Trigger Point

by Matthew Glass

  ‘Nothing special,’ said Perez. ‘He talked about how he was ready to intervene.’

  ‘That’s what we want, right?’

  ‘Yeah. He kept hammering it in the questions, possibly a little too much. You know what he’s like. He can be a little tin-eared and then the press read everything he says like it’s the Talmud. There’s no doubt his communication’s a problem.’

  ‘You think we should reappoint him?’

  There were glances around the room. Knowles had asked the question somewhat mischievously. Marty Perez, he knew, coveted the job of chairman of the Fed for himself. Strickland’s term ran another two years. Tom Knowles thought Strickland was doing a pretty good job, although everyone was always talking about his communication style. Personally, he found him stiff and long-winded, and he had no great personal rapport with the man. But as long as the economy was running smoothly he could live with that.

  ‘I just think he’s never going to be a great communicator,’ said Perez eventually.

  ‘We all know that,’ said Ed Abrahams. ‘Look, have we got a problem from his statement yesterday or not?’

  Perez shook his head. ‘No. There was a little selling in the market afterwards, that’s all.’

  10

  THE NAME STRUCK him. He had seen it on the list recently, he knew, without having expected to. And here it was again. Fidelian Bank.

  Sammy Horwitz was a young staffer in the division of Bank Supervision in the New York district of the Federal Reserve. Part of his job was to look over the so-called five per cent list, a daily spreadsheet that showed the stock price movements of all bank or bank holding companies quoted on the New York Stock Exchange. The New York Fed didn’t regulate investment banks like Fidelian but they were on the list as well because of the effects they could have on the banks that the Fed did regulate. Any stock that had moved five per cent or more than the average movement in the sector was highlighted, blue for up, red for down. Three days after Ron Strickland’s report to the Senate Banking Committee, Fidelian was red. On the spreadsheet Horwitz could see that it gone red two days previously as well.

  There was only one problem with the five per cent list. Although the excess stock price movements were clearly identified, there were no rules about what anyone was supposed to do with them. The stock price was only one of numerous indicators of a bank’s health, in this case reflecting the market’s view. Accordingly, a five per cent stock price movement within a day might make perfect sense given what the Fed already knew, and in that case one would have been more surprised to find that it hadn’t occurred. Other times it came out of the blue, and might mean the market genuinely knew something that the regulators didn’t – which was worrying. Arguably more often, it might mean the market thought it knew something that in fact it didn’t – which wasn’t.

  Sammy Horwitz, of course, knew something about Fidelian. It was an investment bank that had undergone rapid growth out of the financial crisis with a large franchise in Asian markets. But that wasn’t enough. His first job was to find out more.

  First he pulled the stock price history off Bloomberg. Going back a year, it showed a fairly steady line, somewhat underperforming the banking sector as a whole, but with nothing notable until the significant falls over the past few days. He downloaded the Fidelian file off the Fed’s internal system and the company’s latest filings from the Securities and Exchange Commission website. He scanned them quickly. Fidelian wasn’t on any watch list for at-risk banks. Its capital ratio and other key financial indicators were adequate. He rang his counterpart at the SEC and was told they weren’t aware of any concerns. He hit the Fidelian website and did a search of its investor relations section for any announcements over the past couple of weeks that might have turned the market sour on it. He drew a blank. He did a press search for articles and analysis and drew another blank.

  An hour after noticing its name on the list, Sammy Horwitz still had no idea why Fidelian stock was falling.

  Later that day he mentioned it to his boss, Cindy Moore. She hadn’t heard any rumors of problems with Fidelian.

  ‘What are the trade volumes?’ said Moore.

  ‘Average.’ Horwitz had already thought of that. If trade in the stock was unusually light, a couple of oddball trades could distort the price.

  ‘Keep an eye on it,’ said Moore.

  Horwitz checked the price at the end of the day. The stock had fallen a couple of per cent further. The next day, Friday, Fidelian kept falling. By early afternoon it was down almost fifteen per cent over the week.

  Horwitz took it back to his boss.

