arizona, by any chance?’

  ‘I’m afraid I can’t say. Let’s just say that the other institution doesn’t give me any comfort that this is a good investment.’

  Just then from the back of the plane Jack Salmon let out a whoop of laughter at something Cash had said, and Madeleine and I exchanged amused glances.

  The Tahiti was located on Las Vegas’s Strip, the area three miles from downtown which contained the glitziest casinos. There was no mistaking it as we approached. A tall white octagonal tower housed the bulk of the hotel rooms. The entrance was up a short palm-tree-lined drive. Big banners hung over the door announcing the Grand Opening.

  The first steps into the Tahiti were breathtaking. The foyer was a huge atrium reaching a hundred feet into the sky. The floor was broken up into islands connected by walkways. Salty water lapped up against the island shores, in small waves. On the islands were a variety of seating areas, bars, fast-food counters and the inevitable slots. As I walked through the archipelago, I was struck by the atmosphere, a mixture of warm flowers and slight salty tang which really did conjure up images of the South Seas. Brightly coloured fish and turtles swam between the islands, and coral reefs smouldered below the surface. On one side of the atrium, the water was fenced off. There, the thrusting triangles of sharks’ dorsal fins ploughed through the pool. Beautiful women in grass skirts and garlands glided amongst the trees with drinks and change for the slots.