End Game

by Matthew Glass

‘If we can get the stock.’

  ‘Let me get some work done on this.’

  Grey nodded. ‘I’m going to make some calls.’

  Over the next couple of hours, Ed Grey spoke to a half dozen other Divvies. The general reaction was exactly the one that he had expected. If Treasury was going to start making threats – whether they knew something or were just talking tough – the market would show what it could really do when it set to work.

  As he talked, screens on Grey’s wall showed the result. He watched the markets moving down all morning. Margin calls would be coming in all over the Street, he knew. People would be selling because of that. Prices would fall further.

  There was money to be made out there. There always was. But Grey had a lot of bets stacked on the market going the other way. He did some rough calculations on a notepad while he waited for Tony’s scenarios. He didn’t need too much detail to figure out which way they pointed.

  He gazed at the figures on the notepad. Then he picked up the phone to his assistant.

  ‘Zoe, can you get me through to the US Treasury, please?’

  ‘In Washington, Mr Grey?’

  ‘That’s right. See if you can get me through to the office of the Treasury secretary. Her name’s Susan Opitz. Ask her assistant to let her know that Ed Grey would like to speak with her.’

  SHE RANG HIM back that evening. Grey had known Susan Opitz for twenty-plus years. They had been associates together at the New York office of McKinsey, the management consulting firm, when they were fresh out of business school. Grey had stayed there only a couple of years before moving into funds, and Opitz had stayed barely any longer before moving into the utilities industry, where her stellar career had taken her to the CEO post at GrandWest Pacific before joining Tom Knowles’ cabinet. In those couple of years they had spent ten months together on the same assignment. Ten months of eighteen-hour days creates a bond you don’t readily forget.

  ‘Ed,’ said Opitz, ‘I should tell you right away I’ve got a note-taker on the line. I don’t mean to imply anything but I think it’s appropriate in the circumstances.’

  ‘Sure, Susan,’ said Grey. ‘I understand. Hello note-taker.’

  There was no response.

  ‘What can I do for you, Ed?’

  ‘Susan, I appreciate you calling me back.’

  ‘Yeah. How’re you doing, anyway?’

  ‘Good. You?’

  ‘Good. Listen, I haven’t got a lot of time. I’m sorry about that.’

  ‘No problem. You know, Jim Rosario, on CNBC today, said something about a rumor that you guys might ban short selling.’

  ‘Yeah, I heard about that.’ Opitz didn’t say anything else. Rosario had been briefed by her own communications director.

  ‘Stop me if I’m saying something I shouldn’t, Susan, but if that came from one of your officials, I’m not sure what effect he thought he was going to have, but if he thought he was going to be helpful, well, we had about all the help we can take. I assume you know what happened on the markets today.’

  Opitz knew. ‘Ed,’ she said, glancing at the aide who was taking notes, ‘I’m going to have to be careful here. You’ll clearly have an interest in which way the markets go and I’m going to assume you’re not trying to influence me in any way.’

  ‘Susan, I can make money whether the markets go up or down. That’s not what this is about.’

  In her office, Opitz raised an eyebrow. She had liked Ed Grey in the time they worked together. He was one of those big, energetic guys who treated the world like a playground created for his personal amusement. He could be a lot of fun. But she had had glimpses of another side of him, a raw, egocentric brutality when it came to looking after number one. He was attractive but dangerous, the kind of guy you could enjoy working with but wouldn’t want to get too close to. And now he ran a DIV, one of the biggest in the market. She didn’t trust a word he said.

  ‘What worries me,’ said Grey, ‘I think what worries all of us, is if it looks like you guys don’t know what you’re doing. Now, I’m assuming this was some relatively junior guy who got it into his head to float some kind of balloon with Rosario under the misguided impression that was going to calm the markets. Am I right?’

  Opitz didn’t reply. She avoided her aide’s gaze.