  Cindy Moore put in a call to Joe Mancini, head of Market Surveillance at the New York Stock Exchange. She asked him if he knew anything about Fidelian. Mancini said he’d get back to her. He called back on Monday. Fidelian stock had opened still lower.

  ‘We don’t see anything in it,’ said Mancini.

  ‘It’s down almost twenty per cent in the past week.’

  ‘Obviously some people don’t think very much of it. That’s the market. What’re you gonna do?’

  ‘You don’t think it’s being targeted by shorts?’

  ‘Probably is. Listen, Cindy, the whole banking sector is down a little.’

  ‘What are you hearing?’

  ‘Your chairman spooked the market. When he says stuff like that on Capitol Hill, what do you think’s going to happen?’

  ‘He didn’t say anything. What did he say?’

  ‘What can I tell you? You’ve got the whole sector down a little so naturally there’s one or two under some real pressure, and apart from Mr Strickland’s erudite remarks the world looks exactly the same as it did a fortnight ago. At least I haven’t noticed any change.’

  ‘Do you know who’s selling?’

  Mancini laughed. ‘Listen, we’ll keep an eye on it.’

  Later, Moore had another call from Mancini to say there were rumors in the market that a couple of banks might be coming to the market for a cash call over the next few weeks and people were taking bets on who it was going to be.

  ‘And Fidelian’s one of them?’ said Moore.

  ‘I’m guessing, looking at the numbers. Their percentage of shorted stock is up. But it’s a rumor, Cindy. It might be Fidelian today, it might be someone else tomorrow.’

  ‘And you think this is all legit?’

  ‘They’re allowed to bet. That’s what markets do, Cindy.’

  Moore rolled her eyes. Mancini had a habit of talking about what ‘markets do’ as if he was instructing a child in the ways of the world. He thought everyone at the Fed was an academic who had no idea how the market really worked, and the only thing worse in his view than a man from the Fed was a woman from the Fed. Moore could almost taste the condescension every time she spoke to him.

  ‘Joe, if something’s going on here, we’ve got to stop it right now.’

  ‘Something like what?’

  ‘Is this some kind of coordinated action?’

  ‘Like a bear raid?’ Mancini chuckled. ‘Look, they’re being shorted, right? That doesn’t mean we’re looking at a bear raid.’

  ‘I don’t think this is funny. Can you tell me that for sure? Can you tell me for sure nothing’s going on here?’

  ‘I can only tell you what I can tell you.’ Mancini’s voice was snappy now. ‘If I thought we were looking at something illegal you can bet your bottom dollar I’d be doing something about it and I wouldn’t be waiting for you to tell me.’

  ‘I hope not.’

  ‘Of course not. But you know, I need some evidence first. Last time I looked this is still a free market. They’re taking bets, Cindy. Okay? They’re taking bets out there on who’s going to come back to the market for cash. And people are taking profit. It’s been a good year. Some people are gonna want to take a little profit and when they hear Professor Strickland saying the party’s over and they see the market getting a little jittery they say it’s time to do it. Strickland’s paid to burst t
he bubble, right? They’re worried that’s what he’s going to do.’

  Cindy was silent for a moment. ‘Where did you hear these rumors?’

  ‘Jeez, Cindy! It’s just something guys are hearing. You ought to get in the market a little. There are rumors out there every single day.’

  ‘You don’t know any more about it?’ said Moore, ignoring the jibe.

  ‘I don’t. I swear I don’t. It’ll be this rumor today, it’ll be something else tomorrow. We’ve got a little profit-taking going on, it makes it all seem a little worse.’

  Moore was silent.

  ‘Come on, Cindy. It’s like a snake pit out there. You’ve got to sit back and let them writhe. Enjoy it. Watch them eat each other and give thanks to God you’re not out there with them.’

  ‘Yeah,’ said Moore. ‘Thanks.’ She put the phone down. Mancini might be right, but she was paid to do more than watch the snakes writhe, as he put it. And she thought he was way too complacent. For someone paid to identify market manipulation, he was way too willing to accept that any given pattern of trades was just the regular market at work. Joe Mancini had always struck her as the kind of regulator who was invariably ready to arrive just as soon as the horse had bolted.

