Page said he tried to register ULPD with the Financial Services Authority. The regulator gave him a long form to fill in but it was never submitted. ‘I had no chance of getting FSA approval, bottom line,’ Page explained. ‘I didn’t have a long established company, I didn’t have the appropriate qualifications, da, da, da.’ Nor did he bother with VAT registration or an accountant. Again, he was about to take other people’s money for spread betting and for property developments. The separation was essential to avoid accusations of fraud and deception. But Page was more worried about opening up the Currency Club to accountants. ‘What am I going to say to them? “I’ve got this spread-betting operation can you tidy it up for me?”’
In truth, Page didn’t want anyone nosing through his bank statements, spread-betting accounts and loose bits of paper on which he noted the names of core Currency Club members and their investments. ‘I never told people all the business. No one ever knew, and quite rightly so, no one should ever know all your business, no investor should ever know every single thing that is going on. That’s not how it works. If you trust me you don’t need to know … My remit was to make them money.’
ULPD, then, was the new front for the old spread-betting operation. Page had effectively set up a hedge fund for cops that retained its core activity of spread betting on financial markets and sporting events but offered a new investment opportunity in property development.
Hedge funds were becoming all the rage in early 2003 after the dot.com bubble burst and banks stopped lending on the same scale to small start-up companies. They filled that funding gap and became a ‘shadow-banking system’ without the regulation required of a bank. A hedge fund didn’t need a certain level of capital to operate; they didn’t have to open their books to audits or make declarations to any watchdog. In fact, they weren’t required to register in these early days.
Hedge funds managed the money of investors looking for high returns in an era of low interest rates. They might take that money and loan it to a start-up business in return for equity. They might bet against a company’s stock. Another gamble might be on commodities and currencies. The idea being to hedge or off set the fund’s exposure by taking long positions (that value will go up in price) and short ones (that it will go down). It’s a bit like going to the races and having various options to win money, not just that Red Rum crosses the finish line first.
Hedge funds also benefited from the credit and housing bubbles and from government deregulation since 2000 in another form of City gambling – the derivatives market. These are financial contracts made between traders across the world’s markets. The contract derives its value from the performance of an underlying asset, usually stocks, debt, commodities such as oil and gold and currencies. In short, a buyer makes a contract with a seller on how much the price of the asset will change over time.
Ultimately, hedge funds were high risk for high-return financial casinos. Investors never knew or controlled the direction of how their money was invested or gambled. They judged the hedge fund on financial performance in the size and consistency of the returns it paid out. If unsatisfied, they could always pull their stake. In the end, there is no real downside for the hedge-fund managers because they could legally charge commission even for losing other people’s money.
Page’s ULPD idea was similar in philosophy. But in execution it had two major drawbacks. First, hedge funds and investment banks were not just reliant on human judgement to read the financial markets right. They had also invested millions of pounds in computers and programmers who had written models for ingesting up-to-the-nano-second financial data to determine whether to bet one way or another on a commodity, currency or derivative. In contrast, Page was self-taught, bad at maths and reliant on data that in market terms was very out-of-date.
Second, the way Page managed investors’ money was starting to look like a Ponzi scheme – investors deposited money in various bank accounts of his choosing which he then transferred to spread-betting accounts. Quarterly returns were paid from moving around that money between old and new investors.
Charles Ponzi was jailed for running the first eponymous scam in 1920. The simple fraud works like a pyramid scheme, in that earlier investors are paid from later investors’ money rather than from the profits generated by successful betting and investments. A Ponzi scheme can run for years as long as there is a regular stream of new investors so that the money coming in exceeds that going out in returns.
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Almost immediately after ULPD was set up in January 2003, Page started marketing his company to trusted SO14 Currency Club members. He showed them a corporate brochure with various investment options in property development, incredibly high returns and that crazy personal guarantee of their stake back if all went tits up.
‘With the fairly dismal performance of world stock markets over the past few years, many investors have seen the value of their portfolios significantly reduced and in some case have lost nearly all their original investment capital. At this time there is still some weakness with the equity markets although some professional investors would argue that the fundamentals are improving, thus leading to higher interest rates globally,’ Page wrote in the brochure’s introduction, sounding every bit the pundit he had studied so avidly in the Buckingham Palace canteen.
Obviously there is still concern of continued terrorism issues which could lead to further market setbacks. Equally, investors who choose to leave their money in high interest accounts or savings bonds, which lock in funds for a number of years and penalise you with early withdrawal penalties, have seen a relatively low return with the same period. Again, even with the current pick up in interest rates, returns on your money are still relatively disappointing.
So now let’s look at the property market. Over the same period of time homeowners have seen the value of their properties increase dramatically. Many entrepreneurs and building companies continue to profit from the housing market through buying and selling properties on a regular basis as well as specialising in the more lucrative development side of the market where profit margins on new build homes are substantially higher.
