“That’s just one Fed deposit transaction,” said Lee. “It took me a week to run it to earth, and when I did, it was back in the Fed. We believe there are many more such discrepancies—and it seems they’re being caused by one of our systems here.”
“Which one?” I asked, as if I didn’t know.
“The interface to the Fedwire system—a part of wire transfers.”
“I see. Unfortunately, I’m no longer in charge of those systems, Lee,” I told him. “I left that department months ago.”
“Yes, we know,” he said, then looked at his hands in his lap. “But we understand you’ve just completed a study of security on all major systems. I thought … we thought you might have some findings that could help us out.”
I’ll just bet the subject of my study had been bandied about in the audit department. Not to mention the fact that the report had been suppressed.
“I’m afraid I’m not yet empowered to release that information, Lee,” I told him. “Have you a clue how much money we’re talking about?”
“For the last week of January alone, about sixty million so far. Of course, that’s peanuts compared with our reserve balance, but there may be even more. Those correspondent accounts through which the money was moved have thousands of transactions a day, and we have to go through all that by hand.”
“Wow, I had no idea! No computer aids for audit,” I said. Better and better. “My sympathies are really with you. I’ll tell you what—though I’m not supposed to share my findings with anyone yet, no one said I couldn’t personally look over those findings myself, in private, with your specific problem in mind. After all, it might be the Fedwire system that screwed up, and not our interface—then we wouldn’t be involved at all.”
“Gee, that would be great,” Lee assured me. “It would save us loads of time in audit, if we could just pinpoint how the money could get scattered like that.” He stood up and gave me his hand.
“Oh—and Lee,” I said when he reached the door, “you haven’t discussed this problem with Kislick Willingly—have you?”
“Not yet,” he said, looking wary. “You were the first one we’ve come to.”
“That’s okay. I know they’re his systems now, so he should be informed—but perhaps it’s best not to alarm anyone just yet, until we’ve learned what the problem is.”
This tiny seed of doubt about Kiwi would surely grow like wildfire in the fertile neuroses of the audit department. Auditors were by nature suspicious—or they wouldn’t be auditors.
I had a lot to tell Lee Jay Strauss when I was ready. But auditors always worked best when you gave their natural mistrust of humanity time to propagate on its own—like mushrooms—in the dark.
FOREIGN EXCHANGE
A dime for the bank, a penny to spend.
—John D. Rockefeller
WEDNESDAY, MARCH 3
Pearl was going for her morning constitutional along the quay at Omphalos. Across the sea lay the sunny coast of Turkey. She was glad this island they’d bought looked better than it had in the catalog photo. The sea glittered turquoise in the sun, little brightly colored caïques bobbed in the water, and healthy-looking young Greek boys cleaned their nets over big wooden racks down at the wharves.
Until six weeks ago, when she arrived here with Lelia, Pearl hadn’t been involved in this caper at all—not really—except to give moral support and warn her friends of impending trouble. But now that she’d let herself be bulldozed into coming to the island—now that she was a full participant—she saw things differently. And what she saw, amazingly enough, was that most of this so-called caper wasn’t even illegal!
Okay, it was against the law to counterfeit securities. But neither those counterfeits nor the real securities they’d exchanged them for had ever been turned into cash! In essence, using them as collateral was no different from using the title of your car to secure a loan—when you knew you’d driven it off a cliff the night before! You still had a valid piece of paper that said you owned the car. And if you paid off the loan with interest, no one would be the wiser and everyone might benefit.
So they bought a piece of rock to which no country had laid claim in fifty years; they declared sovereignty (though—as Tor had learned—there was no international court to which one must petition for the sovereignty of a piece of unclaimed land!); and they turned it into an international tax haven.
Pearl herself had done the econometrics and the setup single-handedly, requiring that any business done here on the island—if they wanted to receive the tax-free seal from her—must be conducted in the “local currency,” and she would decide the rate of that currency against the others, taking her profit margin against the market. It was just like the retail FX business, where you changed money at an airport and their fee was built into the exchange rate—something Pearl did every day for the bank. Then, with those profits from her fees, she “took positions” in the world currency market each day, to increase her earnings—wholesale FX trading—the other side of the same coin.
But none of this was illegal, except the initial counterfeits they’d made. Even so, as long as those fake securities in the vault were believed by everybody to be real, the rightful owners still derived full benefit of their use as well!
The advantage to Pearl of joining this caper was that it was worth more than ten lifetime careers at any financial institution. Now she’d set up an economic system for an entire country—and a profitable one, at that. She was the Fed and the SEC, the treasury, Fort Knox, and all the mints and banks and brokers rolled into one! She wouldn’t have to look hard for a job, with references like those—but perhaps she wouldn’t need one. If they kept this island business going long enough to pay back all those loans with interest, she didn’t see why they couldn’t stay on an extra month or two and rake in a few more millions for themselves—and at no cost to anyone at all!
Pearl paused to survey the scene as she did every morning, took a deep breath of sea air, and descended the stone steps to the harbor. The young Greek fishermen stopped working and waved gaily as she passed. She headed down to the dock. The morning boat had just arrived from the mainland, and she picked up her usual batch of newspapers, which she threw into a big woven basket over her shoulder. Then she went along the quay to the sailors’ pub for a cup of coffee.
