Chang sat her phone down. She felt weak in the knees and light-headed. The voice on the phone, it couldn't be real. Deep inside, though, she knew it was true. She felt sick all of a sudden. She sank to the floor, paralyzed by fear.
Nora Brooks could tell Secretary Chang wasn't going to be much help, so she called the Chairperson of the Federal Reserve, Jane Bleecher. She explained the activities within the derivatives market.
"So the 10-year is now 18.35%?" Bleecher asked.
"Yes, Ma'am, up 280 basis points since this morning's bond auction. That represents an 18% increase in the 10-year rate, in a matter of hours. There are no buyers for the existing US debt." Brooks explained.
"How could the banks have so poorly mispriced the risk in the derivatives?" Bleecher asked.
"The risk models are all based on historic statistical data," Brooks explained. "There has never been a one-day rate increase like what we saw today. We have never seen more than a 100 basis point jump in a single day. These derivatives are priced using the same risk formulas that have always been used. The pricing models aren’t that much different than what insurance companies use. This is an extreme outlier event, probably in the neighborhood of 9 standard deviations from the mean."
"Thank you, Nora," Bleecher said, "I have to call the President right away."
Howe answered the phone. "Jane, they are telling me this is important. I hope it is, because you are interrupting a very important meeting."
Jane explained the situation. Anthony Howe had come from a Wall Street family. His father was the co-founder of the Wall Street mega firm Howe Clancy. He understood the implications right away.
"Jane, I want you to hang up with me and call the SEC. Have them close all the markets in 30 minutes. Call Brooks back and have her halt all commodities and derivatives trading. Also get the FDIC and tell them to shut down the banks in 30 minutes. I want everything to close down simultaneously in 30 minutes. Do you understand me?"
"Yes Mr. President. I’ll get straight to work on all of that." She hung up.
Howe got straight to work as well.
He called his financial planner inside Howe Clancy and told him, “Sell everything and get as much physical cash out of the system as you can. Wire the rest to Zurich. After that, go to as many coin shops as you can and clean them out by any means necessary; cash, check or credit card. Move fast, buy any silver or gold the shops have available.”
Soon the rumor of Howe's move had spread throughout the building at Howe Clancy and everyone knew this was the big one. Most did not have time to react before the banks and markets were closed down.
CHAPTER 8
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
-George Washington
Matt was bringing some wood up to the house on the dolly. Adam Bair pulled into Matt's drive and got out of the truck. Matt called out from across the yard, "Hey, Cousin!"
"Why don't you drive your truck down there and bring up a rick or two at a time?" Adam asked.
"It's my exercise," Matt explained. "I can only stay in the house for so long. This gets me out and keeps me warm while I'm doing it. Plus, it saves gas."
"Well, they just shut down the banks and the markets," Adam said.
"What happened?" Matt asked.
"An interest rate spike triggered some type of derivatives Armageddon according to CNBC," Adam answered.
"Do you still have anything in the bank?” Matt asked.
"A few hundred that I kept to pay bills with," Adam responded.
"You should probably try to spend that with your debit card," Matt suggested.
"I tried," Adam responded. "All the credit cards are shut down. There are zero banking services operating in the US. I can't even sign in to my online banking account."
"Do you mind if we shoot over to your house and check out a few news sites so I can try to get a feel for what’s going on?" Matt requested.
"Let's do it," Adam said.
"Karen will probably want to go also. I'll get her." Matt went in to get Karen, but she was busy making some cookies.
"You go ahead, I'll walk over when I’m finished," Karen said.
"Drive the truck over. I don't want you walking around by yourself," Matt said.
"Is a bunny going to eat me?" Karen joked.
Matt had not gotten past his overprotective paranoia from living in South Florida. Crime was so bad when they left, he was constantly worried about Karen when she was out by herself. Now, they were in the middle of the woods and he had to remind himself that she was finally safe.
"Okay, walk but bring your pistol," Matt negotiated.
"I don't leave home without it," She said.
Matt and Adam jumped in the truck and headed to Adam's house.
When the guys walked in, the rest of the family was gathered around the television. The story had moved past the financial channels and had permeated all of the news stations.
Matt watched for a few minutes then went to the computer to check out Zero Hedge. He knew he would get the most accurate version of what happening from Zero Hedge. Matt read what they had posted and checked a couple more sites before returning to the living room.
"It looks like all of the big banks are bankrupt," he announced to the rest of the room.
"What does that mean?" Janice asked.
"It means they owe a lot more than they have, and the holders of the interest rate swaps want their money now," Matt said.
"Won’t the government bail them out?" Shelly asked.
"They owe about $700 trillion this time, Shelly. I don't think anybody can bail them out," Matt said. "Even with the out-of-control money creation by most every central bank in the world, the global M2 money supply is still less than $50 trillion dollars. The banks owe 14 times more than all the money in the world. If they’re going to get a bailout, it’s going to have to come from another planet."
"But depositors will still be covered. Right?" Janice inquired.
