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 the 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.’