Project Northwest (22 page)

“What are your plans for the weekend?”

“I’m flying home to see my daughter. I have
to return Sunday.”

“Where is home?”

“I was told not to give any details.” As a
mother, she wanted to tell him with pride her daughter, Madeline,
was a fourth grade honor student in Denver, Colorado. “Sure, I
understand. Well, we’re joined at the hip, so let’s go and see what
the professor has to say.”

They exited the data room and both collected
their cell phones from the lockers. James noticed he had voicemails
and checked the messages.

The first one was from a Lady Sylvia with the
Mystic House and he thought, at first, she had left the message to
the wrong number and almost deleted it until it registered that Sam
M.D. was Mark.

The second message was from Bridget, saying
she loved him, but the Seattle Seahawks and Duke Blue Devils
posters in the living room were coming down. He’d have to wait
until he had a man cave.

The third message was from the insurance
adjuster, Manuel Sanchez, ‘Mr. Spain, we are nearing the final
stages of your claim. We appraised a value of seventy-two thousand
for the 1969 Boss 429 Mustang. Unfortunately, your policy, number
00231419, has a property damage limit of forty thousand, so the
vehicle is considered a total loss. We will be sending you the
standard release package, along with a check. Thank you and have a
good day.’

“Love messages from Bridget?” Shelly
asked.

“Yes, I forgot I have a meeting with my
psychic today. Do you think we could skip lunch? And I’m only
getting forty thousand for my Mustang.”

Shelly’s phone rang. “Hello. ... Yes.
Correct. ... It’s a psychic, I guess. ... I will let him know.” She
placed her cell phone on her shoulder. “Mr. Wright wants to know
what is Sam M.D.?”

“Oh, it should be Sammy. I don’t book the
appointment with my real name.” The excuse had to work. Hell, he
just thought of it on the spot.

She brought the phone back to her ear. “Did
you get that? ... I will. Bye.”

She placed the cell phone in her purse. “He
said you can go, but I have to go with you and do not try to lose
them. He also said he’s sorry about the car.” She shook her head as
she relayed the message. “I don’t much like psychics. I can’t
believe you go to one, can’t we skip it?”

“I try to keep an open mind, Shelly. Would
you believe what’s happening to us if you weren’t living it? Two
peas in a pod, remember.”

James could see she wasn’t being persuaded,
so he quickly shifted gears. “She’s not that kind of psychic. She
deals in love and spiritual awareness.” He had no idea what it
meant, but neither did Shelly.

“Okay, but you owe me one, they really spook
me.”

They found a couple of seats in the middle of
the auditorium and politely clapped and shared in the can-laughter
when expected. The professor wasn’t your average economics
professor. He was fluid and didn’t mention many numbers in his
speech.

“Ladies and gentlemen, please help me welcome
Dr. Thomas,” announced Mr. Stone.

“Thank you, Mr. Stone,” Dr. Thomas said as he
removed the microphone from the podium and walked the floor.

“Tsunamis are ruthless, but not because they
are powerful forces of nature. They are certainly that, but because
they seem to strike instantly and always hit coastlines where
millions of people create homesteads, raise their families, and
live off the resources of the sea. Tsunamis are natural weapons of
mass destruction and I don’t think anyone would disagree.

“There are manmade tsunamis, too. Financial
mechanisms that quake somewhere in the remoteness of a deep black
sea we call economics, Wall Street. Take your pick of the cause of
the quake and most have set their sights on the burst of the
housing bubble, but that was only a ripple. The true cause of the
tsunami, I believe, hasn’t arrived yet. Derivatives such as credit
default swaps or CDS’s. Let’s be clear, if a housing market value
falls, there are still assets behind the loans. Sure, the asset
decreased in value, but there is still an asset, only the home
owner is going to lose in the bet or only the bank. The event is
somewhat isolated.”

He paused and put up one of only two slides
he had loaded into the presentation. It showed the increasing trend
of CDS’s from 1998 to 2008. It was a startling trend. Credit
default swaps, originally created by JP Morgan Chase in 1995, had
increased 100 fold from 1998 to 2008.