"The 2005 bankruptcy reform act, pushed through by our good friends at Howe Clancy, Goldman Sachs and JP Morgan Chase, made sure that derivatives holders would have super priority in case of a bankruptcy. Depositors are now considered unsecured creditors," Matt explained.
"But that’s the depositor’s money!" Shelly protested.
"Not according to US bankruptcy law," Matt said.
"The FDIC will still make good on insured amounts, though," Wesley said. "I bet they knew this was coming. Maybe that's why they dropped the FDIC insured amount to $75,000."
"I don't know. This event would have been hard to pinpoint when it would happen. The interest-rate market is built purely on confidence," Matt said.
"Unless someone planned this event," Adam added.
"It's possible, but folks on our level will never know if that's what happened," Matt said. "As far as the FDIC reimbursing depositors, they only have about $30 billion in the fund insuring over $10 trillion in deposits. So yeah, the first one third of a percent of depositors should theoretically have no problem getting their money. The other 99.7% are on their own."
"But the Fed can just print the money to reimburse them," Wes stated.
"And nearly double the money supply in doing so," Matt said. "Either way, the paper money won't be worth having by the time this is all over with."
"So should we run out and try to buy stuff with the little bit of cash we have left?" Adam asked.
"If there are staples you need and think you can get, yes," Matt said. "There will probably be a run on anything like food and personal supplies. We’ll probably see worse rioting than we saw in the last EBT riots. If there are no banks, credit cards and EBT cards won't work at all this time. In addition to the dependent welfare class rioting, everyone who put their faith in credit cards will also be joining the show. If you’re just looking to get rid of the rest of your dollars, I would wait. In th
e short run, we’ll probably see a major liquidity crisis where people who haven't prepared are looking to sell everything of value for a few bucks. We might see jewelry, ammo, tools, farm animals or even farms being sold for pennies on the dollar to try to get cash. If the grid stays up for a while, Craigslist may be a gold mine in the next few days. Once the smoke clears though, dollars won't be good for anything except lighting fires."
"Well," Adam said, "I guess we’re pretty well set on staples. Ladies, why don't y'all write a list of everything you would like to buy if this was the last day grocery stores were going to be open. Me and the guys will go to Kroger and pick up what we can find."
"Sounds like a good plan," Matt said, "But, I think we should try the Piggly Wiggly. It’s a little more out of the way. Piggly Wiggly is less likely to have trouble and more likely to have the stuff we're looking for."
"Good call," Adam said.
"Karen is coming over in a while; tell her I'll be right back," Matt said to Janice.
"You better get something for her," Janice said.
"Oh, I know what she'll want," Matt said.
"What's that?" Janice inquired.
"Cheese, mostly extra sharp Cheddar. Maybe a little Swiss; Brie if I can find it. That's not likely at Piggly Wiggly, though," Matt said.
The guys loaded into Adam's truck and headed out.
CHAPTER 9
"The rich rule over the poor, and the borrower is servant to the lender."
-Proverbs 22:7
Anthony Howe sat in the oval office with Treasury Secretary Melinda Chang, Fed Chair Jane Bleecher, his new Press Secretary Jared Campbell and his new Chief of Staff Alec Renzi. It was hard to say how long Jared and Alec would last. In the high stress environment of the financial meltdown, those two positions were likely to have a higher-than-average turnover rate.
"People, this is not pretty. Everyone needs to understand that the next few weeks are going to be tough. The press is going to be attacking us and the people are going to be blaming us for this mess we walked into. Get over it and do your job. When we send soldiers into war, everyone knows there are going to be casualties. People accept that with no problem. They are going to have to accept the fact that there are going to be some losses in this crisis.
“We all knew a crunch was coming, I just wasn't expecting it today. But it's here so let's just roll with the punches. I'm open to any ideas you have about holding the country together. A lot of it is going to be damage control. Jared, you are my man for that. Spin this to be Paul Randall's fault. Say whatever you have to say. I'll sign off on anything you come up with as long as you make us look like we’re doing everything we can. Just let the public know we’re up against impossible circumstances. I don't even need to see what you’re going to put out. You know what they need to hear to make them feel better, so write it up and roll it out.
“Alec, get the military, FEMA and DHS together and come up with a plan to keep order. I want it finalized and ready to go into effect by sundown. I am declaring martial law and suspending the Posse Comitatus Act. I want troublemakers detained at the first signs of civil unrest. Anyone who breaks dusk-til-dawn curfew is to be detained. Anyone who resists detainment is to be shot on sight. We are not playing around with rioters for the next month like Al Mohammad did last year in the EBT riots. If people went nuts over that, you can bet they’ll go stark raving mad over this. People are going to get upset when we start shooting Americans, but they’ll get the message that we won’t tolerate chaos.
“Melinda, if you’re not up for this, I need to know now. You had a little meltdown earlier. If you need to tap out, tell me now. I can promote New York Fed President Sydney Roth to Treasury Secretary. Nobody will think any less of you."
Chang had adjusted herself with a couple of stiff drinks prior to the meeting. "I think I’ll be okay, Mr. President. It was just the initial shock."
