Debt Of Honor (1994)

by Tom - Jack Ryan 06 Clancy

  Other Asian banks went next, repeating the same procedure as in Hong Kong, and the people in the War Room watched their machines. Just after noon, New York time, Friday, which was 2:03 A.M. on Saturday in Tokyo, they saw another three hundred million dollars of U.S. bonds dumped into the market, these at a price even more attractive than that just offered in Hong Kong, and these, also, were rapidly bought by other European bankers for whom the working day and week were just coming to an end. As yet nothing grossly unusual had happened. Only then did the Japanese banks make their move, well covered by the activity of others. The Tokyo banks as well started selling off their U.S. Treasuries, clearly taking action to firm up the yen, it appeared. In the process, however, the entire world's ready surplus-dollar capacity had been used up in a period of minutes. It could be written off as a mere coincidence, but the currency traders--at least those not at lunch in New York--were now alerted to the fact that any further trading on those notes would be unsettling, however unlikely that might be, what with the known strength of the dollar.

  The state dinner was reflective of traditional Russian hospitality, made all the more intense by the fact that it celebrated the end of two generations of nuclear terror. The Metropolitan of the Russian Orthodox Church intoned a long and dignified invocation. Himself twice the victim of political imprisonment, his invitation to rejoice was heartfelt, moving a few to tears, which were soon banished by the start of the feast. There was soup, and caviar, and fowl, and fine beef; and huge quantities of alcohol which, for just this once, everyone felt free to imbibe. The real work of the trip was done. There really were no secrets left to hide. Tomorrow was Saturday, and everyone would have the chance to sleep late.

  "You, too, Cathy?" Jack asked. His wife was not normally a heavy drinker, but tonight she was knocking it back.

  "This champagne is wonderful." It was her first state dinner overseas. She'd had a good day of her own with local ophthalmic surgeons, and had invited two of the best, full professors both, to come to the Wilmer Institute and acquaint themselves with her specialty area. Cathy was in the running for a Lasker Award for her work with laser surgery, the product of eleven years of clinical research, and the reason she had not accepted a department chairmanship twice offered by University of Virginia. Her big paper announcing the breakthrough would soon be published in NEJM, and for her as well, this night and this trip were the culmination of many things.

  "You're going to pay for it tomorrow," her husband warned. Jack was going easier on all the drinks, though he had already exceeded his normal nightly limit, which was one. It was the toasts that would do everyone in, he knew, having been through Russian banquets before. It was just a cultural thing. The Russians could drink most Irishmen under any table, something he'd once learned the hard way, but most of the American party either hadn't learned that lesson or simply didn't care this night. The National Security Advisor shook his head. They'd sure as hell learn it tomorrow morning. The main course arrived just then, and deep red wine filled the glasses.

  "Oh, God, my dress is going to split wide open!"

  "That should add to the official entertainment," her husband observed, earning a glare from across the table.

  "You are far too skinny," Golovko observed, sitting next to her and giving voice to another Russian prejudice.

  "So how old are your children?" Yelena Golovko asked. Also thin by Russian standards, she was a professor of pediatrics, and a very pleasant dinner companion.

  "An American custom," Jack replied, pulling out his wallet and showing the pictures. "Olivia--I call her Sally. This is little Jack, and this is our newest."

  "Your son favors you, but the girls are the image of their mother."

  Jack grinned. "A good thing, too."

  The great trading firms are just that, but it's a mystery to the average stockholder just how they trade. Wall Street was a vast collection of misnomers, beginning with the street itself, which is the approximate width of a back alley in most American residential areas, and even the sidewalks seem overly narrow for the degree of traffic they serve. When purchase orders came in to a major house, like the largest of them, Merrill Lynch, the traders did not go looking, physically or electronically, for someone willing to sell that particular issue. Rather, every day the company itself bought measured holdings of issues deemed likely to trade, and then awaited consumer interest in them. Buying in fairly large blocks made for some degree of volume discounting, and the sales, generally, were at a somewhat higher price. In this way the trading houses made money on what bookies called a "middle" position, typically about one eighth of a point. A point was a dollar, and thus an eighth of a point was twelve and a half cents. Seemingly a tiny margin of profit for a stock whose share value could be anything up to hundreds of dollars in the case of some blue chips, it was a margin repeated on many issues on a daily basis, compounded over time to a huge potential profit if things went well. But they didn't always go well, and it was also possible for the houses to lose vast sums in a market that fell more rapidly than their estimates. There were many aphorisms warning of this. On the Hong Kong market, a large and active one, it was said that the market "went up like an escalator and down like an elevator," but the most basic saying was hammered into the mind of every new "rocket scientist" on the huge computer-trading floor of Merrill Lynch headquarters on the Lower West Side: "Never assume that there is a buyer for what you want to sell." But everyone did assume that, of course, because there always was, at least as far back as the collective memory of the firm went, and that was pretty far.

