by Roman Klee
On their way over to their new surroundings, Alva Grenelund said to Wright, “I wanted to ask you for a loan first. But we had a problem contacting you.”
Wright smiled. If Grenelund thought her host was about to open up on the whole saga of his disappearing act, then she was very much mistaken.
Budd Wright held all the cards now and he had no intention of letting the guys at Solomon off the hook. In more ways than one, he was disgusted by their behavior and the moment had come for someone to act in a ruthless way.
The firm had lost its hard won reputation for treating clients fairly and avoiding conflicts of interest. Budd Wright intended to cut the Brothers back down to size.
He didn’t normally hold personal grudges, because they could very soon turn into expensive trials of strength, serving no long-term purpose.
But it was also difficult for him to overlook the fact that the firm’s latest derivative creation had been constructed as a bet against him. In itself this did not upset him. He wanted the firm corralled, because he was alarmed by the potential abuses L.A.Y.D.E.E. style contracts provided the less savory elements of the financial underworld.
And that was wrong on so many levels.
Budd Wright’s pragmatic side could also dismiss the whole thing as just another type of commercial arrangement, similar in nature to the millions of transactions that went on every day.
On this occasion, Solomon lost and he won. A simple, straightforward outcome; it was just business.
Δ = T +5.3.2
Nathan was enjoying his walk up to the big house. He stopped at the bottom of the Villa Esmeralda’s garden, where he noticed something very surprising; a Native American teepee. To Nathan, the structure looked totally out of place, but it was impossible to resist, he simply had to look inside.
The interior was much bigger than he expected. The semi-translucent canvas walls created the illusion of ascending space. There was a large circular wooden table (with a special rotating center piece for passing food and condiments around) and several rows of stacked chairs.
Nathan was trying to visualize how many people they could comfortably fit inside the teepee, when he heard loud voices and footsteps heading in his direction. Someone called out Budd Wright’s name.
If he left the same way he had come in, everyone would see him and there would be a very awkward moment. This was not how he wanted his first meeting with Budd Wright to be.
Then he saw his salvation. In the middle of one of the canvas panels he noticed a long green curtain. With luck, it would provide the perfect hiding place.
He rushed over and with just seconds before the First Name Only invitees entered, managed to slip behind it.
Nathan stood totally still, trying to suppress his breathing and prevent the material from moving. When he felt comfortable enough, he checked his new surroundings and noticed he was standing in a small washroom, stacked high with crates of Pepsi Max. He very much hoped the meeting would be short.
It was hard to believe that he was about to listen in to one of the most important back-room deals ever.
The discussions in the tepee were taking a lot longer than anyone anticipated. Jade expected her husband to swiftly get to the bottom of things. He was known for his ability to come to difficult decisions quickly and then move on. But sworn to secrecy, she carried on telling her guests that Budd’s plane had broken down again and he would be joining them all later in the evening.
The final obstacle to reaching an agreement centered on the size of the partners’ severance packages. Since everyone agreed Solomon Brothers had to be wound up, how much could they reasonably pay and did they need to honor all the terms in some of the gold-plated executive contracts? And how would this all look in the court of public opinion?
Budd Wright made his position very clear; he was set against paying anything at all, because he argued it was against the interests of the U.S. taxpayer.
However, in the process he had turned himself into a constituency of one, failing to win over the Wall Street titans. He agreed that all Solomon’s employees should receive whatever was due to them. But as far as the partners were concerned, he was not in favor of paying them off, let alone preserving the value of their equity capital as some people around the table suggested.
The tone of the discussions changed later, when Treasury Secretary Joe Aldrich, joined in via a video link from Washington. He had just returned from dining with the First Family and sent seasons greetings from the president, together with the commander in chief’s expectation for the Solomon problem to be resolved in a speedy manner.
The final stumbling block was whether Alva Grenelund should get all the compensation, owed under the terms of her contract. Aldrich threatened the bazooka option; he would block any request to get the Fed to switch on its mighty printing press, unless they settled the matter once and for all. His intervention concentrated the assembled minds.
The reason was simple. Without the Fed’s quick hit, quick fix money, there would be no market rally and no easy profits.
Aldrich suggested they create a special emergency fund, which they would tell the public was designed to bring stability and return confidence to the financial system. The important thing was to give it massive leverage. Then it would be so large, they could use it to pay off Solomon’s partners, and no one would notice where all the money had gone.
The Treasury secretary asked for some names. From around the table, Budd Wright’s guests made their suggestions.
“How about SOS, Save Our Solomon?” or “SARP, Solomon’s Asset Relief Program,” or maybe, “CARP, Crony Assed Republican Party.”
“Hey, let’s keep politics out of this,” said Aldrich.
Finally, they settled on HOPE, Helping Other People’s Endeavors—another acronym that was high sounding enough to appear meaningful, but which naturally contained no reference to Solomon Brothers.