"Jared," Howe said, "I am leaving you in control of the fort. People need to see you in the White House Press Briefing Room to feel like things are normal. You’ll be staying in the White House subterranean bunker. Marines and Secret Service will be with you. The bunker is designed to withstand a bomb, you’ll be perfectly safe there from a few protestors. You can bring your wife and kids, but absolutely no one else can know about it.
“The rest of us are relocating to Mount Weather in Virginia. It's not far, and it’ll be a much better place to work. Same thing goes for the rest of you. Bring your spouse and children and nobody, and I mean nobody else knows where you are. I am not threatening you with your job. If it leaks out and causes me more trouble, you will be prosecuted."
The intercom phone buzzed."Mr. President, Stanley Klauser from the IMF is on the line."
"Didn't I say I was not to be disturbed?" Howe shot back.
"Yes, Mr. President, but he said if you don't take the call, not to bother calling back," The voice said.
"Put him through," Howe growled.
"Mr. Director," Howe said.
"Mr. President," Klauser said over the speaker phone. "Are you free to speak or do you need to take me off speaker?"
"I am here with my staff, but they need to hear our conversation. They’ll be involved with the decision process of our crisis," Howe said.
"Very well then," Klauser said in his thick German-Swiss accent. "We seem to have something of a conundrum. As we discussed previously, the IMF was depending on a percentage of the deposits in your banks to secure additional relief monies for your fiscal shortfall coming up at the end of the month.
“It is my understanding that much of those deposits are now evaporated by today's action in the derivatives market. Most of the money in the banks has already been carted off by the derivatives investors to other countries. I also understand that if there were more money, that the derivatives investors who were not able to cash out would be first in line to receive it under your current bankruptcy laws.
“I am very much unable to secure additional financing for the US unless you can come up with another way to produce good faith capital. The other member nations have been very patient with your country in taking the recommendations from our last agreement."
"Mr. Director," Howe said, "we have made the 15% across the board cuts to all of our military, government and entitlement programs. This deep cutting austerity has been in the face of very high inflation which has caused the strain to be much more for our citizens and government employees to bear than the nominal 15% cuts."
"Mr. President," Klauser countered, "The International Monetary Fund put those requirements in the last deal as mandatory austerity measures. It was our expectation and the expectation of the other member countries that America would continue to find other areas to reduce spending. You still have more entitlement spending and more military spending than any other country in the world. America asking for more is the equivalent of the CEO of a company going around and begging for change from the people in the mailroom. The mailroom clerks are none too happy about lending money to the man they see ride around in a limousine while they are struggling to put bread on the table. I am sure you see my position."
The mailroom analogy sent a shot of anger to Howe's brain. His face was glowing red, but he knew he had to endure the abuse. He knew Klauser was loving every minute of it.
"Does the Director have any recommendations?" Howe said like a dog with his tail tucked.
"Of course, I would have to run it by the board of directors and have any agreement ratified by the member countries but I may have a thought or two," Klauser said.
Howe knew he was toying with him. Klauser had the board and the new Council of Member States that ratified agreements eating out of his hand.
In the past few years, the IMF and the UN had grown closer and closer. The Council of Member States had been formed as a permanent committee to function in the role that the Troika had filled in the previous European crisis. The Troika was made up of representatives from the European Central Bank, the IMF and the Europe
an Union. Financial woes were spreading around the world and an international board was needed to help govern the bailouts and bail-ins in a way that made all member countries feel included in the process. New international law continued to change the procedure used to grant loans and reduce the sovereignty of nations. Now, accepting loans from the IMF was tantamount to selling your soul to the devil. Klauser already had a list and Howe knew it. Klauser would have never initiated the call unless he knew the terms he was going to dictate to Howe.
"First, you must cut your spending across the board by 50%. Your economy has collapsed and you will soon have no tax revenue whatsoever," Klauser said.
"So another 35% on top of the 15% cuts made last year?" Howe asked.
"No!" Klauser shot back somewhat annoyed. "50% from current levels."
The audacity of the IMF Director infuriated Howe. "There is no way I can cut military spending, social security, government payrolls, health care, and government assistance programs by 50% in one swipe, Stanley!"
There was silence on Klauser’s end. Howe had just yelled at the only person who could help him and in front of his staff to boot.
"Then descend into chaos, Mr. Howe and let the vultures lick up the scraps! Good day!" Klauser yelled as he hung up the phone.
No one in the Oval Office said a word. Melinda Chang helped herself to a glass of brandy from the decanter on the shelf. No one noticed. Not even Howe, who would have usually sent a staff member home for drinking his brandy without it being offered to them.
Howe yelled at his staff, "Don't you people have something to do?"
The room cleared in less than 15 seconds without anyone saying a word.
CHAPTER 10
“The fate of unborn millions will now depend, under God, on the courage and conduct of this army. Our cruel and unrelenting enemy leaves us only the choice of brave resistance, or the most abject submission. We have, therefore, to resolve to conquer or die."
American Meltdown: Book Two Page 4