The Banker's Dilemma: She promised him Paris in the spring

by Roman Klee

  When his guests arrived, he never met them at the jetty or heliport. Instead, they were expected to make their own way to the villa.

  Most people picked up the coins and handed them over to Budd, who always stood inside the front porch. The conversation inevitably started off with Budd saying he must have dropped the golden treasure by mistake.

  He was quick to praise his guests for being honest. Then he bit the coins and astonished everyone with his generosity, by handing them straight back.

  Not everyone understood what Budd meant when he said he had won his bet: Think of them as a reward, a finder’s fee if you will, he used to say.

  On the rare occasions when guests didn’t pick up a single coin, Wright always assumed they had paid for an expensive business school education, which among other things taught theories about efficient stock markets. Or at the very least, they were from Chicago. Their stay on the island was invariably a short one.

  Jade Wright’s invite to Christmas dinner at the Villa Esmeralda was one of the most welcome anyone was likely to receive during the holiday season.

  By tradition, guests started to arrive a couple of days in advance, staying in the numerous and luxurious cottages dotted around the island. In a normal year, Jade invited around twenty-nine guests, not including family members.

  On this occasion, the traditional invitees were going to be joined by several reluctant guests. They would rather have been sitting at home, sharing the morning with their own families, watching grandchildren eagerly ripping the paper off neatly wrapped presents, while wives carefully opened duck egg-blue boxes, tied with white ribbons and finished in bows.

  Maybe their reluctance was down to the fact that they had seen the P.S. Jade wrote at the bottom of her invites. It contained the power to strike dread into the hearts of even the most self-confident: Don’t forget to bring a bathing suit, unless you have no dignity and can stand skinny-dipping with Budd.

  Earlier in the year, Jade had to cancel the First Name Only Duck Shoot. It could not go ahead without Budd being there. She hoped he’d return to the island much sooner than he did.

  But no matter. Now they were having a meeting of a very different kind. One guest was already calling it the First Name Only Turkey Fest. And his quick-witted remark was more than just a joke—for one very good reason.

  While the Wright family’s team of cooks labored hard in the kitchen, preparing the twenty-nine-pound turkey for the evening meal, another turkey of a very different breed was about to be carved up by a small, but select group of America’s leading financiers.

  They sat round the table in Budd Wright’s office, the crème de la crème of Wall Street. And everyone was on first name terms; Ben and Frank. Henry and Paul. Nelson and Abram. They represented the elite of the elite; the fabled one-percenters.

  The chairman of the Federal Reserve, in between snacking on turkey filled poppy-seed bagels, watched proceedings via the video link.

  A hastily corralled team of investment bankers had compiled a detailed balance sheet of all Solomon Brothers’ investments and open trading positions, which Wright had studied in detail before the meeting. The list read like an almanac of bets placed to chase and profit from whatever the latest hot investment fashion happened to be. The firm’s diversification strategy used standard business school techniques, lifted from text books.

  The world population was expanding and Asia was shifting to a high-protein diet, so the Brothers invested in farms (some as far away as the Ukraine, others in Zambia) and new grain silos nearer to home. Their traders could take physical delivery of soybeans, wheat and corn, keep supplies off the market and then go long multiple grain futures contracts.

  The world was running out of oil and Asian demand was exploding, so the Brothers leased capacity and bought tankers outright, as well as adding storage facilities. They kept their tankers at sea for longer than normal, once again restricting supply, while they went long oil futures, with a bunch of OTC trades on the side.

  With a nod and a wink, Solomon’s traders could not be expected to accurately report their true OTC positions; hell what was the point in trading over the counter if you couldn’t capture a little home advantage? Who cared if it pushed up prices at the gas pumps?

  Solomon’s Green Energy trading division, acquired land for wind and solar energy farms in North America, Europe, North Africa and Asia, to hedge against a fall in demand for fossil fuels.

  A second part of the firm’s hedge involved buying carbon credits. Traders recorded these on their books at billions of dollars, but in reality, they were virtually worthless thanks to fraud and manipulation in the European carbon market. (Martin Gale and Marky Mark used a Congress inspired accounting loophole that let them discard the firm’s obsession with mark-to-market.)

  Solomon organized IPOs for new energy companies, selling them at massive premiums to their true worth. Later they sold the same stocks short, sending prices into free-fall. The firm’s books still carried profitable open short positions on these companies.

  The private equity and venture capital investments ranged from online pet shops to a manufacturer of nanophosphate lithium-ion batteries. They must have sounded good at the time, a way to build dreams, but now no one had any idea how much they were worth, if they were worth anything at all.

  Solomon owned stakes in copper and gold mines, as well as a diamond mine in Australia, specializing in the extraction of fancy gemstones. It was enough to make Henry Winston proud.

  The Brothers’ bond portfolio was one of the largest on the Street. They held positions across the entire yield curve, with a very generous allocation of U.S. treasuries and aggressive option and futures hedges.

