Trigger Point

by Matthew Glass

  In her office, Opitz raised an eyebrow. She had liked Ed Grey in the time they worked together. He was one of those big, energetic guys who treated the world like a playground created for his personal amusement. He could be a lot of fun. But she had had glimpses of another side of him, a raw, egocentric brutality when it came to looking after number one. He was attractive but dangerous, the kind of guy you could enjoy working with but wouldn’t want to get too close to. And now he ran a DIV, one of the biggest in the market. She didn’t trust a word he said.

  ‘What worries me,’ said Grey, ‘I think what worries all of us, is if it looks like you guys don’t know what you’re doing. Now, I’m assuming this was some relatively junior guy who got it into his head to float some kind of balloon with Rosario under the misguided impression that was going to calm the markets. Am I right?’

  Opitz didn’t reply. She avoided her aide’s gaze.

  ‘Well, I don’t expect you to tell me. There’s only one justification for letting out a threat like that, and that’s if you know something really bad.’ Ed paused, listening. His primary reason for making the call was to get the message across that a veiled threat to ban shorts – or anything like it, in case Treasury had plans for anything else as stupid – would achieve the exact opposite effect they wanted. But if Treasury did know something he didn’t, and he could find out about it, it certainly wouldn’t hurt.

  ‘Ed, I couldn’t possibly tell you what we know and don’t know.’

  ‘Sure. Well, if this did come from your department, and if whoever said it was trying to put a leash on the shorts, he’s had the opposite effect.’

  ‘Why do you think that is?’ asked Opitz carefully.

  ‘Susan, it’s the market. It’s the psychology. If you’re going to come out hard against us, you’ve got to do it right away. Threats don’t work. It looks weak. You show weakness and we’re going to rip your throat out just for the hell of it.’

  ‘Is that what’s happened?’

  ‘Partly. You guys have shown fear. Loss of control. Then like I said, some other people are going to be thinking, if this is actually serious, what do they know that we don’t? Better get in quick. I think that’s driven a wave of short selling through the market today that wouldn’t have been there if no one had said anything. Obviously I have no figures, so it’s just my assessment from looking at the way the market’s gone and from our own trading interactions. You know, I think if you guys want to put a floor under this you just sit back and let the market do what it does.’

  Opitz frowned. No one in her department had suggested the market would react like that. They had all managed to persuade themselves that the markets would see it as an indication of their resolve. Maybe there were other reasons for what had happened today. One thing she knew for certain was that Ed Grey wouldn’t be saying this if it didn’t serve his own financial interests.

  ‘Ed, I can’t talk about any interventions we may or may not be thinking about.’

  ‘I know that, Susan. And I guess it must be politically difficult for the president to let this ride with the midterms coming up. I thought his statement was good, but this thing has undone that and then some. Look, my take is that what’s been happening here for the past couple of weeks is just the market doing what it does. It’s no big deal. It’s just some people who have obviously decided there’s a little froth in there right now and so maybe it’s time to take that away.’

  ‘So you don’t think there’s anything fundamentally wrong underlying it?’

  ‘I’m not sure,’ said Grey. ‘What do you think?’

  Ed listened for Opitz’s answer, still hoping to find out if the Treasury knew something he didn’t.

  Opitz glanced at her aide, thinking.

  Suddenly she turned back to the speakerphone. ‘Have you been shorting Fidelian?’

  Grey laughed. ‘Wow. That’s direct.’

  ‘Ed, have you? Who’s lending the stock? Ed, who’s lending Fidelian stock out there?’

  ‘Even if I had been shorting Fidelian, what difference does it make?’

  ‘I’d like to know where the stock’s coming from.’

  ‘Does it matter?’

  ‘Yes. It does.’

  Grey was silent. This was interesting. Why did it matter where the stock came from? Normally, all that mattered was how much stock was being shorted, not who was lending it.

  ‘Ed. I want to ask you something. It’s not about what you’ve been doing, okay? It’s just about what you’ve seen.’

  ‘About Fidelian?’

  ‘In general. Is anything odd going on?’