  ‘Well, I don’t expect you to tell me. There’s only one justification for letting out a threat like that, and that’s if you know something really bad.’ Ed paused, listening. His primary reason for making the call was to get the message across that a veiled threat to ban shorts – or anything like it, in case Treasury had plans for anything else as stupid – would achieve the exact opposite effect they wanted. But if Treasury did know something he didn’t, and he could find out about it, it certainly wouldn’t hurt.

  ‘Ed, I couldn’t possibly tell you what we know and don’t know.’

  ‘Sure. Well, if this did come from your department, and if whoever said it was trying to put a leash on the shorts, he’s had the opposite effect.’

  ‘Why do you think that is?’ asked Opitz carefully.

  ‘Susan, it’s the market. It’s the psychology. If you’re going to come out hard against us, you’ve got to do it right away. Threats don’t work. It looks weak. You show weakness and we’re going to rip your throat out just for the hell of it.’

  ‘Is that what’s happened?’

  ‘Partly. You guys have shown fear. Loss of control. Then like I said, some other people are going to be thinking, if this is actually serious, what do they know that we don’t? Better get in quick. I think that’s driven a wave of short selling through the market today that wouldn’t have been there if no one had said anything. Obviously I have no figures, so it’s just my assessment from looking at the way the market’s gone and from our own trading interactions. You know, I think if you guys want to put a floor under this you just sit back and let the market do what it does.’

  Opitz frowned. No one in her department had suggested the market would react like that. They had all managed to persuade themselves that the markets would see it as an indication of their resolve. Maybe there were other reasons for what had happened today. One thing she knew for certain was that Ed Grey wouldn’t be saying this if it didn’t serve his own financial interests.

  ‘Ed, I can’t talk about any interventions we may or may not be thinking about.’

  ‘I know that, Susan. And I guess it must be politically difficult for the president to let this ride with the midterms coming up. I thought his statement was good, but this thing has undone that and then some. Look, my take is that what’s been happening here for the past couple of weeks is just the market doing what it does. It’s no big deal. It’s just some people who have obviously decided there’s a little froth in there right now and so maybe it’s time to take that away.’

  ‘So you don’t think there’s anything fundamentally wrong underlying it?’

  ‘I’m not sure,’ said Grey. ‘What do you think?’

  Ed listened for Opitz’s answer, still hoping to find out if the Treasury knew something he didn’t.

  Opitz glanced at her aide, thinking.

  Suddenly she turned back to the speakerphone. ‘Have you been shorting Fidelian?’

  Grey laughed. ‘Wow. That’s direct.’

  ‘Ed, have you? Who’s lending the stock? Ed, who’s lending Fidelian stock out there?’

  ‘Even if I had been shorting Fidelian, what difference does it make?’

  ‘I’d like to know where the stock’s coming from.’

  ‘Does it matter?’

  ‘Yes. It does.’

  Grey was silent. This was interesting. Why did it matter where the stock came from? Normally, all that mattered was how much stock was being shorted, not who was lending it.

  ‘Ed. I want to ask you something. It’s not about what you’ve been doing, okay? It’s just about what you’ve seen.’

  ‘About Fidelian?’

  ‘In general. Is anything odd go
ing on?’

  ‘Odd? Susan, I don’t think I get you.’

  Opitz hesitated. She had a meeting scheduled with the CEO of Fidelian and the president of the New York Fed for the following day and she hoped to find out what, if anything, was going on inside that bank. Right now, she had to be exceptionally careful in what she said. She couldn’t take the risk that Ed Grey would put some kind of rumor into circulation that would send another wave of selling through the market. Nor could she say anything that could later be interpreted as having given him an unfair advantage through insight into the thinking or concerns of the administration. It was safer, she thought, to say nothing.

  And yet Grey was in the market in a way that none of her officials or the officials at the Fed or SEC was. He would be hearing things that would never come anywhere near their ears.

  ‘Susan, do you want to tell me what you mean?’

  ‘Ed, is this just a bunch of Divvies trying to make a buck?’

  Grey laughed. ‘You tell me.’

  ‘Do you think so?’

  ‘Susan, come on, it’s never just the Divvies. That’s a myth. The market doesn’t move like this unless everyone’s in.’

