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.
Whatever Grey had done, whatever he had started, the markets had overwhelmed him and swept him away. But something had had to set them off. He wondered – not for the first time – whether it really could have been him, whether the plot he plotted in this very office with Boris Malevsky and Tony Evangelou could have been responsible for events of this magnitude, whether, had he not plotted that plot, none of this would ever have happened.
He thought about it, staring at the darkness outside his window. Then he picked up the phone.
THE SECRETARY DIDN’T get back to him until after midnight. Ed was in his apartment. He had said to call any time she had the chance, it didn’t matter how late.
‘Ed, I’ve got a note-taker on the line,’ said Opitz. ‘And I don’t have a lot of time. I’m sorry. You said you had something important to tell me. I assume this isn’t some kind of attempt to find out about anything we might have under consideration.’
‘Of course not,’ he said. ‘I know you wouldn’t tell me.’
‘Okay. It’s been a long day.’ Opitz paused and took a deep breath. ‘What is it?’
‘Susan, this is confidential, okay? I’m telling you this because I think as a good citizen I need to.’
‘What is it?’
‘It’s confidential.’
‘Alright, it’s confidential. As long as it doesn’t go against my legal duty as Treasury secretary to divulge what you tell me. What is it?’
Grey hesitated. ‘I started it.’
‘What?’
‘This. Everything. The collapse.’
There was silence for a moment, then Opitz laughed. ‘Ed, it’s very kind of you to offer to take the blame, but I’m not sure–’
‘Susan, we’re the ones who started shorting Fidelian. And a bunch of other banks.’
Opitz’s laughter had stopped. ‘Why did you do that?’
‘We had a hunch.’
‘Were you passed any inside information?’
‘Absolutely not.’
‘Be honest with me.’
‘We only knew what was publicly available.’
‘Were you acting alone?’
‘Of course.’
‘You couldn’t have had such a big effect by yourself.’
‘It was a big position, Susan. The more they went down, the bigger I made it.’
‘That’s still not enough.’
‘A bunch of other Divvies probably figured out what we were doing and joined in.’
‘Was this a coordinated raid? Is that what you’re telling me?’
‘Absolutely not.’
‘Did you start any rumors? Is that what you did?’
‘No! Susan, I did nothing illegal. We just had a hunch. Call it a lucky hunch.’
‘Then why are you telling me this? I’m not interested in your hunches.’
‘Because the way the president’s talking,’ said Grey, ‘the way you’re talking when I see you on TV, it’s like you think the Chinese started it. You think they had some kind of political plan. That’s not what happened. I had a hunch and I shorted Fidelian.’
‘Did you know it was on the brink of twenty-three billion in writedowns?’
‘No.’
‘Then what was the hunch, Ed?’
‘It was … it was a hunch, Susan. We did some analysis. We had a hunch there were a bunch of banks that probably weren’t as strong as they looked and were overpriced. I didn’t expect any of them to go bankrupt.’
‘Not even Fidelian?’
‘No.’
‘Do you know anything about the process by which Bill Custler decided not to take the rescue offer?’
‘No. I’ve never spoken to Bill Custler in my life.’
‘From some other source?’
‘No.’
‘So what you called to tell me,’ said Opitz, ‘is that the origin of this crisis doesn’t lie with the PIC or the Chinese government, but with you. With a hunch you had that you could make some money by shorting Fidelian? Is that it, Ed?’
‘That’s right.’
‘That’s a hell of a story, Ed. Maybe one day you could write a book about it.’
‘Susan, it’s true.’
‘I’m not saying it isn’t. What does intrigue me, Ed, is why you thought you should tell me.’
‘Because it shows it’s not a political crisis. There isn’t any big political conspiracy here. That’s not how it started. It started with someone – me – taking a bet. It’s what happens every day. It’s the markets.’
There was silence for a moment, then Opitz started to laugh.
‘What? You don’t believe me?’
‘No, I do, Ed. I do.’
‘Then what’s funny?’
‘You are. Calling to tell me. Where have you been, Ed? Don’t you know what happened today?’
‘Of course I know what happened today! Hell, Susan, my fund’s falling apart in front of my eyes.’
‘I’m sorry, but–’
‘Suspend mark to market! For Christ’s sake, Susan, suspend mark to market and let some of us survive.’
‘Is that what you rang to tell me?’ demanded Opitz angrily.
‘No! I rang to tell you that I started it. I rang to tell you it isn’t political.’
‘It is now. Ed, it doesn’t matter how it started. Don’t you get it? That doesn’t matter any more.’
‘Then what are you going to do?’
‘Wait and see.’
‘For God’s sake, Susan, I’m telling you what to do. Suspend mark to market! Suspend it now!’
Grey was desperate. He was down on his knees. Literally, in his apartment, the phone shaking in his hand. This wasn’t what he had rung to say but it burst out of him. It was his only chance of survival. ‘Suspend it, Susan! Suspend mark to market!’
Opitz listened to him in distaste. Grey was sobbing.
‘Suspend it. Please! Please! For God’s sake–’
‘We’ll do what we have to do,’ said Opitz, and she put down the phone.