She was on her second cup and third newspaper when she found it. She sat there a moment without breathing, then took a red pencil from her bag and circled the ad. Cursing softly to herself, she gathered the scattered newspapers, threw some money on the table, and hurried out of the restaurant.
She climbed the hill and went along the cobbled street to the sail makers’—a barnlike structure that Tor had purchased as their headquarters. Entering the dark main floor, she nodded to the Greek boy who served as receptionist, handyman, and guard. Then she climbed the rickety stairs to the next floor. Without knocking, she threw open the door of the first room on the left.
“Read it and weep,” she told a surprised Tor, tossing the tattered, two-day-old copy of The Wall Street Journal on the desk before him. It was folded open to the notice she’d circled in red.
He glanced at it quickly; his face became grave.
“So they’ve exercised their call option to pay off these bonds,” he said. “What’s the face value of what we hold of this issue—and how many banks is it scattered in?”
“Hang on to your hat,” Pearl told him. “We have to come up with twenty million—right now—to cover these bonds. These that have been called are securing our loans in half a dozen French banks, and one in Italy. That’s the money you used to buy this lovely island. If we can’t cover those loans, and they find out about the fake duplicates in the vault, we’re going to have plenty of time in prison to remember how charming—but brief—a time we spent here.”
“I’m surprised you haven’t earned that much in profit already,” said Tor with a smile. “You’ve been trading currency for six weeks, here in a tax-free haven. And
you are, after all, one of the top FX traders in the world.”
“Who told you that?” snapped Pearl.
“Why, you did, my dear. But I’ve anticipated this, and I know how to raise the money quickly without jeopardizing our freedom or asking our California friends to bail us out. If we handle it right, I might even wind up with enough cash left over to win my bet!”
“If you think I can pick up that kind of cash by peddling my body to those boy sailors down there—it won’t even get us bus fare home,” said Pearl. “What did you have in mind?”
“Something more pragmatic—though perhaps less interesting, from your viewpoint,” he told her with a smile. “In fact, it’s been part of my plan from the very beginnings—we just need to change the schedule by a week or two. My dear, I think it’s time to sell our little country.”
FRIDAY, MARCH 12
The Vagabond Club sat, dripping in ivy and nostalgia, on the steep-curved lip of Nob Hill in San Francisco. Just off the harlequin-marbled entrance hall lay the vast reading room, its beveled windows overlooking Taylor Street’s hurtling descent to the Tenderloin. Here in the silence of the reading room—with its Prussian-blue-and-peach carpets, massive library tables, dark wood wainscoting, and French oils from various Paris exhibitions—the warm aura of nineteenth-century San Francisco still existed.
Downstairs in the Red Room, place settings for one hundred had been laid; the Waterford candlesticks sparkled, the bone china shone in the dim romantic light, and dark red roses, the color of blood, were thickly clustered in crystal bowls at the center of each round table.
In the adjoining room, behind heavy double doors, the gentlemen, dressed in black tie, were having cocktails and waiting for the announcement of dinner. They were men of every profession, from countries all over the world, but they all had two things in common: They were members of the Vagabond Club; and they had earned it. Whether through family connections, great wealth, or the prestige of personal power, each man in this room had paid his dues.
When at last the massive doors were thrown open, they filed into the dining hall and found their places. Seating arrangements had been prepared with customary discretion: those with the most lavish titles, positions, or bankrolls sat at the main table, with pecking order defined by relative proximity to them. A podium stood near the front, for the after-dinner speeches.
A light course of Scottish salmon—preferred by club members to the less costly Nova Scotia—was followed by the chef’s famous roast duck. The salad was served after the entrée, in club tradition, and the cheeses were followed by a course of sweets.
When at last the coffee arrived, the first speaker, a British banker, took the podium. He waited until the room had quieted, then tapped his microphone a few times to be sure it was adjusted properly.
“Gentlemen, this is indeed a momentous occasion,” he began. “As you know, it is the tradition—the unbroken rule—of this club never to mention world affairs, politics, or business here within the hallowed walls. We are Vagabonds, and proud of it—despite the fact that our membership rolls have listed more ambassadors, royalty, U.S. presidents, board chairmen, corporate founders—in short, more blue-chip and blue-blood men—than any private association in the world!
“So, in keeping with that one inviolable club rule never to discuss the sordid daily traffic that greets us outside these walls—I suggest instead we raise our glasses simply to toast the launching of the new and exciting venture we in this room are all aware of—the eve of whose inauguration we’re foregathered here to celebrate—the dawn of whose—”
“What are you trying to say, Paul?” someone from a nearby table said as everyone laughed.
“Let’s toast our new enterprise,” said the banker, laughing as well.
A tinkling of wineglasses was heard. The waiters replenished the wine, then discreetly left the room.
The British banker was replaced at the podium by Livingston—speaker of the evening, and head of a worldwide petroleum conglomerate.
