The Squeeze

by Paul Schueller

  “The only way this firm has a chance is if we figure out a way to stabilize the market when the news hits. We did double check the numbers with finance and confirmed that we don’t have enough money and borrowing capacity to buy back all the bad paper.” Everyone turned towards John.

  “Don’t look at me. I’m losing enough money. I’m not sending good money after bad,” John defensively asserted.

  “Why not? You owe us all that,” Tommy looked at John in disbelief “That wasn’t the deal. I don’t owe you shit! Besides, my money won’t be enough to make that work.” John said defiantly.

  The PR guy continued. “He’s right. The only real way to do this is to cover what we can, and bring McKinstry in on it. McKinstry would have the capacity to buy back the bad paper that we couldn’t. They would lose some money in the short term, but they would get good assets along with clearing the bad ones from the market and turn those short-term losses into market share. We’d each be buying good and bad, but by the time we settle up on this mess, we’d be lucky to still be in business and hold onto five percent of the market.”

  Tommy knew in the back of his mind that this was the only alternative, but going to McKinstry was the last thing in the world he wanted to do.

  He set up a meeting for the next morning with Mark Schmidt, the head of McKinstry.

  Tommy spent most of the night at the office poring over the reports that Jack, the market desk manager, had provided. There were a normal number of short positions in the market over time but nothing of any significance until the last few business days from a company called Big Mountain Traders. They had shorted small quantities starting six months ago, and the volume seemed to move up at about the same time and rate that the bad credits were going into the market. Those volumes were still relatively small until a massive increase in volume by Big Mountain just in the last couple of days. This was more than coincidence as Tommy was sure that whoever made the short trades knew about what was going on at Environmental Verifications all along, and they were waiting for just the right time to bet big.

  The short trades meant that Big Mountain Traders made arrangements to borrow offsets for a fee with the hope that the price would go down.

  If the market went down enough they could buy credits at that lower price and repay the credits that they had borrowed, making a profit as the market dropped. Big Mountain established thirty times more short positions over a couple of recent trading days than the company had ever done before. Those positions cost Big Mountain several millions of dollars in fees but were set to make about eighty million if the market went down to three dollars per ton. Tommy figured if the news hit that they lost control of the situation, the market could go even lower. Hell, the market could go to pennies, with Big Mountain making even more.

  He was sure that Jack was already trying to chase down the ownership, so Tommy planned to check with him in the morning. It had to be related to whoever created the false records. It was the only way to turn fraud into big cash.

  It was midnight, and Tommy couldn’t stand to be at the office anymore. He took a cab home, opened a bottle of Malbec, poured himself a glass, and started to roll the decisions he’d made in last two years through his mind. Why didn’t he check things more closely? Why did he trust John? George? Hell, why did he trust anyone? The growth was too good, too big, too fast.

  Tommy drank a bottle and a half of wine and took a muscle relaxer. He knew it was the only way sleep would come. Before he knew it, the alarm was ringing obnoxiously. The sun lit up the room and he was still in yesterday’s clothes. Reluctantly, he got out of bed and trudged into the kitchen. He threw away the empty wine bottle, corked the remaining bottle, and checked his phone. Two texts and a missed call from Susan.

  That would have to wait until later. He changed his clothes without showering and headed out of his condo as quickly as possible for his appointment at McKinstry.

  Tommy was greeted at McKinstry by a big handshake and hug from Mark Schmidt, even though they had met and talked only once before.

  Mark was an outgoing man from West Texas who grew up in the oil and natural gas business. He knew all the ins and outs of trading, only now it was carbon instead of fuels. He was a large man with a belly and facial features that fit with his substantial girth. His broad nose and cheeks looked like a roadmap of red vessels and the purple hue of his skin was a permanent reminder of years of whiskey drinking and deal making.

  He was the only guy in Chicago always wearing a cowboy hat. He hoped Tommy was there to sell, since McKinstry had been trying to court and woo John. Eagerly, he cooed, “What can I do for you, Tommy?”

  “I’ll get right to the point. We have a little problem that could turn into your problem too.” Tommy went on to explain the mess and ask for his help.

  “Doesn’t seem like a good business opportunity to me. You know we’re going to have to pour tens and probably hundreds of millions into buying worthless offsets to stabilize the market,” Mark said.

  “You’re kidding, right?” Tommy couldn’t believe what he was hearing.

  “Well, no,” Mark replied.

  “You’ll use the money it would have taken to buy our business and basically steal it. Actually, in the long run you’ll probably get it all for nothing since you can sell the good inventory later at a profit to make up for the short term losses of the bad paper once the market stabilizes.”

  “If the market stabilizes,” Mark said.

  “It will. All I need is for you to give me two or three business days next week to get ready. We need to extend our credit lines and raise some emergency capital.”

  “That leaves me with market info that could get my ass handed to me if I don’t report it immediately.”

  “My guess is that given what you have to gain, you’ll live with it,”

  Tommy replied. Mark shrugged but really didn’t commit to Tommy’s request, and they parted company. Tommy headed back to the office.