  ‘When you say everyone …?’

  ‘The banks, the funds. Mom and Pop.’

  ‘Okay. Ed, what I’m really asking …’ Opitz paused again. She glanced at her aide, who was frowning. ‘You know, let’s say you’re borrowing shares to short the market. Who’s lending?’

  ‘I don’t know. Who always lends?’

  ‘You haven’t noticed any …’ Opitz was stumped. She wanted to say it. She wanted to come right out and say it: are you aware of any politically motivated sellers? Are you aware of any action taken by sovereign investment funds, and in particular the PIC? But she couldn’t be that explicit. Do that, and if Grey wanted to, if it served his interests, he’d let fly rumors about who the Treasury thought was driving this and they would be ripping through the markets by the time they opened again tomorrow morning.

  Grey listened to the silence. Opitz obviously had something in mind. He wondered what it was. He wondered how it would affect the way the market was moving.

  ‘So you haven’t noticed anything strange?’ said Opitz eventually.

  ‘Can you be more specific?’ said Grey.

  ‘No, it’s just a general question.’

  Grey waited, hoping Opitz would say more.

  There was silence.

  Eventually Grey spoke. ‘No, Susan. I haven’t noticed anything strange. I called because I wanted to tell you what I thought about Rosario’s report. I thought you should know what it looked like from out here.’

  ‘I appreciate it.’

  ‘Susan, my sense is everyone’s nervous. Everyone’s wondering whether we’re seeing something big here. Now, you and I will have our own opinions about that. But anything anyone says in the administration – you, the Fed, anyone – it has to be incredibly careful.’

  ‘We’re always careful.’

  ‘I know that. But I mean really careful. I’m in this market. I’m telling you, Susan, it feels like it’s tinder out there. Someone else says the wrong thing – it’s going to go up.’

  ‘What would help stop that?’

  Grey thought quickly. He was ready to close out his Fidelian position and take his profit. The way the market was moving was making him nervous. There was way too much uncertainty now. He wanted something to reduce that – and there was one thing that might do it.

  ‘Get Fidelian to preannounce their last quarter’s earning,’ he said. ‘That’s what everyone would like to see. They’re not due to announce until next month. Get them to bring it forward.’

  18

  SUSAN OPITZ HAD met Bill Custler previously but she didn’t really know him. As an ex-executive from the utilities industry, she didn’t know the Wall Street coterie like Jerry Rabin, the president of the New York Fed, who had spent all of his adult life either working with them or regulating them.

  She glanced at her watch. ‘Let’s get to the point, Mr Custler. What’s the situation?’

  They were sitting in Rabin’s office. Rabin was a tall, dark-headed man with slouching shoulders who always looked to be weighed down by the thankless task of regulating Wall Street. Opposite them sat Custler, a slim man of medium height with thinning grey hair and blue eyes.

  ‘You’ve got our filings,’ said Custler. ‘We’re compliant. Our capital ratio’s adequate.’

  ‘Just.’

  ‘Just is enough, ma’am.’

  ‘Let’s be frank. There’s a rumor you’ll be coming to the market for cash.’

  ‘I can’t confirm rumors.’

  ‘I think you’d better start. Or else you’d better be able to deny them.’

  There was silence. Custler glanced around uncomfortably.

  ‘We’ve been reviewing our loan book,’ he said eventually.

  Opitz leaned forward. ‘Mr Custler, what’s in it?’

  ‘As I said, we’re reviewing it.’

  Opitz glanced at Rabin, then looked back at the Fidelian CEO. ‘Mr Custler, I think you’re probably in a situation where you want to level with us here.’

  ‘Bill,’ said Rabin, ‘you really do need to tell us what’s going on.’

  Custler hesitated.

  ‘Mr Custler, you need to understand some realities. We’re ten days away from an election and the president needs to get this dealt with. It’s time to talk. You’re sitting in the last chance saloon.’

  ‘I’m way past the last chance saloon,’ said Custler.

  Opitz looked at him sharply. ‘What does that mean?’

