End Game (39 page)

‘So where does the uncertainty come from? It’s no secret that the collapse of Fidelian Bank took place in circumstances that were, to say the least, confusing. Inquiries are in train, both in Congress and within the Treasury Department, to understand the decisions that were taken by the Fidelian management in the days and weeks leading up to the collapse. The relevant law enforcement agencies are also looking into it. If there is even a hint of illegality in what was done, the full weight of the law will be brought against those responsible. But there is another question, and I want to openly acknowledge it. Were government-owned foreign investment funds involved in, or responsible in any way for, the decisions that were taken by the executive management of Fidelian Bank? And if so, was this involvement motivated purely by financial considerations – as would legitimately be the case with any investor – or was this involvement guided in some way by the ultimate owners of these funds, the relevant foreign governments, with non-financial motives?

‘Now, let me state this very clearly. The United States will not tolerate the manipulation of its markets for political purposes by any foreign government. We would view this with the utmost gravity as an attack on a vital interest of the United States. Now, let me also state this very clearly. I do not believe that this has happened. I do not believe that it will happen. We have already seen Prime Minister Peskarov of Russia state explicitly that in the case of Russian state investment funds, there is complete separation of the commercial management of the funds from the political process, and I thank him for his willingness to speak frankly on the matter and for his offer to cooperate with the Securities and Exchange Commission and other regulatory authorities should this be required. I am very confident that you will see over the coming days other governments whose countries also run large investment funds making the same commitment. I invite all countries whose state investment funds hold US assets to provide this assurance. Most importantly, I expect the countries with the largest such funds to take a lead in making their position clear.’

He paused to ensure the implication was noted.

‘In case they do not – and I think they will, but in case they do not – I have asked Secretary Opitz and the relevant authorities to look at developing a set of regulations that can be enforced to ensure there is no manipulation of our markets. This is no different in principle from the many measures that already exist to prevent market manipulation. We have strong laws and we take firm action against individuals and institutions who engage in insider trading, propagation of rumor, and other manipulative practices. If there is the possibility of a new form of manipulative practice, in this case from foreign governments, we will introduce new measures to stop it. We will cut it off. States with funds that do not provide an assurance that they are acting purely on commercial grounds – and I hope there will be no such states – should expect to see these measures enforced rapidly and vigorously against them.

‘Those are the remarks I wanted to make today. I will leave it to Secretary Opitz and Secretary Oakley to provide further clarification.

‘Thank you. I wish you all happy holidays.’

44

OVERNIGHT, NINE COUNTRIES
responded, as they had promised to do prior to the president’s statement being made. Saudi Arabia, the United Arab Emirates, Kuwait, Norway, Singapore, Libya, Kazakhstan, Australia and South Korea, between them holding sovereign wealth funds ranging from as small as $40 million in value to as large as $1.6 trillion – made statements denying political involvement in the decisions of the funds and committing to refrain from any such involvement in the future.

The press wasn’t impressed. A leader in the next day’s
New York Times
was titled
The Genie is out of the Bottle
. It argued that once political manipulation of US markets was even considered to be possible, the rules of the game had changed. Or to put it another way, the game had changed, and right now there were no rules.

The financial press speculated ominously about the new regulations the administration might introduce and whether they were about to see the end, at least temporarily, of the free market model that had served the United States since the birth of the republic.

The markets seemed to think they might. The flow of money out of stocks and company debt and into cash, bonds and gold gushed further as rumors swept across the financial sector about the changes the Treasury secretary would be introducing and the prospect of economic conflict with China.

And that was before the Chinese government, seven days later, finally broke its silence.

EVERYONE SEES AN
event from a different place. When the event is momentous, everyone has different memories of the instant they hear about it that will stay with them forever. For Ed Grey, the memory of this event would always be associated with the whirr of a running machine. As he did every day around 6am, on a cold, grey Monday morning in December, Ed Grey pounded the moving belt in his apartment, watching the Asian market report on CNBC.