  Budd Wright allowed himself numerous little chuckles as he reviewed Solomon Brothers’ efforts to establish a corner in each market they operated in.

  At every turn, they looked for the most leveraged exposure and then ramped it up to never before seen levels. And he was licking his lips at the great knock down prices he would offer to take selective assets off the Brothers’ hands.

  To start with, he calculated what it would be worth for Brenton Davenport to take over Solomon’s open stock trading positions. He would make a single offer, no haggling over the price, take it or leave it. He was looking forward to adding a bunch of new tech stocks at mouth watering valuations.

  On the bond side, he wanted to keep adding to his futures positions and the entry points in the Solomon portfolio, once again looked very attractive.

  No doubt the guys who submitted daily LIBOR data had helped out the prop traders with special low-ball rates whenever they needed a favor—what were buddies for after all? Wright was sure the U.S. farmland would make a very good fit with the family’s own farming businesses in Kansas, under Pam’s brilliant management.

  He was less keen on the foreign assets, particularly the acreage in the Ukraine. Some of the corporate debt at distress level prices also looked tempting. He had no interest in the hard to value mining and private equity stakes. Or any of the other so-called alternatives.

  Maybe there would be a cent or two on the dollar left over for Solomon’s creditors. Though this was extremely unlikely, especially after the accountants, lawyers and auditors had finished adding up their billable hours.

  There was no doubt that the vultures assembled on the Isla de Ballenas would do a good job stripping the choicest meat from the bones, paying bottom dollar in the process, but the overriding issue remained how to unwind the massive L.A.Y.D.E.E.s trade together with the firm’s other positions, without destabilizing the entire financial system.

  It was a major problem for the guys assembled around the circular dining table. And they had to get a grip fast.

  On a normal holiday afternoon, they would now be asleep or thinking how to work off the excesses of the day, instead of trying to grapple with the sensitivity of the T-copula function, t
ail dependence, math constants and differential equations.

  Though in all honesty, they were not trying too hard because their minds were already made up.

  Δ = T +5.3

  Nathan lay on the bed in the pool house, with one thought going round and round his head; they’re coming to get me … they’re coming to get me, any moment NOW!

  I’m not paranoid. But I know they’re coming to get me!

  Refocus on positive images and then allow them to manifest.

  And they’re gonna break down the door with massive axes.

  Remember, focus on the NOW.

  Axes, razor-sharp axes will be their weapons of choice.

  She said nothing to Nathan. She sat silently, listening. Because she was paid to listen.

  Remember, check the coffee. It’s poisoned. Radioisotope polonium-210. Don’t ever drink the Kool-Aid.

  And he recalled how his therapy sessions, consumed so much time and so much money, money spent on words, his own words turned back against him, so that they were now literally costing him.

  It wasn’t the first time he felt like the victim. Why had it turned out this way all over again? Clearly he was doing something wrong. It had to be his fault, because that was what his therapist said; he attracted negative things into his life. He needed to refocus on positive images and then wait, because he was enough.

  Well, as far as Nathan was concerned, thinking about all things nice and wonderful would not be enough to stop the guys he had upset from pursuing him. On reflection, he now bitterly regretted the way he had gone about conducting himself with Antonio Orofino and Pete Cunningham.

  They only ever got involved in things that could benefit them, and if it meant they had to stamp on a few heads along the way, then that was the way it had to be. Nathan was now convinced they would come at any moment.

  Barricade the doors, bar the windows. Make it impossible for them to enter. Dial nine-one-one.

  But would the police answer his call for help? Would they really turn up? Perhaps someone had paid them to sit back, fill in forms all day and ignore his pleas for assistance.

  He had annoyed more than a few people in high places and it took no leap of the imagination to work out that they had the contacts and unlimited resources to do him harm. That was just the way of the world. The guys who were mad with him never soiled their hands, they got others to do the really dirty stuff.

  They only used anonymous sources with no direct links back to them and whose existence was easy to deny.

  Of all the things they could do to him, Nathan saw no point in trying to rank them in terms of what might be an acceptable threshold of pain, because his threshold was very low.

  He didn’t want to wake up with plastic explosives attached to his neck, a slow ticking time bomb complete with a trigger device, activated by an innocent phone call. Just a couple of rings and there would definitely be no one left behind to pick up.

  And there were many other methods.

  Like the Mexican gutting technique.

  A sharp knife, a deep incision across the abdomen, entrails ripped out. Trussed up like a pig, hung from some bridge downtown and left to slowly die in purgatory.

  They said it was a favorite method used by leaders of Mexican drug cartels, whenever they wanted to send a warning to potential police collaborators.

  Never forget Nathan. At the Trust, we only back winners!

  Then Nathan woke up. And remembered, he was safe. The Isla de Ballenas was everything he imagined it would be. It had become his sanctuary. There was no need to feel insecure, because for as long as he remained on the island, he was protected from outside forces that wished him harm.