“I want to do a simple demonstration of a
simple CDS deal. Just bear with me, as I’m sure most of you have a
very good understanding. But I see some bored faces and a couple of
confused faces. I can’t help if you’re bored, but I can possibly
help those who are confused.”

“In its simplest form a CDS is a bet, no
different than pulling up a chair at a roulette table. In my hand,
I hold a hundred dollar bill. I’m going to loan this to this
gentleman for eight percent interest.” He handed the bill to a bank
auditor in the first row, who pretended to pocket it.

“I have the serial number,” the doctor joked
and the crowd politely laughed.

“This gentleman looks trustworthy enough and
I know he has decent credit because I checked, but I want to buy a
little insurance in case he goes broke, so I talk to her.” He
placed his hand over the young lady sitting next to the
auditor.

“Hey, this guy owes me one hundred dollars.
Can you insure the debt for me? She says, ‘sure, if you pay me five
dollars,’” Dr. Thomas said in a woman-like voice.

“Deal. As the original lender, I’m in a good
spot. I have an insured loan, a contract—a guarantee between me and
him, and now a guarantee from her. Because I have two guarantees to
pay, the credit agencies rate my loan books very high. Nothing
wrong so far, right?” The crowd already sees the possible downfall
in the deal and begins to murmur.

“Now, she’s a business, so I don’t check her
like I did the first guy. I use a ratings agency and the agency
states she is good for the hundred. But it’s a big risk, right? She
accepted five dollars to pay a hundred dollar debt in the event he
defaults without checking him out. As long as nothing goes wrong,
she will make money hand over fist, but she has no true asset
leveraged against her position and even though a deal is made—if
she goes bankrupt, well, I’m okay, I guess, unless he goes
bankrupt, right?”

The audience quietly agreed.

“Wrong, credit agencies rate in two ways. She
gets into financial trouble.” The crowd booed and the young lady
sank into her chair.

“It happens, and the credit agencies demand
that she raise cash to cover debts or they will downgrade her. She
can’t raise cash because she’s made this same crazy bet over and
over with many companies. She goes bankrupt. Sure, some of the five
dollars she collected over the years found its way to a reserve
fund of some sort, but much of it is paid out as salary and huge
bonuses. The credit agency looks at my books and says, ‘Hey, you’re
no longer insured. Get insured or we will downgrade your rating.’ I
can’t get insurance and now it costs me more to manage my loans and
I’m losing money or just barely breaking even. The entire deal
unravels, with no one in a position to pay when he goes bankrupt,”
he continued, pointing at the auditor with the hundred dollar
bill.

“Of course, a credit default swap is much
more complicated than that, but the demonstration illustrates the
basic idea behind it. But wait, there’s more, to rob the common
catchphrase of info commercials. It gets worse. She’s just a single
insurer; others, investment banks and insurance groups, seeing
there is easy money to be made, package up her debt with thousands
of others and sell the packaged contract on the CDS market.
Eventually, every number on the roulette table is covered with all
the players hoping the wheel never spins. Hoping the little white
ball never drops, they’re hoping the game is never in play.
Thirty-five of them are going to lose and lose big.”

He collected his hundred dollar bill from the
auditor, who pretended to hold snugly to it, and made his way back
to the podium. He clicks the remote to bring up his second and
final slide.

The slide contained only two bullet points:
Debt covered by CDS contracts estimated to be between 33 and 47
trillion dollars. The second bullet point was astonishing: Total
over-the-counter (OTC) derivative notional value is in the
neighborhood of 600 trillion dollars.
(Notional value is the
face amount of a note and normally doesn’t change hands.)

Dr. Thomas paused, then placed his hand on
the remark in parenthesis. “I’m not certain the notional value of
six hundred trillion is correct, but the scary thing is that I
can’t prove it’s wrong. We’re all in finance here and we know
financial systems shouldn’t have this type of anomaly, if one could
call six hundred trillion an anomaly. This, my colleagues, is the
wave rushing out.