At present there are many smaller investors who would also like to capitalise in the property sector but are restrained from doing so due to insufficient funding and/or overall knowledge of the property investment business … With our proven experience, we offer each investor the opportunity to cash in on the property market with no capital risk and achieve excellent returns without the associated problems … Our expertise have [sic] created a sound non risk system of making continued profits for ULPD and our investors.
Making sound business investment decisions is paramount in any company, especially within the property investment sector where there are many pitfalls … Profits can increased [sic] further through development of land for new build housing projects as well as specialist conversions for example barns, stables, dairy blocks etc. Over the last few years interest and development of these particular buildings has soared to an all time high partly due to television and magazine exposures and partly due to their strong profit potential.
Jim Mahaffy from St James’s Palace and Adam McGregor from Buckingham Palace were happy to get involved. But the reaction of other Royal Protection officers was lukewarm. There was a sense they were waiting to see how their two colleagues fared before piling in. Page reasoned that many of his police investors wanted to remain in the shadows. Their attitude was, he said, ‘I don’t give a fuck how you do it as long as it’s legal, but we don’t want our names on Jack shit’.
Page knew that for ULPD to take off with his police and civilian investors he needed ‘a show piece’ property to demonstrate what the company could do for them. He had been scouring the Essex countryside for a conversion project he could develop and sell quickly for a substantial profit in the booming housing market.
On 1 September 2003, he made an informal purchase agreement with the owner of three derelict barns on Spurrie
rs Farm in Norton Heath for £450,000. Page had been discussing the idea with finance company Mortgage Guarantee to convert the barns into two-storey homes with three or four bedrooms.
Later that month, after doing its own checks, the company sent Page a formal mortgage offer: £250,000 towards the purchase price and a further £270,000 to be released in stages for building costs over the one-year lifetime of the mortgage. The finance company would charge 1.5 per cent monthly interest on the loan. Its surveyors had estimated that when converted the three barns with land would sell for £1,435 million.
The UK housing market had been frothing since 1998. From 2002 to 2007 UK prices rose 90 per cent, the highest rise within the European Union after Spain. UK banks, building societies and finance companies in 2003 were not just offering many multiples of an applicant’s income, they had come up with interest-only mortgage deals and self-certifying mortgages for the self-employed, who didn’t have to justify their ability to re-pay.
There was also another type of mortgage on offer for those with a bad credit rating and a high risk of defaulting. The adjustable rate mortgage was one where the interest starts low and then rises steeply. They were also known as teaser loans because low-income families were lured in with the offer of an initial period of low interest rates. The risk was that these borrowers would default when the higher interest rate kicked in. But the banks selling these so-called subprime mortgages were not concerned. Why? Because, for one, they and Alan Greenspan believed that house prices would continue to rise and therefore homeowners would be able to refinance their mortgage when the teaser rate ended as their home would be worth more.
The City in 2003 was the place to be for innovation in how to supposedly spread the risk of selling high-risk loans such as these adjustable rate or subprime mortgages. In an age of low interest rates and cheap credit, large investors, such as pension funds, were looking for higher returns on their money. The banks and hedge funds were keen to feed this need by finding new and more complex ways to sell the bundles of high-risk subprime mortgage debt they were holding.
Welcome to the fiendishly complex world of mortgage securitization. It works like this: In the old world, the high-street bank lending you the money to buy a house expected you to pay them back and were therefore careful to whom they lent. In the new world of derivatives, that same high-street bank making you the loan might sell it on and therefore didn’t care about your creditworthiness or ability to pay them back.
Consequently, the high-street bank now earned huge fees from selling subprime mortgages to risky customers. Often mortgage brokers would be on secret commissions to sell customers these adjustable rate mortgages. The high-street bank earned further fees from selling this high-risk loan to an investment bank.
The investment bank would make even more money by selling the risky debt to investors looking for high returns. First, the investment bank would bundle up the mortgage debt – a process called securitisation – with other types of debt such as credit cards, car loans and student loans into a new type of derivative called a collateralized debt obligation (CDO). These CDOs were then sold to different types of investors. Those seeking high returns would buy the high-risk CDOs. Other more cautious investors, such as pension funds with billions of pounds to invest, needed to be assured that the CDO was safe. The investment banks achieved this by paying rating agencies to over-value the CDOs and through this process some of the most toxic high-risk debt was given a safe rating.
Those CDOs the investment bank couldn’t sell were moved off its balance sheet into a front company. The regulator was aware the banks and hedge funds were doing this to create the illusion of a healthy balance sheet, but turned a blind eye.
As there was no regulatory restraint on this process, more and more mortgage loans were sold with no care for their quality or the ability of the borrower to repay. Volume was everything, because more loans meant more fees. And the riskiest loans, such as subprime mortgages, meant higher fees because they carried higher interest rates. This incentivized mortgage brokers to sell more adjustable rate mortgages – subprime loans – to people who either couldn’t afford them or didn’t need them. The securitization chain was therefore fuelling a huge boom in housing, which together with the credit boom ensured billions of pounds in profits for the banks and financial institutions.