  Custler took a deep breath. ‘There are some loans in the portfolio … A big chunk of loans. We’ve got some developing markets business that was a little bullish when it was written. As you know, this bank grew very, very quickly out of the financial crisis. The management back then had a philosophy to go very aggressive to get market share, especially to build its Asian business. Part of the reason I was brought in was because that was getting a little too much. That’s left a legacy. Some of the decisions back then weren’t great.’

  ‘How not great?’

  ‘Not great.’

  ‘You’re going to write stuff down?’

  Custler nodded.

  ‘A lot?’ said Rabin. ‘Don’t you think that’s something you should have shared with us? I talked to you, Bill. For God’s sake, I talked to you two weeks ago.’

  Custler looked at him apologetically. ‘Jerry, I’m guided by our chief compliance officer.’

  ‘Sounds like someone needs to have a word with your chief compliance officer,’ said Opitz.

  ‘When’s this writedown going to happen?’ asked Rabin

  ‘We don’t file our quarterly results for another month. I’ve been trying to set up a bond issue.’

  ‘Who with?’

  ‘Morgan Stanley’s the lead. The plan was to announce the issue at the quarterly at the same time as we announce the writedown.’

  ‘And?’

  ‘That was before our stock price headed south. The shorts are killing us. They’re just killing us. Now Morgan’s telling us they can’t underwrite us at these prices.’

  ‘Bill, how much capital are you hoping to raise?’

  ‘Twenty-three billion.’

  Opitz and Rabin stared at him.

  ‘Bill …’ said Rabin.

  ‘Twenty-three billion, Jerry. That’s what it is.’

  Susan Opitz sat back and took a deep breath. Rabin shook his head as if testing whether he was really awake.

  ‘Bill,’ he said, ‘you want to get all of this through a bond issue?’

  Custler nodded.

  ‘What about a rights issue?’

  ‘Our shareholders … I mean our major shareholders are not supportive of that idea.’

  ‘What about for a part of it?’

  Custler shook his head.

  ‘Will they take up a portion of the bond issue?’

>   ‘At this stage, I don’t believe they will.’

  ‘Mr Custler,’ said Opitz. ‘I’m afraid I have to agree with Morgans. I can’t see you having a hope in hell of going to the market for twenty-three billion dollars with your share price down forty per cent in the last month and when your own major shareholders aren’t prepared to provide some kind of support as a portion of that requirement.’

  ‘Madam Secretary, I’m not disputing it. I can tell you I’ve had a few sleepless nights.’

  ‘Bill,’ said Rabin, ‘how bad is this? How much of this twenty-three billion do you absolutely have to have? What’s the minimum?’

  ‘That is the minimum, Ron. That just keeps us adequate.’

  ‘Jesus Christ,’ murmured Rabin.

  Bill Custler took a deep breath, as if relieved to have it off his chest.

  ‘And this is all from a bunch of developing market loans?’ said Rabin.

  ‘And some other stuff. There were a lot of bad decisions.’

  ‘Like what?’ demanded Opitz.

  ‘A whole series of things.’

  ‘Really? Like things that have miraculously reappeared on the balance sheet?’

  ‘Not like that. Not to my knowledge.’

  ‘Not to your knowledge?’

  ‘Look, Madam Secretary, I wasn’t CEO when those decisions were made. This goes back five, six years. I didn’t find out about the true state of this part of the business until long after I took over, and I’ve tried to deal with it in a way that doesn’t destabilize the bank. And I could do it. We can trade through this if we can raise the capital, and until the damn shorts came along we were going to be able to raise the capital and it was all going to be okay.’

  ‘Twenty-three billion?’

  ‘Morgans said they thought they could do it. But now we’ve got the shorts on us and these rumors are going around and I don’t know where they’re coming from–’

  ‘Does it matter?’ demanded Rabin. ‘Bill, none of the rumors are as bad as the truth.’

  ‘Well, we were going to raise it, Jerry. It was going to be okay. Frankly, I don’t know where the drop in the share price came from because as far as I know there weren’t any rumors on the street until it started happening.’