  ‘Odd? Susan, I don’t think I get you.’

  Opitz hesitated. She had a meeting scheduled with the CEO of Fidelian and the president of the New York Fed for the following day and she hoped to find out what, if anything, was going on inside that bank. Right now, she had to be exceptionally careful in what she said. She couldn’t take the risk that Ed Grey would put some kind of rumor into circulation that would send another wave of selling through the market. Nor could she say anything that could later be interpreted as having given him an unfair advantage through insight into the thinking or concerns of the administration. It was safer, she thought, to say nothing.

  And yet Grey was in the market in a way that none of her officials or the officials at the Fed or SEC was. He would be hearing things that would never come anywhere near their ears.

  ‘Susan, do you want to tell me what you mean?’

  ‘Ed, is this just a bunch of Divvies trying to make a buck?’

  Grey laughed. ‘You tell me.’

  ‘Do you think so?’

  ‘Susan, come on, it’s never just the Divvies. That’s a myth. The market doesn’t move like this unless everyone’s in.’

  ‘When you say everyone …?’

  ‘The banks, the funds. Mom and Pop.’

  ‘Okay. Ed, what I’m really asking …’ Opitz paused again. She glanced at her aide, who was frowning. ‘You know, let’s say you’re borrowing shares to short the market. Who’s lending?’

  ‘I don’t know. Who always lends?’

  ‘You haven’t noticed any …’ Opitz was stumped. She wanted to say it. She wanted to come right out and say it: are you aware of any politically motivated sellers? Are you aware of any action taken by sovereign investment funds, and in particular the PIC? But she couldn’t be that explicit. Do that, and if Grey wanted to, if it served his interests, he’d let fly rumors about who the Treasury thought was driving this and they would be ripping through the markets by the time they opened again tomorrow morning.

  Grey listened to the silence. Opitz obviously had something in mind. He wondered what it was. He wondered how it would affect the way the market was moving.

  ‘So you haven’t noticed anything strange?’ said Opitz eventually.

  ‘Can you be more specific?’ said Grey.

  ‘No, it’s just a general question.’

  Grey waited, hoping Opitz would say more.

  There was silence.

  Eventually Grey spoke. ‘No, Susan. I haven’t noticed anything strange. I called because I wanted to tell you what I thought about Rosario’s report. I thought you should know what it looked like from out here.’

  ‘I appreciate it.’

  ‘Susan, my sense is everyone’s nervous. Everyone’s wondering whether we’re seeing something big here. Now, you and I will have our own opinions about that. But anything anyone says in the administration – you, the Fed, anyone – it has to be incredibly careful.’

  ‘We’re always careful.’

  ‘I know that. But I mean really careful. I’m in this market. I’m telling you, Susan, it feels like it’s tinder out there. Someone else says the wrong thing – it’s going to go up.’

  ‘What would help stop that?’

  Grey thought quickly. He was ready to close out his Fidelian position and take his profit. The way the market was moving was making him nervous. There was way too much uncer
tainty now. He wanted something to reduce that – and there was one thing that might do it.

  ‘Get Fidelian to preannounce their last quarter’s earning,’ he said. ‘That’s what everyone would like to see. They’re not due to announce until next month. Get them to bring it forward.’

  18

  SUSAN OPITZ HAD met Bill Custler previously but she didn’t really know him. As an ex-executive from the utilities industry, she didn’t know the Wall Street coterie like Jerry Rabin, the president of the New York Fed, who had spent all of his adult life either working with them or regulating them.

  She glanced at her watch. ‘Let’s get to the point, Mr Custler. What’s the situation?’

  They were sitting in Rabin’s office. Rabin was a tall, dark-headed man with slouching shoulders who always looked to be weighed down by the thankless task of regulating Wall Street. Opposite them sat Custler, a slim man of medium height with thinning grey hair and blue eyes.

  ‘You’ve got our filings,’ said Custler. ‘We’re compliant. Our capital ratio’s adequate.’

  ‘Just.’

  ‘Just is enough, ma’am.’