Investors could buy insurance in the event that the CDOs went bad because the people owing the money had stopped paying their mortgage or car loan, for example. The investor would pay a quarterly premium to a company that specialized in insuring it against the debt going bad. This insurance policy was also something that the City could gamble on and to do this a second unregulated derivative market was created called credit default swaps (CDSs).
Speculators and investment banks could now buy CDSs in order to bet against certain CDOs that they didn’t own and believed would default. The insurance company would make millions in fees and broker bonuses from selling these CDSs without ever having put aside a large pot of money in case it had to pay out any investor claims. Once again, volume over quality was the guiding principle to ensure huge fees.
And what about the investors? They did not know, because the investment bank wasn’t saying that the CDOs they were buying were not good investments but junk, and the bank was secretly betting millions of pounds that it would default.
Through this incredible deception and trickery, in 2003–4 investment banks such as Goldman Sachs, Morgan Stanley, Lehman Brothers and Merrill Lynch earned huge revenues from the process of repackaging toxic debt and selling it as good investments.
After the 2008 financial meltdown, respected Financial Times writer Martin Wolf was not alone in describing this process of mortgage securitization as ‘a great big national and global Ponzi scheme’.
It was in this general financial culture that Page was able to secure a £510,000 loan offer from Mortgage Guarantee in September 2003. The finance company was not making the offer to ULPD, as one might expect. It was a personal mortgage in the name of Page and his unemployed wife secured on the barns.
The one-income family qualified for such a large mortgage, despite a bad credit history, presumably on the popular delusion that UK property prices were only going forever up.
But Page still needed to raise the remaining £200,000 to buy the derelict barns.
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The owner of the barns had agreed to allow Page to start work on the conversion in October 2003, months before the contracts were due to be exchanged. Builder Paul Ballard, the husband of Laura’s sister Jill, was going to oversee the work. Page’s brother-in-law was a discharged bankrupt.
Mortgage Guarantee would only release the loan in May 2004. That left Page with eight months to find £200,000 for the purchase price and some start-up cash for the conversion.
Page claims he put £50,000 of his own money into buying the barns. He’d taken out a six-month bridging loan for £30,000 secured against the family home at 2.5 per cent interest. There was also some money stashed away from selling a small property he had inherited from a dead relative.
The remaining monies Page took from police and civilian investors even though the line between the Currency Club’s spread-betting operation and ULPD was still very blurred.
Adam McGregor understood this fuzziness. ‘As long as I got money back at a later date that was all I was concerned about,’ he later explained.
A few months after ULPD was incorporated, Page confided in McGregor about his plan to take time off work (not that he was exactly doing much more than turning up) to convert derelict properties. He claimed he would be funding his new vocation through a lucky consortium of officers.
McGregor was starting to regard Page as a brother. He liked being part of a core group of SO14 officers at BP who he described as ‘money-orientated’. He’d already opened his own CMC account in March 2003, which Page was allowed to use. The password was ‘Bald eagle’, a bird of prey that the receding Royal Protection officer
resembled.
It impressed McGregor that Page was diversifying into property and he felt the use of his brother-in-law as the building contractor would prevent any rip-offs during the eighteen-month development period.
After they visited Spurriers Farm to see the proposed site and conversion plans, Page offered McGregor an incredible 20–30 per cent return on any investment. It wasn’t a hard sell. Page knew his friend was in for the long term. In fact, McGregor was all in.
‘I decided to invest heavily, as much as I could. I considered it to be a very viable opportunity considering what the properties would be worth at the end … I didn’t even want a piece of paper, a “contract”. It was the fact I trusted him,’ he explained later.
The decision to commit so heavily was an interesting one because McGregor had not exactly experienced Page’s Midas touch on his Currency Club investment. His £10,000 stake had been gambled and lost with, at best, only £2500 returned.
Nevertheless, over eight days in May, McGregor invested £54,400. NatWest had loaned him £20,000. The same amount came from his pregnant girlfriend, Louise Kilford, who was also a Met police officer. She had taken a loan from Lloyds bank. Most of the investment money was paid into Laura’s Clippers account at NatWest and then to Page’s CMC account.
McGregor had also convinced his girlfriend’s father, Barry Kilford, to invest £30,000 of his pension money from British Telecom for a £500 monthly return. Again there was no contract. What there was, said McGregor, was ‘an awful amount of trust’.
In June, McGregor raised a further £35,000 from Barclaycard and his bank, which all went to Page. He later re-mortgaged his house to free up £30,000 without having yet received any returns. Other money came from running up debt on his credit cards at 0 per cent interest. McGregor borrowed and then cleared the loan by transferring it to another credit company. Once the balance was cleared the same bank would offer him a new loan and so on. He told lenders he wanted the money for home improvements.
For Queen and Currency: Audacious fraud, greed and gambling at Buckingham Palace Page 9