Tom Barton opened his eyes. It took him a couple of seconds to take in the surroundings. He reached out and felt Sophie's warm body by his side; a wonderful start to the day in Cannes. That morning they planned to drive from the luxurious Carlton Hotel to Monaco where they would join Sergei Tarasov on his yacht. The oligarch had flown in to join his yacht in the principality, where his tennis star and fashion designer girlfriend was presenting her latest collection of sportswear.
Barton’s leitmotiv was the MIPIM conference, which brought together the world’s international property professionals. It had seemed like a good occasion to test the weakening pulse of the market, though the idea of joining a flock of advisers, bankers and their retinues did not really excite Barton’s enthusiasm.
The sombre mood at the annual event had not dampened neither Barton’s nor Sophie’s happy mood. For the professionals it was another story; what should have been a fun-packed gathering, filled with bonhomie and back slapping, turned out to be a very depressing affair. The bubble had burst; restaurants were empty and even the coveted Cannes beach-front hotels announced vacancies. There were fewer extravagant high spirited parties and even fewer luxury yachts at what in recent years had become the most looked forward to international property event of the year.
The aftershocks of the economic crisis continued to send tremors through the financial world. The previous evening the news media announced the Bombay Stock Exchange had been rocked a billion-dollar fraud. It did not surprise Barton in the least. A Western educated MBA graduate, one of India’s new breed of golden boys, was forced to admit cooking his firm’s books. The firm, Satyam; Sanskrit for truth, had ratcheted up losses of over one billion dollars, a gigantic sum by Indian standards, dragging the Bombay stock exchange down by a huge seven percent in a single trading session. Satyam’s founder had falsified the company’s balance sheets by declaring fictitious assets and non-existent cash reserves.
Fraud, which had become rampant in the Wild West of global finance, had tarnished the glow of India’s much vaunted economy, forcing the worms out of its rickety woodwork. Only a year before international media had eulogised the success of the Mittals and Tatas, two of the sub-continents extraordinarily rich industrial families. All that had changed; the rich were now keeping a low profile as India’s future began to look uncertain as tensions rose following the destabilizing terrorist attack on the Taj Hotel.
Once again Barton grimly congratulated himself on getting out when he did, though there was a pang of guilt when he wondered how those he had left behind in London were faring. Market demand for mortgages had fallen a massive sixty percent, house prices by more than twenty five and over a million home owners discovered the meaning of negative equity.
If the much talked about green shoots were not weeds, it would be a long time before the good times returned, if ever. Those who had lost their jobs and were struggling to pay their monthly mortgages payments would have a long wait before they could benefit from the harvest, if there was one.
The jobless were a new kind of poor, who, encouraged by Tony Blair and the mirage of Cool Britannia, had embarked on a foolhardy binge of borrowing and spending in the years prior to the credit crunch; it was they who would pay the price. They were the victims of more than a decade of New Labour’s easy money policies that had encouraged lending, invented new forms of credit and reduced interest rates to levels not seen in half a century.
Blair & Company had been the advocates of the flawed system, which was to blame for Britain’s greatest post-war economic crisis, and would certainly pay the price for their unreserved support of the neo-liberal economy they had spawned.
Together Blair and Brown carried the responsibility, though Blair had adroitly left his cohort holding the baby before the effects of his defective governance were exposed. Brown, cursed by a fuming electorate, was left to carry the can. The luckless Prime Minister was castigated by the very same media that had so long pandered to City bankers and property developers, encouraging Britons to heed the reckless exhortations of their leaders, to get rich regardless of the risks.
It was mid-morning when Barton, driving a rented Mercedes coupé, headed eastwards along the winding corniche in the direction of Monaco. It was Sunday and the traffic was light allowing them to pause and admire the spectacular views of the Mediterranean coast. Everything was perfect, it was spring-like, warm and not a cloud on the horizon, as Sophie chatted excitedly about their invitation to meet the famous oligarch. An hour later they drove into the small rich Principality where they were expected aboard the Cleopatra, Tarasov’s legendary yacht, anchored off the quai des Etats-Unis, for lunch and cocktails in the company of the oligarch’s influential friends.
They parked the car on the quai and headed towards the yacht. Sophie looked stunning, in a white off the shoulder dress, her blonde hair adorning her lightly tanned shoulders. Barton marvelled at how she managed to keep her form, something due to her genes, he thought. She was naturally slim and there was of course her French mother’s tradition of healthy eating; a light breakfast, a well-balanced lunch and dinner with no snacks in between.
They were warmly welcomed aboard by Tarasov in person, who gallantly greeted Sophie with a baise-main and complimented her on her beauty. They then joined a very relaxed Steve Howard sipping Champagne on the forward deck to admire the magnificent view of the Principality and its royal palace perched on the hill facing the harbour.