  Most of the trading was not to individual investors, however. Since the 1960s, mutual funds had gradually assumed control of the market. Called "institutions" and grouped under that title with banks, insurance companies, and pension-fund managers, there were actually far more such "institutions" than there were stock issues on the New York Stock Exchange, rather like having hunters outnumbering the game, and the institutions controlled pools of money so vast as to defy comprehension. They were so powerful that to a large extent their policies could actually have a large effect on individual issues and even, briefly, the entire market, and in many cases the "institutions" were controlled by a small number of people--in many cases, just one.

  The third and largest wave of Treasury-note sales came as a surprise to everyone, but most of all to the Federal Reserve Bank headquarters in Washington, whose staff had noted the Hong Kong and Tokyo transactions, the first with interest, the second with a small degree of alarm. The Eurodollar market had made things right, but that market was now mainly closed. These were more Asian banks, institutions that set their benchmarks not in America, but in Japan, and whose technicians had also noted the dumping and done some phoning around the region. Those calls had ended up in a single room atop an office tower, where very senior banking officials said that they'd been called in from a night's sleep to see a situation that looked quite serious to them, occasioning the second wave of sales, and that they recommended a careful, orderly, but rapid movement of position away from the dollar.

  U.S. Treasury notes were the debt instruments of the United States government and also the principal retaining wall for the value of American currency. Regarded for fifty years as the safest investment on the planet, T-Bills gave both American citizens and everyone else the ability to put their capital in a commodity that represented the world's most powerful economy, protected in turn by the world's most powerful military establishment and regulated by a political system that enshrined rights and opportunities through a Constitution that all admired even though they didn't always quite understand it. Whatever the faults and failings of America--none of them mysteries to sophisticated international investors--since 1945 the United States had been the one place in all the world where money was relatively safe. There was an inherent vitality to America from which all strong things grew. Imperfect as they were, Americans were also the world's most optimistic people, still a young country by the standards of the rest of the worl
d, with all the attributes of vigorous youth. And so, when people had wealth to protect, mixed with uncertainty on how to protect it, most often they bought U.S. Treasury notes. The return wasn't always inviting, but the security was.

  But not today. Bankers worldwide saw that Hong Kong and Tokyo had bailed out hard and fast, and the excuse over the trading wires that they were moving their positions from the dollar to the yen just didn't explain it all, especially after a few phone calls were made to inquire why the move had been made. Then the word arrived that more Japanese banks were moving out their bond holdings in a careful, orderly, and rapid movement. With that, bankers throughout Asia started doing the same. The third wave of selling was close to six hundred billion dollars, almost all short-term notes with which the current U.S. administration had chosen to finance its spending deficit.

  The dollar was already falling, and with the start of the third wave of selling, all in a period of less than ninety minutes, the drop grew steeper still. In Europe, traders on their way home heard their cellular phones start beeping to call them back. Something unexpected was afoot. Analysts wondered if it had anything to do with the developing sex scandal within the American government. Europeans always wondered at the American fixation with the sexual dalliances of politicians. It was foolish, puritanical, and irrational, but it was also real to the American political scene, and that made it a relevant factor in how they handled American securities. The value of three-month U.S. Treasury notes was already down 19/32 of a point--bond values were expressed in such fractions--and as a result of that the dollar had fallen four cents against the British pound, even more against the Deutschmark, and more still again against the yen.

  "What the hell is going on?" one of the Fed's board members asked. The whole board, technically known as the Open Market Committee, was grouped around a single computer screen, watching the trend in a collective mood of disbelief. There was no reason for this chaos that any of them could identify. Okay, sure, there was the flap over Vice President Kealty, but he was the Vice President. The stock market had been wavering up and down for some time due to the lingering confusion over the effects of the Trade Reform Act. But what kind of evil synergy was this? The problem, they knew without discussing, was that they might never really know what was happening. Sometimes there was no real explanation. Sometimes things just happened, like a herd of cattle deciding to stampede for no reason that the drovers ever understood. When the dollar was down a full hundred basis points--meaning one percent of value--they all walked into the sanctity of their boardroom and sat down. The discussion was rapid and decisive. There was a run on the dollar. They had to stop it. Instead of the half-point rise in the Discount Rate they had planned to announce at the end of the working day, they would go to a full point. A strong minority actually proposed more than that, but agreed to the compromise. The announcement would be made immediately. The head of the Fed's public-relations department drafted a statement for the Chairman to read for whatever news cameras would answer the summons, and the statement would go out simultaneously on every wire service.

  When brokers returned to their desks from lunch, what had been a fairly calm Friday was something else entirely. Every office had a news board that gave shorthand announcements of national and international events, because such things had effects on the market. The notification that the Fed had jacked up its benchmark rate by a full point shocked most trading rooms to a full fifteen or thirty seconds of silence, punctuated by not a few Holy shits. Technical traders modeling on their computer terminals saw that the market was already reacting. A rise in the discount rate was a sure harbinger of a brief dip in the Dow, like dark clouds were of rain. This storm would not be a pleasant one.