  8

  The next two regular updates to Tommy and John were more of thesame. Everyone was still searching for answers. Who was the hacker?

  Who did they work for? But there were none.

  After lunch Tommy finally decided it might be a good idea to check in with Susan. Although he was starting to feel guilty about taking more from the relationship than he was giving, it didn’t stop him from wanting her help and comfort with this mess. He called from his cell so that she would know who it was. “So, finally willing to talk?” Susan said without a hello.

  “Yeah, sorry. Some pretty ugly things are going on here at work,” Tommy said.

  As he was about to move past his lame apology and on to possible dinner plans, George burst in through the door saying, “People from Commodities Futures Trading Commission are here to see you, and some climate exchange people are on the phone and want to meet with you this afternoon.”

  Tommy’s shoulders sagged so far they disappeared. The CFTC is not well known to most, but they are the commodities version of the Securities Exchange Commission. Whether it's the CFTC, SEC, or IRS, getting a visit from a government acronym was generally a very bad thing. His guests had followed only steps behind George since they believed their business was urgent enough to demand an immediate audience. The older of the two, the one in the more expensive suit, spoke first. Tommy hung up the phone without saying goodbye to Susan.

  “We received a call from McKinstry indicating you might have a bit of a problem with the quality of some of your offsets. They, we, also passed that information along to the carbon exchange markets you trade into. I assume their inquiries will follow ours closely.”

  “I would guess so,” was all Tommy could mumble.

  “We need to schedule an immediate audit. The exchange people are going to let us head this up. No reason for you to have to do this two or three more times,” Suit Number One said.

  “We can have an audit team here tomorrow,” Suit Number Two added.

  “Great. Thanks for the quic
k service,” Tommy answered sarcastically, then switched his tone. “We will be forthcoming, and yes, there are problems.”

  “How significant, may I ask?” requested Suit Number One.

  “Maybe twenty-five percent of our recent inventory,” Tommy replied.

  “Oh, my,” said Suit Number Two. “If this gets out . . . oh my.”

  “We will use all of our resources to buy back the bad offsets and support the prices in the market, but we need more time.”

  “Let’s hope you get it,” said Suit Number One.

  Tommy was dialing Mark before the two were out of the door. “Yeah, this is Tommy. What the hell did you do? I thought we had a deal! You must have called the feds before I even got back to my office!”

  “I never said we had a deal, and you put me in a spot where I had to tell them or risk my company and career. Our firm will still be there side by side with you, buying up your crappy offsets to save the market. Only change is the timetable. This shit will probably hit the fan nearly overnight. You guys need to be ready when the market opens on Monday morning.”

  “What?!” Tommy screamed. He couldn’t believe this was happening.

  “Deal with it. You set this in motion coming to meet with me,” Mark said, and abruptly hung up.

  Tommy then realized that earlier he had hung up on Susan. He texted her back, saying he would be in touch in a couple of days. Tommy cancelled the next update and got John and George in his office and laid out the mess for them.

  “Hell, why don’t we just liquidate our inventory and take whatever cash we have back out of the business?” John suggested.

  “If we don’t try to save it, they will hunt us. Maybe even go after our personal assets. Besides, it’s the right thing to do,” Tommy argued.

  “It’s the right thing to do, particularly if you’re feeling guilty,” John shot back.

  “What are you trying to say?” Tommy asked, defensively raising his eyebrow, and putting his hands on his desk.

  “You know what I’m saying.”

  “More likely you did this than me, asshole!” Tommy cried. He rushed John and shoved him over the table that sat behind his desk guest chairs, sending John headfirst between the table and the wall.

  John rose to retaliate but stopped short. As often as he had pushed people to their limit in his career, this was the first time anyone had laid a hand on him. Surprised and somewhat intimidated, he collected himself instead and asked what they needed to do. Tommy settled down quickly, too, not having had a physical altercation since high school and, likewise, not knowing what to do next. “We need to have all our cash available and the line of credit from the bank all set for Monday. They don’t know what’s up yet. We’ll tell them the truth . . . that we are buying up offsets on the market.”

  “I’m fine with telling them part of the truth,” John said.

  “Whenever the price starts moving down towards, let’s say seven dollars, we need to buy. The market is closing for the week in an hour, so we should be fine until Monday. It depends how quickly word gets out.”

  “What is McKinstry going to do?” George asked.

  “They are going to support by buying at six dollars if things get ugly. They want to see our money out there first, or they’ll just let us sink.”

  Tommy ruefully turned away from his partners, trudged toward the door, leaving them behind. The three partners each headed home, knowing there was nothing they could do except wait for Monday morning.

  Tommy didn’t self-medicate over the weekend with alcohol and pills; he was hoping to be focused on Monday, and he was sick of always being numb. For some strange reason, he wanted to feel this. He needed to be present. On Sunday night he found himself lying in his bed staring at the ceiling, mind racing. Sleep evaded him, so he finally decided to get up and go in early to make sure everything was ready for the market opening. He was amazed at how many people were on the Brown Line at five in the morning. He got off at Quincy and Wells, his regular stop, and walked a block east to the trendy offices of Environmental Verifications.