  She wasn’t going to leave it at that. She had worked at the New York Fed for the past fourteen years and that meant she had seen the events of ’08 up close. She had seen Bear Stearns get sold over a weekend. She had seen Lehman go down and AIG nationalized in the course of forty-eight hair-raising hours. Once things started moving, she knew, they could move with extraordinary speed. This needed to go higher. She spoke to her boss, who spoke to his boss, Jerry Rabin, the president of the New York Fed. They both already knew that Fidelian’s stock was slipping. Rabin got on the phone to Bill Custler, the CEO of Fidelian Bank.

  Rabin knew Custler well. He asked him what he thought was going on with the stock price. Custler said he had no idea.

  ‘Bill,’ said Rabin, ‘is there something we should know?’

  ‘We’re in compliance,’ said Custler.

  ‘I’m not saying you’re not.’ Rabin paused. He respected Bill Custler as a competent and honest executive. ‘People are shorting you, Bill. Why are they doing that?’

  ‘I have no idea.’

  Rabin didn’t know if he heard something in Custler’s tone. It was a little more stiff and formal than normal.

  ‘Bill, if you’ve got something to tell us, for God’s sake, tell us early.’

  There was silence.

  Rabin waited for him to reply.

  ‘Bill?’

  ‘Jerry,’ said Custler, ‘I’ve got nothing to tell you.’

  11

  TONY EVANGELOU LAUGHED. ‘Ed,’ he said, ‘you’re insane.’

  Ed Grey grinned. ‘So you’re telling me we close out now?’

  ‘Yes, I’m telling you we close out now. Let’s buy the stock, send it back, close out now and be thankful this blind fucking bet came good.’

  Grey looked at Evangelou in mock dismay. ‘Tony, I expected more from you.’

  ‘Sure you did.’

  Grey turned to Boris Malevsky. ‘How much do we take if we close out now?’

  ‘Thirty-one million.’

  ‘How much you going to get if we do?’

  ‘One point six,’ said Malevsky. ‘Five per cent, right?’

  ‘You’re rounding up!’ Grey laughed. ‘Why not? You ever had a one point six million bonus?’

  Malevsky shook his head.

  ‘What do you want to do? You want the one point six?’

  ‘Double or nothing,’ said Evangelou. ‘Goes the wrong way, you still lose your job, Malevsky.’

  ‘That’s true,’ said Grey. ‘Huh, Boris? What do you think?’

  Malevsky hesitated. ‘I think it’s got a way to go.’

  ‘Really,’ said Grey. ‘Why?’

  ‘There’s a cash call coming from Fidelian. The market still doesn’t know about it.’

  ‘The market’s marked them down twenty per cent for no apparent reason but Strickland’s speech and our own fine leadership,’ said Evangelou. ‘Twenty per cent. How much capital does that say Fidelian has to raise? Have you crunched those numbers, Boris?’

  ‘Nine billion.’

  ‘A twenty per cent fall says they have to raise nine billion?’

  ‘That’s right.’

  ‘That’s a ridiculous amount. They’re not coming to the market for that much.’

  Boris shrugged.

  ‘Ed, we have no real research behind this, we have no rationale, we have no–’

  ‘And Boris here has just made himself one point six million. This is just starting. I take your point about the nine billion, Tony. That’s way too much. But that’s the point. It’s not rational now. The whole sector’s moving. We’re on the tiger, Tony. We’re riding it. When you ride the tiger, you ride it to the end. You ride her to the fucking end. It is the biggest, biggest, biggest mistake you can make to get off too early.’

  ‘This tiger is falling flat right under us. This tiger is running out of steam. In another second it’s gonna turn around and bite the hell out of our ass for still being on its back.’

  ‘Well, that is a possibility.’ Grey grinned. He was definitely of the school that said you added to your trade when your trade was doing well. Evangelou was more conservative. He was all numbers, not feel. He was very disciplined, a take-your-profit-at-your-target kind of trader and always needed pushing to stake more on his trades. But Grey respected that. He was the opposite. It was what made them such a good team when it came to managing the really big-bet trades that came along only once or twice a year.