Budd’s heart sank in despair. Once again, the Wall Street elite was behaving true to form. When it came down to the wire, it preferred to deal itself the rich rewards of failure while handing over the losses to the great American public.
But he understood, it was only possible to do so much and he let his objections slip. He was after all, picking up some very fine assets at fire-sale prices and the best part was he had been given first-dibs.
Looked at in a fresh light, preserving the sanctity of contract was an important principle of business practice, something he knew he should never try to overturn, because it could come back later and damage his own interests.
So the meeting broke up with a final agreement, with everyone looking forward to a day’s rest, before the opening of the Asian markets.
The First Name Only guests were led straight out of the tepee and down a secluded path, where a collection of golf carts whisked them off to the heliport. On arrival in Brunswick, a fleet of executive jets was waiting to take America’s top financiers to places as far a field as St. Barts in the Caribbean, Mahé in the Indian Ocean and Klosters in Switzerland.
Later, Budd Wright and Aldrich would speak to Alva Grenelund. They intended to tell her how the firm was going to be broken up. Budd expected Grenelund to object, but knew her resistance would rapidly disappear, just as soon as Aldrich informed her of how large her confidential severance package would be.
Alva would of course be devastated, but on the bright side, unless some unforeseen calamity struck, she would never have to worry about affording New York City’s sky-high property taxes or service charges, let alone vacating her Eight70 duplex.
Throughout the great carve up by the Wall Street elite, Nathan remained in his hiding place, not daring to move. By a sheer stroke of luck, his time away from the other guests allowed him to gather vital market sensitive information. If he could use it for himself, he stood to make his very own killing.
He just hoped Jade hadn’t missed him during dinn
er.
Δ = T +5.4
Who knew for sure how the market would open on the Monday after Christmas? Up, down, sideways. There were only three possible outcomes.
And Nathan was pretty sure he knew the right one.
Of course, when he worked on the DPG desk, he was averse to taking unhedged directional bets. He was trained to hunt out hedges. Gains offset losses, losses offset gains, but they were structured so as to lower risk while enhancing profits for the firm.
But part of him was frustrated that he couldn’t take advantage of his new knowledge. He was stuck on the Isla de Ballenas, with no access to his trading account.
Because he had closed it.
In a moment of pure enlightenment, on his return from Thailand, Nathan thought about ending his addiction to speculation. His recent trading record in commodities futures and stock options had seen the occasional gain wiped out by losses.
But he couldn’t resist a final throw of the dice, believing he could profit from his inside knowledge about Budd Wright. Since he was no longer an S.E.C. Qualified Investor, he had to content himself with conventional, exchange traded options. Despite his conviction that Wright had been alive, all his positions expired worthless. The time really had come to stop.
It was only later he realized where he was going wrong, and the truth was pretty mundane.
The techniques he used to make money for Solomon’s partners, worked, because he calculated the value of OTC derivatives based on the firm’s own valuation models.
It was odd that knowing this, he still thought he could bet big and win. He put this failure down to the conditioning process he underwent working for Solomon. He was as guilty as the next guy of drinking the in-house Kool-Aid without asking questions. Nathan saw no point in finding fault with the system that issued his pay-check every month.
But when he tried using his trading models in much bigger and more liquid markets, prices didn’t always move in the way his finely calibrated algorithms predicted; it was definitely a case of models behaving badly.
Now, he really had valuable information, and with it a golden opportunity presented itself.
The obvious trade was a big short on the entire financial sector. Load up extra on put options—the more the stocks fell the more money he made.
Everyone was waiting for a statement from the chairman of the Federal Reserve. Newt Cleveland was known as the savior of markets, the patron saint of traders and hedge fund managers.
Normally, he would issue something that sounded suitably formal, but simply amounted to doing whatever it took to stabilize markets. And normally, he had the decency to do this a good couple of hours before the Japanese and Asian markets opened late Sunday evening Eastern time. That way he headed off an all out panic.
But nothing was forthcoming. Nada. Niente.
Nathan was sure how the markets would behave. Predictably, the Nikkei and the rest of Asia plunged on the opening and stayed down throughout the day. Optimists, who were wrongly positioned, hoped against hope that Mr. Cleveland would save them from the thrashing they were taking.
But no. He was sitting on his hands. Or more likely, still digesting his intake of turkey and pumpkin pie. So when it was the turn of New York markets to open, Nathan was convinced the outcome was a slum-dunk; stock prices would be down a lot and give him a chance to profit from the collapse.
Only he couldn’t. He was forced to watch from the sidelines—an unwilling and silent observer.
Δ = T +5.5
The rumors of deep trading losses at Solomon Brothers were taken badly by U.S. markets. For the faint hearted, the best thing to do was to quickly bury the Bloomberg screen. It was a typical response from traders, sell and ask questions later. Their busy fingers, greedy for action after the holidays, frantically pressed the bid side multiple times, in a collective reflex action that would have made Pavlov proud.