“To continue my tsunami analogy, when a
tsunami rushes to the shore, the first to perish are the onlookers,
those at the shoreline watching the initial wave go out. These are
your average moms and dads, shareholders who’ve invested for the
future: college funds for their kids, retirement, et cetera. Let’s
be honest, they will not stand a chance when the tsunami hits, when
the wave rushes in.

“It will destroy all the homes and businesses
along the shore. In a matter of seconds, millions of people will be
homeless, and businesses, employers, will simply disappear, the
economy will crash. That’s the mom and pop industry, the core of
many countries. This, of course, will put the government in a
panic, a panic that will ripple through communities and economies,
and the government will react as it always does, in misguided
attempts and ineptitude.”

Dr. Thomas walked back to the center of the
stage. “What happens when a government panics? They seek experts.
Usually, the same experts that got us into the mess to begin with,
the ones who caused the problem are put in charge to fix it. This
is not only idiotic because of the obvious, it’s poor judgment
because these CEOs are well-connected and run in deep circles of
cronyism. Cronyism rears its ugly head like the diseases that
ravage the survivors of the tsunami. If you think cronyism isn’t in
play, just look at the inconsistencies in the treatment of banks,
investment banks, and insurance agencies since 2007.”

Dr. Thomas saw Mr. Stone off stage, pointing
at his watch. “I can see Mr. Stone is calling time on me.”

He placed the microphone back in its stand
and tapped it until a little feedback could be heard. When he was
convinced he had everyone’s attention, he continued, “The tsunami
is coming, ladies and gentleman. The initial wave has gone out,
don’t get caught at the shore gawking.”

The room erupted in genuine but reserved
applause as Dr. Thomas shook Mr. Stone’s hand and made his way to
the side of the room where his book table was set up. He was
selling a self-published book called
Financial Tsunami: Initial
Wave.

James and Shelly made their rounds, ate a
little cake, and made their way back through security to begin
their fifth day of criminal espionage, knowing Dr. Thomas was more
right than wrong.

Chapter
Eighteen

~ Lady Sylvia ~

James waited near
the doors of the bank lobby as Shelly purchased a caramel
frappuccino from the plush Starbucks. He was starting to get
anxious. He had no idea what Mark was up to and the moment was
quickly approaching. He considered not going and questioned that if
Mark knew the danger he was in, he would realize there was a lot of
danger if Mr. Wright sniffed out what was happening. He’d already
told James it was his third strike, and then there was the risk to
Shelly and her daughter, not to mention Bridget. James was having
some serious second thoughts.

“These are so good,” Shelly said as she
slurped the coffee and caramel mixture and met James at the
door.

“You know what? I don’t think I’m going to
go. I think I’ll just skip it this time. Why put us at risk?”

“What risk? Mr. Wright said you could go.”
Her words were thick from the cold drink.

“I know, but I think I’ll just skip it.”

“No, let’s go. To be honest, I’m kind of
intrigued by the whole thing now. What does your instinct tell
you?”

“It’s screaming
‘don’t go’
.”

“Well mine is saying
‘go’
, and a
woman’s instinct is more accurate than a man’s.”

“Really, and how is that?”

“Simple, women have better empathic
ability.”

“I don’t buy that for a minute. Not even sure
what that means.”

“See, I knew you would say that. Let’s just
go, it will be interesting.”

“Okay, but don’t be surprised if I change my
mind as soon as we’re there,” he said as they exited the
building.

“I could use the walk anyway. Caramel is
delicious, but it’s not exactly skinny food. Plus, I feel like I
need to see her for some reason. Who knows, I might get my palm
read after you.”

“You know the area is haunted, right?”

“No.” She stopped in mid-step and froze.

“Come on, I’ll tell you about it. You’re
right, this is kind of fun.”

The sky helped set the mood with a slight
overcast as they leisurely walked and James told her the tale he’d
heard during a Halloween ghost tour the year before.

“Post Alley has a chilling history and is the
subject of narration on several ghost tours, especially in the area
of Seattle’s Pike Place Market. Many locals swear the area is
haunted with the mortuary ghosts of children.”

Shelly was scared, but wanted more.

“Bridget likes to be scared, too, and I’ve
basically memorized the story.”