  The big houses, Merrill Lynch, Lehman Brothers, Prudential-Bache, and all the rest, were highly automated, and all were organized along similar lines. In almost every case there was a single large room with banks of computer terminals. The size of the room was invariably dictated by the configuration of the building, and the highly paid technicians were crowded in almost as densely as a Japanese corporate office, except that in the American business centers people weren't allowed to smoke. Few of the men wore their suit jackets, and most of the women wore sneakers.

  They were all very bright, though their educational backgrounds might have surprised the casual visitor. Once peopled with products of the Harvard or Wharton business schools, the new crop of "rocket scientists" were just that--largely holders of science degrees, especially mathematics and physics. MIT was the current school of choice, along with a handful of others. The reason was that the trading houses all used computers, and the computers used highly complex mathematical models both to analyze and predict what the market was doing. The models were based on painstaking historical research that covered the NYSE all the way back to when it was a place under the shade of a button-wood tree. Teams of historians and mathematicians had plotted every move in the market. These records had been analyzed, compared with all identifiable outside factors, and given their own mathematically drawn measure of reality, and the result was a series of very precise and inhumanly intricate models for how the market had worked, did work, and would work. All of this data, however, was dedicated to the idea that dice did have a memory, a concept beloved of casino owners, but false.

  You needed to be a mathematical genius, everyone said (especially the mathematical geniuses), to understand how this thing operated. The older hands kept out of the way for the most part. People who had learned business in business schools, or even people who had started as clerks and made their way up the ladder through sheer effort and savvy, had made way for the new generation--not really regretting it. The half-life of a computer jockey was eight years or so. The pace on the floor was killing, and you had to be young and stupid, in addition to being young and brilliant, to survive out there. The older hands who had worked their way up the hard way let the youngsters do the computer-driving, since they themselves had only a passing familiarization with the equipment, and took on the role of supervising, marking trends, setting corporate policy, and generally being the kindly uncle to the youngsters, who regarded the supervisory personnel as old farts to whom you ran in time of trouble.

  The result was that nobody was really in charge of anything--except, perhaps, the computer models, and everyone used the same model. They came in slightly different flavors, since the consultants who had generated them had been directed by each trading house to come up with something special, and the result was prosperity for the consultants, who did essentially the same work for each customer but billed each for what they claimed was a unique product.

  The result, in military terms, was an operational doctrine both identical and inflexible across the industry. Moreover, it was an operational philosophy that everyone knew and understood only in part.

  The Columbus Group, one of the largest mutual-fund fleets, had its own computer models. Controlling billions of dollars, its three main funds, Nina, Pinta, and Santa Maria, were able to purchase large blocks of equities at rock-bottom prices, and by those very transactions to affect the price of individual issues. That vast market power was in turn commanded by no more than three individuals, and that trio reported to a fourth man who made all of the really important decisions. The rest of the firm's rocket scientists were paid, graded, and promoted on their ability to make recommendations to the seniors. They had no real power per se. The word of the boss was law, and everybody accepted that as a matter of course. The boss was invariably a man with his own fortune in the group. Each of his dollars had the same value as the dollar of the smallest investor, of whom there were thousands. It ran the same risks, reaped the same benefits, and occasionally took the same losses as everyone else's dollar. That, really, was the only security built into the entire trading system. The ultimate sin in the brokerage business was to place your own interests before those of your investors. Merely by putting your interests alongside theirs, there came the guarantee that everyone was in
it together, and the little guys who had not the barest understanding of how the market worked rested secure in the idea that the big boys who did know were looking after things. It was not unlike the American West in the late nineteenth century, where small cattle ranchers entrusted their diminutive herds to those of the large ranchers for the drive to the railheads.

  It was 1:50 P.M. when Columbus made its first move. Calling his top people together, Raizo Yamata's principal lieutenant briefly discussed the sudden run on the dollar. Heads nodded. It was serious. Pinta, the medium-risk fund of the fleet, had a goodly supply of Treasury notes, always a good parking place in which to put cash in anticipation of a better opportunity for later on. The value of these notes was falling. He announced that he was ordering their immediate transfer for Deutschmarks, again the most stable currency in Europe. The Pinta manager nodded, lifted his phone, and gave the order, and another huge transaction was made, the first by an American trader.

  "1 don't like the way this afternoon is going," the vice-chairman said next. "I want everybody close." Heads nodded again. The storm clouds were coming closer, and the herd was getting restless with the first shafts of lightning. "What bank stocks are vulnerable to a weak dollar?" he asked. He already knew the answer, but it was good form to ask.

  "Citibank," the Nina manager replied. He was responsible for the blue-chip fund's management. "We have a ton of their stock."

  "Start bailing out," the vice-chairman ordered, using the American idiom. "I don't like the way the banks are exposed."