  ‘Let’s be frank. There’s a rumor you’ll be coming to the market for cash.’

  ‘I can’t confirm rumors.’

  ‘I think you’d better start. Or else you’d better be able to deny them.’

  There was silence. Custler glanced around uncomfortably.

  ‘We’ve been reviewing our loan book,’ he said eventually.

  Opitz leaned forward. ‘Mr Custler, what’s in it?’

  ‘As I said, we’re reviewing it.’

  Opitz glanced at Rabin, then looked back at the Fidelian CEO. ‘Mr Custler, I think you’re probably in a situation where you want to level with us here.’

  ‘Bill,’ said Rabin, ‘you really do need to tell us what’s going on.’

  Custler hesitated.

  ‘Mr Custler, you need to understand some realities. We’re ten days away from an election and the president needs to get this dealt with. It’s time to talk. You’re sitting in the last chance saloon.’

  ‘I’m way past the last chance saloon,’ said Custler.

  Opitz looked at him sharply. ‘What does that mean?’

  Custler took a deep breath. ‘There are some loans in the portfolio … A big chunk of loans. We’ve got some developing markets business that was a little bullish when it was written. As you know, this bank grew very, very quickly out of the financial crisis. The management back then had a philosophy to go very aggressive to get market share, especially to build its Asian business. Part of the reason I was brought in was because that was getting a little too much. That’s left a legacy. Some of the decisions back then weren’t great.’

  ‘How not great?’

  ‘Not great.’

  ‘You’re going to write stuff down?’

  Custler nodded.

  ‘A lot?’ said Rabin. ‘Don’t you think that’s something you should have shared with us? I talked to you, Bill. For God’s sake, I talked to you two weeks ago.’

  Custler looked at him apologetically. ‘Jerry, I’m guided by our chief compliance officer.’

  ‘Sounds like someone needs to have a word with your chief compliance officer,’ said Opitz.

  ‘When’s this writedown going to happen?’ asked Rabin

  ‘We don’t file our quarterly results for another month. I’ve been trying to set up a bond issue.’

  ‘Who with?’

  ‘Morgan Stanley’s the lead. The plan was to announce the issue at the quarterly at the same time as we announce the writedown.’

  ‘And?’

  ‘That was before our stock price headed south. The shorts are killing us. They’re just killing us. Now Morgan’s telling us they can’t underwrite us at these prices.’

  ‘Bill, how much capital are you hoping to raise?’

  ‘Twenty-three billion.’

  Opitz and Rabin stared at him.

  ‘Bill …’ said Rabin.

  ‘Twenty-three billion, Jerry. That’s what it is.’

  Susan Opitz sat back and took a deep breath. Rabin shook his head as if testing whether he was really awake.

  ‘Bill,’ he said, ‘you want to get all of this through a bond issue?’

  Custler nodded.

  ‘What about a rights issue?’

  ‘Our shareholders … I mean our major shareholders are not supportive of that idea.’

  ‘What about for a part of it?’

  Custler shook his head.

  ‘Will they take up a portion of the bond issue?’

  ‘At this stage, I don’t believe they will.’

  ‘Mr Custler,’ said Opitz. ‘I’m afraid I have to agree with Morgans. I can’t see you having a hope in hell of going to the market for twenty-three billion dollars with your share price down forty per cent in the last month and when your own major shareholders aren’t prepared to provide some kind of support as a portion of that requirement.’

  ‘Madam Secretary, I’m not disputing it. I can tell you I’ve had a few sleepless nights.’

  ‘Bill,’ said Rabin, ‘how bad is this? How much of this twenty-three billion do you absolutely have to have? What’s the minimum?’

  ‘That is the minimum, Ron. That just keeps us adequate.’

  ‘Jesus Christ,’ murmured Rabin.

  Bill Custler took a deep breath, as if relieved to have it off his chest.

  ‘And this is all from a bunch of developing market loans?’ said Rabin.

  ‘And some other stuff. There were a lot of bad decisions.’

  ‘Like what?’ demanded Opitz.

  ‘A whole series of things.’