“Good evening, good friends. I believe you all know me—I’ve been a member of this club since I was twenty-five, and I’m a few years older than that now!” Light laughter. “My father and grandfather were also Vagabonds; the men of our family have considered the club a second home—often more friendly and familiar than the first!” Throaty chuckles and nudges in the crowd as Livingston continued.
“But in all my decades of membership, I’ve never felt the pride I feel at this moment, standing before you. For gentlemen, tonight we christen not only a new enterprise, but a new way of doing business—a bold venture into the future.
“When we set forth upon this sea, we lift our chains and leave the past in our wake. Should we fail, perhaps history will malign us. But if we succeed—yes, if we succeed—she’ll crown us with the laurels that are our due. Therefore, it’s not just a business venture—but an adventure. Our fraternity pitches its fortunes together and casts the lot—leaving a proud legacy to posterity, opening a new book in the history of money, and inscribing our names on a fresh new page of history!”
The members were on their feet at once in a storm of applause, crying “Hear, hear!” as they rang their glasses and pounded the tables. When the storm died down, Livingston continued.
“The members who set up this venture—who put the financial deck together and raised funds from those in this room—are sitting here among us. But if I started thanking everyone, we’d never get out of here sober!” Huzzahs and whistles. “So stand up, gentlemen—you know who you are—and take a bow.”
A dozen men stood beside their chairs. They were greeted with thunderous applause. When they resumed their seats, Livingston added, “I hope you got a good look at them—so if this deal goes sour, you’ll know who to blame!”
Much laughter and slaps on the back to the bankers.
“Tomorrow our representative leaves for Paris to conclude the last stage of negotiation. If all goes well, he’ll be unloading a lot of your hard-earned cash. Once this negotiation is complete, our larger management team can head to Greece to assume control from the European consortium who set the business up. So by next week, gentlemen—with the help of God and a little money—we should be the owners of our own private country!”
The room was again pandemonium—men on their feet cheering, glasses raised aloft. As they started to file from the room to the lounge upstairs for after-dinner cognacs, a member caught up to one of the bankers Livingston had singled out earlier for praise.
“Well, Lawrence,” he said warmly, “you boys have certainly put this together cleanly and quickly. If you swing this Paris negotiation, we’ll all be a whole lot richer than today.”
“Profit is the name of the game,” said Lawrence as the two stepped onto the elevator.
“Yes—that’s what I wanted to ask you. Livingston told me it was your clever idea to force out these Europeans—whoever they are—the ones who own the island now. Something about a leveraged takeover?”
“It’s pretty much done, though they don’t know it yet,” Lawrence said. “They were asking a thirty-million-dollar fee over and above the asset value of their business. Our research revealed they had financed the entire operation—island and all—through loans drawn on numerous European banks. Yesterday, we bought up those loans.”
“You mean we—the club—are now their creditor?”
“By holding this paper,” said Lawrence, “we technically own their business. All they have to do is fail to meet one single payment, and we can pull the rug from beneath them completely. Under those circumstances, our spending an extra thirty million seems completely unnecessary to me.”
“Brilliant,” said his companion. “So your Paris negotiation will just involve their turning over the keys to you. By the way, where’s your new candidate to the club this evening? Kislick Willingly. I somehow expected he might be here tonight.”
“I’ve withdrawn his name from membership,” said Lawrence. The other glanced at him quick
ly, in surprise, for such a thing was never done. “After all, anyone might blackball him when it came to the vote. He needn’t know it was I.”
The dim elevator light glinted on his gold-rimmed glasses. His companion thought with a sudden chill that he’d never seen eyes quite so cold. The elevator stopped, and they moved to the lounge with the others.
“Why the sudden change of heart?” he asked Lawrence.
“He really isn’t one of us,” Lawrence said.
WEDNESDAY, MARCH 17
The rue de Berri angled like a narrow alley off the Champs-Elysées, only a short distance from the Arc de Triomphe.
On the top floor of a three-story building, about a block down the street, was nestled the exclusive private watering hole La Banque—the bankers’ club. In the corner of the main club room, across a sea of faded green carpeting, sat Tor, sipping a fizzy reddish drink and gazing out the window.
Across the street were the chestnut trees, unthawing after their long winter sleep. The stiff branches packed with tight red buds tapped gently against the boatlike windows of le bateau—Picasso’s old Paris studio. The late-afternoon sun coated its dingy windows in gold.
Tor glanced at his watch, had another sip, and looked at the door. A man in a dove-gray suit entered, glanced once about the room, and sighting Tor, crossed to his table.
“Sorry I’m late—don’t bother,” he said as Tor was about to rise. “What’s that you’re drinking?”
“Cassis and soda,” Tor replied.
“I’ll have scotch on the rocks,” he told the waiter who’d come up. As soon as the waiter had left he added, “Everything’s nearly wrapped up. We just need your signature on these papers, and the transfer’s complete.”
“Not quite,” said Tor, watching the cubes of sunlight reflect on the surface of the other’s gold-rimmed glasses. “There’s the little matter of payment, I believe.”
“I’m afraid not,” said Lawrence coldly. “You see, we’ve acquired your paper: all your loans are now in our hands. Technically, we own the island—the entire operation—already. You may repossess your collateral when you sign these papers.”
A Calculated Risk Page 28