  At the time, it felt good. He had found someone to blame for all the things that had gone wrong in his life. He was driven by a desire to get back at his old firm and his boss, the guy who chose to fire him instead of Noboru Takeshita.

  But Nathan had not counted on the power of the Brothers’ network or the influence it could exert at a time and place of the Brothers’ own choosing. They were the true masters when it came to promoting their interests at everyone else’s expense.

  Luckily Nathan had escaped. He was free from their influence on the island. Or at least that was what he hoped.

  Nathan got up and went outside. Even in December, he was struck by how bright the light on the island was and he felt more comfortable wearing green tinted shades.

  He decided to clear his head before Jade’s Christmas feast. And there was no better way than sampling the sea air.

  He began his exploration of the island with a brisk walk along a yellow gravel path, and soon discovered a sign, pointing the way to the Villa Esmeralda.

  Δ = T +5.3.1

  Everyone in the room knew the unspoken truth. A solution to settling the derivative trades, needed all the other Wall Street players to admit they too had been dabbling in L.A.Y.D.E.E.s. It was quite an embarrassing admission to make, but it had to be done if they were to stand any chance of keeping their phony baloney jobs. Then everyone could move on, carve up the spoils and hand over to the U.S. taxpayer the parts the bankers considered worthless.

  They had the weekend to work through a solution, only no one really wanted to spend a full two days sifting through detailed accounts of what Solomon Brothers was worth. The Asian and U.S. markets opened on the Monday, Europe a day later.

  With the Fed chairman off for a snooze, two new faces from Solomon appeared on the video link, to provide some extra color on the state of the firm’s balance sheet.

  Markus Markstaler began by pointing out there was at least some good news. Because of the way L.A.Y.D.E.E.s contracts settled, there was no need to signal any kind of liquidity issue to the regulators for several weeks, possibly longer.

  “We’ll say the firm’s capital is as solid and secure as Fort Knox. Of course, no one will believe us, except the mom and pop suckers sitting at home. But it will give us time.”

  It was commonplace for traders to be slow in keeping OTC settlements up to date. That would take the firm into the New Year.

  Bernie Billings however, did not sound as confident. He said, “The thing is, even if we could enforce the contracts, the counterparties can’t pay up. They’ll default and their collateral’s gone bad.”

  This really was the worst of all possible worlds.

  And Alva Grenelund’s face had turned bright red, after Billings’ show of disloyalty. If she hadn’t been surrounded by so many distinguished figures in finance, she would have fired the guy on the spot.

  They all knew what the Solomon senior partner was angling for. She wanted the Federal Reserve to sign a check for a pump priming exercise to inflate markets, thereby covering everyone’s exposed parts as quickly as possible.

  “Who else will fail now Solomon is technically bust?” asked Abram.

  “You can drop the technically bit. It is bust,” replied Ben.

  “Anyway, this is all bullshit. Playing the waiting game won’t work. Or least not for very long,” added Nelson, who appeared to be talking the most sense.

  “You’ll get flooded with margin and collateral calls. Your repos will unwind, people will refuse to roll them.”

  Then he added, clearly giving the impression he enjoyed straight talking, “And it will start before the markets open. You got no chance, you’re toast.”

  One thing was for sure however. The guys assembled around the table would be given enough time to get their financial affairs in order. They all owned options in their own firms, stock and bond portfolios and stood to lose a great deal personally if markets suddenly moved violently against their positions. Now they knew the scale of the problem facing Solomon, they could take action and stem any losses to their net worth.

  The risk takers among them were working out how to exploit the situation for their own ends.

 
; Ben suggested they could make a killing from a market collapse. Once the rumors started to circulate, they’d be the usual knee-jerk rush for the exits. They’d be tough talking and posturing about moral hazard and too-big to fail.

  And then the Dow would crash a few more hundred points and just like magic, the Fed would step in with a liquidity boost, they could buy the dip and sell the rebound.

  They’d be back to making money, nice ‘n’ easy.

  No one expected any difficulty getting the Fed to see things their way. And they were right of course. There was nothing quite like it when the Fed started printing money with its electronic printing press. The effect was similar to the heads of the Federal Reserve banks, handing out neatly wrapped foil parcels of magic white powder, and instructing their anointed bankers to hoover it up their noses.

  It came as no surprise that the men who pulled and pushed the levers of the banking system, had only one objective in mind; to make financial markets race to higher highs.

  Henry liked to call it wampum, and there was nothing as good as wampum to make every problem magically disappear.

  The Fed called it being accommodative. Henry thought of it in quite another way. “These guys, they like bending over for us to …”

  He was about to continue, but stopped in time when he saw Jade enter the room to tell the assembled gentlemen that she would be serving dinner in ten minutes.

  Yes, the survival of Wall Street and the entire financial system were at stake, but Jade Wright wouldn’t let anything ruin her turkey dinner.

  Luckily, Budd intervened and brokered a compromise—they would eat in the teepee. The cooks could bring everything out on trays. There was no problem, they could use the revolving section of the dining table to get everyone served in time.