  He swung around and faced the screens on the wall of his office. One of them showed the price for the overall banking sector. The other showed Fidelian. The movement in the market over the past week had been more than he expected. ‘You think we’re doing that? I mean, Fidelian, maybe. But the sector, the whole fucking sector. Look at the sector. How much are we in now?’

  ‘Two hundred,’ said Evangelou.

  ‘Two hundred,’ murmured Grey. He took a slurp on his coffee. ‘That’s nothing.’

  ‘Who’d you talk to?’ said Evangelou knowingly.

  ‘A couple of guys.’

  You couldn’t expect a market to move without the odd shot of rumor to lubricate the rails. To help build momentum, Grey had spoken to a number of other Divvies he knew closely. He certainly hadn’t told them about Boris Malevsky’s piece of information. That particular nugget of gold was for Red River alone. But you didn’t have to reveal what you knew to start the rumors flying. You only had to be careful that those rumors – or the variants of them that were sure to develop – didn’t swing back to bite you. The guys you spoke to weren’t your friends, no matter how well you knew them. They were in the market, and they were in it to make money. For every dime someone makes in the market, someone else loses the same amount. There was no one you could trust. If you gave a signal and someone thought it was pointed in the wrong direction, they’d be your biggest cheerleader and then bet against you to help the market cut your throat. The more of your blood was on the carpet, the more money they’d make.

  ‘Someone else is in,’ said Grey.

  Evangelou nodded. ‘Two hundred’s not going to move the sector like that.’

  ‘How much? A half billion?’

  ‘Depends. That could get it going.’

  ‘Who would it be?’ Grey thought through the likely participants in the game. How many was it likely to be? That made a difference. If there was one big player with a chunk in the game, the minute that player pulled the plug and started buying, prices would rebound and everyone else, including Red River, would get lost in the afterwash. If it was a number of players, no one individual had the power to do that. It might leave Red River, with two hundred in, as the lead player.

  ‘Ed, this is all froth.’

  ‘Maybe,’ said Grey. The received wisdom said that short sellers couldn’
t move a market where investors didn’t want it to go, not for any length of time. It would rapidly rebound as investors came in to buy at levels they deemed to be attractive.

  ‘We’d have to go another two hundred minimum,’ said Tony.

  Grey nodded. Even that might not be enough. And if the market turned, you wouldn’t be able to buy the stocks at a sensible price to close out a position that big. Liquidity, as Evangelou would have been quick to point out, would drain away. Price would overshoot as people realized someone was looking to buy every stock they could find. You could take a bath damn quick. To put any more in now, you’d need to have a strong, strong reason to believe the market had further to fall. The very act of shorting that much more would help it down, but it wouldn’t stay down for long if the market as a whole didn’t believe the sector should be down there. People would start buying.

  He looked at Malevsky. ‘What do you think, Boris? Do you take your one point six and go home?’

  Malevsky shook his head.

  ‘Really? Get this wrong, I’m still going to sack your ass.’

  Boris grinned.

  ‘Give me a reason,’ said Grey. ‘Give me a reason not to give you one point six million dollars.’

  ‘I’ve got two. One, Strickland’s talking to the National Press Club tomorrow.’

  Evangelou rolled his eyes. ‘This again …’

  ‘Two, I was sixteen the day Lehman Brothers went bust.’

  ‘That was your birthday?’ said Evangelou. ‘Not like I can see what that’s got to do with anything.’

  ‘It wasn’t my birthday, but I remember it like it was.’

  ‘Who doesn’t?’

  ‘Exactly. And I wasn’t even interested in finance. Back then I was going to be a doctor. But Lehman went down and everybody knew about it, even me, Boris Malevsky the doctor-to-be. I saw an interesting headline this morning. Are we on the verge of finding the next Lehman?’

  ‘That’s ridiculous.’

  ‘I agree. But I also think it’s the kind of talk Strickland is going to want to stop in its tracks. And I think the entire administration is going to want to make sure there’s no talk like that going around. So I think Strickland is going to come out very, very bullish on the banks. He’s going to say there’s nothing wrong, the regulation’s good, the system’s strong, etc., etc.’