  He realized over the two years in business with John how quickly he’d returned to the commuter grind that he had promised himself to leave behind when he sold his first business.

  Tommy was surprised to be the third and last partner in the building at such an early hour. Everything was set for the day. They put in automatic buy orders for 1,000,000 units at seven dollars, even though the market was set to open at $7.75, the previous week’s close. The market opened and moved down quickly to $7.50, but trading seemed regular.

  The rest of the staff scurried about trying to conduct business as usual. Only a small handful of people worked on tracking the hacker, and Jack was still following the paper trail of Big Mountain Traders ownership.

  Retribution could wait until after they saved the business. The three partners monitored blogs, websites, and trading activity. No one said a word for more than an hour, each assigned to multiple computers.

  “Shit!” Tommy slammed his fists on the table, standing abruptly and knocking over his chair.

  “What?” yelled George and John simultaneously.

  “Couple of bloggers are saying that Carbon Traders has some problems and is being investigated,” Tommy said.

  John ran over to Tommy’s desk and stared at the computer screen.

  “Fuck! Half of the traders and brokers in the market follow these guys!”

  “Well, it’s having an impact. The market is down toward $7.25,” George pointed out.

  John countered, “Let’s change our buy orders to $7.25 so that this thing doesn’t get out of hand before the end of the day. Market makers will think that there is plenty of price support above seven dollars.”

  “Good idea. It will cost us more than buying as the market drops but maybe this will pass. How about putting in orders for up to 3,500,000 units at $7.25?” Tommy suggested.

  The other two nodded and the orders went in. The afternoon passed slowly and all of the orders got filled. They had invested twenty-five million to try to stabilize the market, a small price to pay if it worked.

  The market closed peacefully for the day.

  Knowing that Susan had been right all along, and then to have hung up on her, Tommy went home, too embarrassed to call her back. He set up two computers on an L-shaped desk and opened a beer by each one. He rotated back and forth on his swivel chair, churning through two hours and four beers. Internet chatter increased as time went on.

  He knew it would be worse by morning. After nearly giving himself whiplash while nodding off looking at computer screens, he moved to the couch and got a couple of hours of restless sleep.

  By morning, rumors were at least as bad as the reality. People were expecting an announcement from the trading exchanges. The market opened at seven dollars and they were running through money trying to stop the implosion. They bought all day until they had run through all of their cash and line of credit, well over one hundred million. It was late in the trading day and the market looked like it might be stabilizing at about six dollars but then went into a late-day tailspin. Clearly, McKinstry had moved in and was buying but couldn’t or didn’t hold off the fall as the concern escalated to panic throughout the day.

  At the market close, the regional carbon exchanges made a joint announcement that trading for the following day would be suspended.

  Tommy, George, and John stared at the press release wondering what would come next. John spoke first. “Well, we are still in business. If the price stays where it’s at, we are still okay.”

  Tommy started doing the math in his head. “Not really. Remember we held on to most of our inventory and a good chunk of that is worthless, too. Now we own even more, and we know a good portion of that is bad. We can crunch the numbers tonight, but I'm sure we are underwater.”

  John was more the big picture thinker than the numbers guy, so he asked, “With a little price bump, we can be okay, right?”

  “I doubt it,�
�� Tommy responded.

  As dismal as they all felt, it was a relief to get up in the morning knowing there wouldn’t be any trading that day. They had no money to lose, anyway. The three partners had agreed to “sleep in” and meet at seven to review status reports churned out by their staff throughout the night.

  Just as Tommy had expected, they were clearly underwater when factoring in the falsified offsets. They had invested over two hundred million, much of it borrowed, and they didn’t own enough good inventory to cover their debt. They all stared at the numbers. “That adds up to a big fucking hole and no way to crawl out of this,” Tommy admitted.

  Optimistically, John said, “If the market doubles, we’ll be back in black.”

  “You’re kidding, right? The banks will be crawling up our ass within days. They’ll take this thing before we have time. It will take months at the least for the market to bounce back and we have days or maybe even only hours,” Tommy said. George got up and walked out without saying a word.

  Tommy continued, “Maybe if you put in forty or fifty million, we could buy some time.” John and Tommy didn’t notice George had left. They rarely did. They never gave him enough credit for the things that he did.

  “Same answer as before. It would be good money after bad. We still need someone like McKinstry with hundreds of millions available. They can’t get us personally. We should just walk away,” John said.

  “Don’t be so sure they won’t come after you.”

  “They can try, but I don’t mind paying attorneys for a while until the banks move onto their next disaster. No personal guarantees, no liability. They can’t touch me,” John was used to getting his way, evading disaster and landing on his feet.

  As much as it pissed Tommy off, and while he still thought John was behind the fraud, he might have done the same thing.

  John continued, “Time to cut a deal with McKinstry. They can have the whole mess and we don’t have to worry about attorneys hounding us for the next few years.” The two sat in silence for what seemed like an eternity. Tommy’s jaw tightened more each second. He contemplated throwing John across the table again, but that hadn’t really helped the first time.