Few would have thought they were in the middle of one of the most serious economic crisis since the end of WWII. Champagne flowed and caviar was spooned from large crystal bowls, served by impeccably uniformed waiters. Tarasov was optimistic; as far as he was concerned it was the moment to make a killing, though not all present, many believing the worse was still to come, would have agreed with him.
Barton was not surprised to see Michael Fitzwilliams who greeted him warmly.
‘Tom, nice to see you, how’s Dominica?
‘Fine, I taking a little time to visit France with Sophie,’ he said introducing her to the admiring banker in French.
‘I didn’t know you could speak French Tom.’
‘It’s far from perfect, but I’m making progress thanks to Sophie.’
‘So I gather you’re French,’ said Fitzwilliams turning to Sophie.
‘Half French, the other half is English.’
‘Ah, that’s an interesting combination.’
‘My father is English, an architect in London.’
‘Perhaps I’ve met him?’
‘Emerson and partners.’
‘Ah yes, they designed the Dubai Bank building.’
‘Yes, that’s right, Michael Emerson is my father.’
Fitzwilliams noted that Barton was close to Howard and was appreciated by Tarasov, men of a different metal to many of those he knew in the conventional banking world. They had the kind of qualities that could serve the plan that was slowly taking form in his mind.
The next morning back in Cannes, Barton left Sophie to do a little tourism whilst he headed off for the closing day of the MIPIM conference. After half listening to a sobering debate, Barton found himself talking to a voluble Harvard professor of economics, apparently an acquaintance of Steve Howard’s.
‘Is the worse of the sub-prime crisis over? Maybe. But there’s a lot of other problems out there.’
‘Like what?’
‘Well for one Alt-A mortgages,’ said the professor lecturing to his attentive listeners.
‘Alt-A mortgages?’
‘Alternative A-paper, it’s a US mortgage, riskier than A-paper, that’s to say prime, but not as risky as sub-prime.
‘Tell us the bad news professor,’ Barton asked wondering if he wanted to hear it.
‘Call me Ed. This kind of mortgage required less documentation than a full mortgage, so they were riskier. Home buyers didn’t need proof of income or have a good credit record. Basically they’re adjustable-rate mortgages’
‘Sounds like sub-prime to m
e.’
‘Not quite. If an applicant couldn’t prove his income, or had a high debt-income ratio, it was easier for him to obtain an Alt-A mortgage than a conventional mortgage.’
‘Because less documentation was required.’
‘Right.’
‘I see, it still sound like a sub-prime to me.’
‘Not so, we’d call these near-prime or mid-prime, most Atl-As are held by middle class home owners.’
‘So it means they could declare higher than real incomes to qualify for a bigger loan.’
‘Exactly, and which they may not have been able to afford.’
‘So what’s happening?’
‘Well there’s a serious risk of massive default because unemployment is beginning to hit the middle classes. The sub-prime crisis was caused by higher interest rates, but its rising unemployment that’s threatening Atl-A mortgage holders.’
‘What’s the scale?’
‘Six hundred billion ― the same as sub-prime.’
‘Christ how do we get out,’ Barton said with a laugh.
‘In the past Alt-A losses were around one percent, but this figure has shot up to twenty percent now.’
‘Jesus,’ murmured one of his listeners.
‘You said it.’
Barton thought back to Tarasov’s optimism and wondered if he had got it all wrong.
‘That means all those banks are going to have another round of losses.’
‘And this time around there’s no more money in the kitty to bail them out.’
‘Right again.’
‘So we’d better buy gold!’
The idea of buying gold was not lost on Barton and he made a mental note to call his ETF bullion manager.
Bryant was one of the leading US economists, an eccentric thought Barton, real or feigned, judging by his mop of white hair and the rather worn tweed jacket. The professor waved his hands to emphasise his point; dangerous considering he held an almost full glass of Champagne in one and a half eaten smoked salmon sandwich in the other.
‘So what do the banks do?’
‘They’d lay people off, less jobs. A vicious circle that has to be broken by government help or something else.’
‘Something else?’
‘Traditionally exports.’
‘That’s a bit difficult considering almost every other country is in about the same position.’
‘Correct. So since exports can’t be boosted, the only solution is government intervention, or in simply terms bailouts.’
‘And where do they get the money for bailouts?’
‘They can tax you for it, borrow it, or print it!’
‘So they’ll borrow or print all those billions they’ve already promised.’
‘Dead right,’ he said smiling broadly pleased that his new pupil had got the lesson. ‘In current jargon this is called quantitive easing, that is pouring money into a cash-strapped banking system.’
‘Won’t that be a long term problem?’
‘You bet! A huge raft of debt!
Barton was not overly impressed by the American, economists of his sort had proven themselves to be very wrong in the recent past and were now overstating the situation, already bad, in their about turn.
Chapter 13 LONDON
The Plan Page 13