His gaze became fixed. For a minute or so he kept pounding, and then his hand searched for the control, and he turned the machine off, still gazing at the screen. The whirring of the motor died away. The belt slowed and then stopped. Ed stood and stared.

Like just about every other Divvie in the past few days, he had chased the markets down, always looking for the floor that surely had to be there and always finding that it disappeared under his feet just as he put funds into the market again. Red River was down in just about every asset class it held. Securities, commodities, derivatives, developed markets and developing. Close on eight billion had disappeared, more than ten per cent of Red River’s value at its height, before Peskarov opened his mouth. That had gone to ten, then fifteen, then twenty as asset prices fell and the banks called in margin on a daily basis and he was forced to try to sell into a market where it was almost impossible to find a buyer.

He didn’t know where it was going to end. Unless the market turned around, the only thing that could save him would be a suspension of accounting rules, the mark-to-market requirement whereby the value of an asset portfolio was determined on a daily basis against current market prices. Just about every day there was a rumor that the Fed was about to announce it. Ed Grey didn’t think it would happen. It would be too good to be true. They had talked about that in ’08 but had never done it. He didn’t believe in miracles.

In 2008 people had talked about the end of capitalism, but Ed knew all along it was only the hangover from a very good party, one which he had the luck to leave early, and that sooner or later the party would start up again. This was different. Like everyone else in the market, he agreed with the line taken by the
Times
. The genie was out of the bottle and it was going to take a new bottle to put him back in. No one knew what that new bottle was going to look like, but the president’s statement left no doubt they were trying to design it. Would there be limits on stocks held by foreign investment funds? How would that be policed? What would the limit be? What was going to happen if a fund currently held stocks in excess of the limit? Would the funds abandon US markets entirely? What would it mean for liquidity if you took that amount of money out of the market? What would it mean for the prices of stocks you already held? Were the regulations going to be introduced at a stroke or were they going to be phased in? How would they be phased?

The questions were endless. Whatever the answers, they were going to be bad. At best they would represent a restriction of opportunity, at worst a horrendous degree of disruption which would take a lot of people down. Knowing the haste with which these measures were being put together, Grey had a hunch which end of the spectrum it was going to be. So did everyone else. People were getting out of stocks as fast as they could. There were sellers but no buyers, forcing prices down to ridiculous levels, forcing even more sales as people who hadn’t sold marked to market and were forced to find margin cash for the banks. Meanwhile, bond prices were soaring as investors transferred the funds they had been able to salvage into government securities. Grey himself was doing that as fast as he could. But if something hit the bond markets, he was going to lose another shitload of cash and there was going to be nowhere left to hide.

He was living from minute to minute, data point to data point, in a way he had never lived, not in the darkest days of the crisis in ’08 when even some of his own bets had gone south.

And now he stared at the screen, early on the cold, catastrophic morning of December 17, the December 17 that the markets – in the way of all great traumatic events since the World Trade Towers went down – would come to call 12/17, standing in his jogging shorts on a stationary running belt.

The report was coming from Shanghai. The remarks had apparently just been made by the Chinese premier, Liang Jianzhu, in a speech that he had given to a gathering of foreign business leaders.

The reporter was giving a summary of what Liang had said. Ed Grey couldn’t believe it. Didn’t want to believe it. He picked up the remote and went to another website, then another. It didn’t take long to find the actual footage being played. Liang, a man with a high forehead and brushed-back, jet black hair, stood at a flower-festooned lectern. He was speaking in English.

‘Now, let me refer to the speech that was made a few days ago by the president of the United States. It is clear that we are entering a new phase. The Chinese people have made investments globally with the proceeds of the people’s hard work as any prudent people should. The United States was very glad to receive those investments when it had a need for them. We only need to think back ten years when the government of the United States was desperate for money to stimulate its economy and went to the market with its bonds. There were very few people to take up those bonds except the people of China. But we did it. We only have to think back six or eight years when the corporations of the United States required new capital to return to growth, and their shareholders could not provide it. We provided it. But it is clear we are entering a new phase. It seems that the United States is no longer happy to have the investment of the Chinese people. It talks about introducing new measures. If that is the case, the Chinese people will take its investment back. Others can have the bonds and the stocks. It is a free, global market. The president of the United States should remember one thing. China is not only able to buy, it can also sell.’