All the markets fell during the first hour or two of trading, wiping out in a matter of minutes an entire year’s gains.
And then some.
Right on cue, Alva Grenelund issued a statement assuring investors that the firm was well capitalized and in no danger of going into forced liquidation, as some of the hot heads suggested.
After her press release, the markets fell further.
Think of the profits from my shorts, thought Nathan. This was the way to get rich by playing the market. Not what he’d been doing—relying on the perfection of models.
Then as quickly as Nathan’s imaginary paper profits materialized, so stock prices stopped falling all the way down to hell.
Investors were beginning to have second thoughts. Hesitant at first, then gradually with greater conviction they turned tail and began to buy back their massive short positions. He didn’t know for sure if he was seeing a triple F moment, when a Fat Fingered Freddie in a trading room somewhere, panicked and hit the offer price multiple times.
But whatever was going on, Nathan’s paper profits were gradually melting away with each new upward surge in prices, until they risked turning into large losses—but luckily for him, only of the imaginary kind.
Something was awry.
And then the announcement came. Yes, it was late, but it was also the news that the market wanted to hear.
First up, Solomon Brothers.
The investment bank was no longer open for business. It’s seats on the NYSE and other stock and commodity exchanges across the U.S. and rest of the world, had been suspended. The firm was now under the conservatorship of the Federal government.
Without any outside pressure, the entire Solomon Management Committee voluntarily resigned. All senior partners would give up their severance and annual remuneration packages. No one at the firm would be paid a bonus at the end of the financial year.
Mmm, thought Nathan, they were obviously putting out the kind of news that would soothe the anger of the great American public. Little did it know about the secret back-room deal, which generously compensated all the guys who had really caused the crisis. It was probably being finalized at that very moment, a classic example of the magician’s trick—hey everyone look over here! Over here! Distract the audience for long enough, so they never noticed the real manipulation being done in front of their own eyes.
And then the biggest surprise came from the Isla de Ballenas.
Budd Wright, the CEO and chairman of Brenton Davenport, was to be appointed as temporary senior partner of Solomon Brothers. He would decide on the best way to wind down the investment bank, with a view to causing the least amount of disruption to financial markets. Within days, he would start conducting interviews for replacement managers, to guide the firm through its time under Federal control.
Nathan couldn’t believe his ears.
And there was more.
The arrest of Antonio Orofino. The hedge fund manager was charged with two counts of conspiracy to commit second-degree murder.
Who would have thought it?
Antonio Orofino of Park Avenue, a respected pillar of the financial community and one of the most successful hedge fund managers on Wall Street—somehow he was caught up in the shady business of murder. Nathan realized Orofino was not exactly whiter than white, but he never thought the guy would go to the ultimate extreme just to make money.
Then maybe Nathan deliberately ignored the signs.
Had he chosen to, he could have picked them out, but preferred not to because Orofino had helped him get back on his feet. Without the job at the Banderbilt Trust, Nathan would never have met Carla.
And that was not all.
They also arrested Pete Cunningham and charged him with insider dealing. He was accused of front running client orders and using market sensitive information to trade through a series of secret Swiss bank accounts.
To Nathan, it went to prove what his dad used to say; you should always judge pe
ople by appearances, because the best looking were always too good to be true.
Δ = T +5.7
Nathan was still in a state of shock, but he was pleased about one thing—he had not been whipsawed. He realized at last that he simply didn’t possess the skills to catch the ups and downs of the market; either that or he was just a run of the mill dumb-ass investor with very bad luck.
He thought it best to keep a low profile on the island while the big guys sorted out the problems of the world. In no small part, he was embarrassed to have been involved with a sleaze ball like Orofino. There was a risk his name would come up in conversation, and Nathan knew he would feel uncomfortable being in the same room as Budd Wright while they took the guy apart.
Now he finally understood where he was going wrong.
Nathan went for a walk along the cliff top and because he was still unfamiliar with the island, didn’t realize he was approaching a high Myrtle hedge that marked the end of the formal garden belonging to one of the hunting cottages.
On the other side of the hedge, two of Wall Street’s most powerful executives sat on a wooden slated bench in a cedar paneled gazebo. They shared a bottle of ‘95 Pétrus and talked about the big issues facing their industry.
“Budd will get sucked into the political thing, you know he hates that the most.”
“Ah, yes the backsliding will begin, I guarantee it.”
“Everyone starts out with good intentions. The primrose path of virtue is littered with the bodies of false prophets.”
“Don’t you mean false profits?”
“Oh no, you saw right through me! Better keep them off the balance sheet!”
“Did you hear the one about the new Wall Street recruit who was asked if he was mono-metallic or bi-metallic?”
“No, I thought you couldn’t ask those questions these days.”
“Well, he replied, Heck I don’t know, I just love Metallica!”