  ‘Really? Like things that have miraculously reappeared on the balance sheet?’

  ‘Not like that. Not to my knowledge.’

  ‘Not to your knowledge?’

  ‘Look, Madam Secretary, I wasn’t CEO when those decisions were made. This goes back five, six years. I didn’t find out about the true state of this part of the business until long after I took over, and I’ve tried to deal with it in a way that doesn’t destabilize the bank. And I could do it. We can trade through this if we can raise the capital, and until the damn shorts came along we were going to be able to raise the capital and it was all going to be okay.’

  ‘Twenty-three billion?’

  ‘Morgans said they thought they could do it. But now we’ve got the shorts on us and these rumors are going around and I don’t know where they’re coming from–’

  ‘Does it matter?’ demanded Rabin. ‘Bill, none of the rumors are as bad as the truth.’

  ‘Well, we were going to raise it, Jerry. It was going to be okay. Frankly, I don’t know where the drop in the share price came from because as far as I know there weren’t any rumors on the street until it started happening.’

  ‘Well, someone knew something.’

  ‘That’s right. It’s either from us or Morgans. I haven’t heard any realistic numbers mentioned so I don’t know how much anyone really knows but … yeah, someone knows something and they’ve been shorting us like hell.’

  ‘And you’re going to announce all this at your quarterlies?’ said Rabin.

  ‘I was going to. Now I don’t think we can hold out that long.’

  ‘I was going to say …’

  ‘We’re running out of cash. The rumor mill is killing us. Money’s flowing out the door. I got margin calls and I’ve got guys on the repo desk telling me they can’t roll our paper. You want to know what a nightmare is, you should come sit in on our credit meeting this afternoon.’

  ‘Bill, when you say you’re running out of cash, what are we talking about? Weeks?’

  ‘Days.’

  ‘Days?’ demanded Opitz. ‘You’ve got days left and you’re not talking to us.’

  ‘Yesterday I thought I had weeks.’

  ‘How many days?’ said Rabin.

  ‘Three. Four maybe, depending on how it plays out.’

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p; Opitz and Rabin stared at the CEO. His face was creased in misery.

  ‘I’m going to have to make a statement. I can’t keep holding out. Every damn analyst out there is demanding that I preannounce our earnings.’

  ‘A statement?’ said Rabin. ‘Bill, what the fuck are you gonna say?’

  There was silence.

  Going into this meeting, Susan Opitz had hoped that whatever was going on at Fidelian, it could at least be held back and the bank kept stable until after the election, which was ten days away. But this wasn’t going to keep that long. Even if he could withstand the pressure from the analysts to say something, if Custler believed he wasn’t going to be able to raise the money, he had a fiduciary duty to inform the market. This wasn’t going to keep until the election. It was barely going to keep until tomorrow.

  ‘I can’t believe you haven’t come to me earlier,’ said Rabin.

  ‘What can I say?’ said Custler. ‘Only yesterday, the day before, it didn’t look that bad. The shorts have been hammering us, absolutely hammering us.’ He looked up hopefully. ‘Why don’t you ban them like you said you would?’

  ‘That’s not going to save you, Bill.’

  ‘No.’ Custler shook his head a number of times, eyes gazing blankly at the floor.

  ‘If you make that statement, Mr Custler, that’s the end. No one’s going to deal with you.’

  Custler looked at Opitz helplessly. She wasn’t telling him anything he didn’t know already.

  ‘Mr Custler, you need someone to put in a big slug of cash or you need to sell this bank to someone who’ll take on the liability. Have you considered that?’

  Custler gazed at her.

  ‘Bill,’ said Rabin, ‘have you been talking to anyone?’

  ‘I’m not authorized to do it.’

  Rabin looked at him doubtfully. Wall Street CEOs didn’t necessarily like each other, but they knew each other. They all knew which firms they would consider partnering with if they ever got into trouble and which deals would be a non-starter. They also knew which major investment funds might be looking for an opportunity at any given time. If things were as bad with Fidelian as Custler said, Rabin would have been extremely surprised if he hadn’t been talking to a number of parties.