The words sent a shiver down Ed Grey’s spine. An electric spasm of dread.

They echoed in his mind.

CHINA IS NOT ONLY ABLE TO BUY, IT CAN ALSO SELL.

Not only stocks, but bonds.

Feverishly Ed Grey clicked and clicked and clicked again. In front of him now were the latest prices from the bond markets. London, Paris and Frankfurt had been open for hours.

Down. Everything was down. Ten, fifteen, twenty per cent.

HE WATCHED IT
through the day, as bonds and stocks and every other asset fell. There was nowhere, it seemed, that anyone felt their money was safe but under their bed. By the end of the day Red River’s losses had extended from twenty billion to thirty. In ten short weeks since that cursed day when he listened to Boris Malevsky tell him that Fidelian Bank was going to raise some capital, the value of the Red River funds had halved.

His portfolio managers and analysts were disbelieving. They stared at their screens with wide eyes or furrowed, incredulous frowns. Apart from Tony Evangelou, not one had been in the business in the fall of 2008. Some of them hadn’t even been in college. They had never seen a day like this.

The world was on the precipice of an abyss and no one knew what was down there. All through the day announcements came out of the world’s central banks. It didn’t matter. No one cared what the central bankers were saying, how much capital they were pumping into the system, what guarantees they were offering. If the Chinese government was going to dump its holdings of US bonds, there wasn’t a single financial instrument in the world that would hold its value.

His people would be scarred by this, Grey knew. He had seen the effect last time around. No matter how tough they think they are, traders who have grown up in good times are never ready for their first big crash. Some would be no good for the business after this. Boris Malevsky sat silent, almost catatonic, barely responding to anything around him. Ed tried to keep up morale, the most important commodity at a DIV when the markets were tanking. Demoralized traders made bad decisions. He walked around the trading desk, put his hand on shoulders, pulled up a chair. ‘At least you’ll be able to tell your grandkids you lived through it,’ he told them. He even forced a smile. ‘The eye of the storm. We should get T shirts.’

There didn’t seem to be many takers.

When they left, they drifted out like ghosts into the night. Sell orders were in place in the unlikely event that a buyer turned up somewhere in the east. A couple of the portfolio managers were staying back with the night analysts to monitor the Asian and then European markets as trading moved west overnight.

Ed went back to his office. Tony Evangelou followed him in. They didn’t know what to expect the next day. All they knew was that they were going to keep bleeding, and the best they could hope was to staunch the flow wherever they saw it.

Red River was gone. Unless a miracle happened, Ed would have to sell anything he could just to pay the cash the banks would demand, wiping out not only what was left of six years’ accumulated profits of his clients but the principal they had put in as well. And his own. And even that wouldn’t be enough. When he had sold everything he could and the cash ran out, Red River would be bust.

Tony went. Ed stayed on, feet up on the desk in his office. Six years. Six years of tireless work to build Red River into what it was – and about six weeks to watch it disappear. It made him think of the stories you heard about the Great Crash, of people jumping out of windows. He glanced at his own window with a bitter smile. He went over things in his mind. Not just today, but the past weeks, the past couple of months. He didn’t know if it was exactly guilt that he was feeling. No, not guilt. The markets were the markets. Everything he had done was legal, or almost legal. One piece of insider information, surely, shouldn’t lead to this. The markets were in free fall, a stampede of utterly panicked beasts, and it seemed to have gone beyond them now. There was belligerent talk coming out of the White House, and the tone of the speech made by Liang – obviously deputed by President Zhang to deliver the message – had been equally hostile. During the day, a Chinese government spokesman was reported to have refused the opportunity to provide a less aggressive interpretation of the premier’s words.