Chapter Seventeen
~ Bonfire Fridays ~
Bridget was up before James. She made him his favorite: scrambled eggs with vinegar and garlic, and a couple pieces of bacon with toast. She poured his coffee and gently shook him, “Wake up, baby, today is a new day.”
“I’m up, it smells good,” he said as he stretched his arms over his head.
“What does, breakfast or me?”
“Both, you smell delicious, but you know a man loves his bacon,” he said as he sat up in bed and watched her exit the bedroom.
“They should make a perfume that smells like bacon, it would be a hit,” he shouted.
“Gross. Get up. I have to take you to work and I want to finish unpacking today.”
“I’m up.” James took a shower, shaved, and examined the two cuts in the mirror. They were all but healed, the swelling was gone, and the wounds’ edges had pulled together and now were a sliver of light pink. The black eye was all but a memory. His lip had healed nicely.
“I think I’m going to have two scars,” he said when he sat and savored his eggs.
“Let’s see,” Bridget said, examining him. “Yes, they will be small, though, and women like a man with a few scars,” she said as she softly kissed each one.
“They do?”
“Sure, small ones, though, not anything big or gross. They make you look tough and sexy.”
“I’ll never understand women.”
“That’s our plan, you know, we have secret meetings just to keep you guys on your toes. Don’t forget today is cake day.”
“Damn, I forgot, and it’s my turn to bring the card. Where can we get one this early in the morning?”
“I already have it. It’s next to your cell phone on the nightstand. Okay, let’s get a move on,” she said as she cleared his empty plate from the table.
“You got the card for me? This couple thing might work, after all.”
“You better quit playing. I love this couple thing and I love you, scars and all.”
“I love you, too.”
He collected the Seattle Times from the hallway and quickly checked the personals while drinking his coffee. There was nothing from Mark. James felt a sense of anguish, but persuaded himself that Mark would contact him when he had something.
* * * *
James stopped after he crossed University, turned, and waved to Bridget.
She responded by blowing a kiss. This is how my mornings are going to be for the rest of my life, he thought, and it was wonderful. He made his way into the building, found Mr. Stone, and presented the card. The card was quickly circulated through the data center and found its way to Shelly.
“Is it cake day?” Shelly asked. It seemed every professional was familiar with the concept of cake day. It was the last Friday of the month and that meant a number of things. It was a bonfire of birthday candles on sheet cakes for anyone who had a birthday during the month, the well-deserved public congratulations to anyone who was promoted, and it was the day the guest speaker arrived to push the company line.
Sometimes, the guest speaker was the corporate type, selling the power of 401K plans and safe money investing. Every once in a while the guest speaker would be a local politician speaking for the mere purpose of a photo opportunity. But today, they had a professor of economics, and he apparently had something to say, as everyone was strongly encouraged to attend.
“Do we have to attend?” Shelly questioned.
“Yeah, I think we do. With my recent promotion, I think it would be frowned upon if I didn’t go. You can stay here, though.”
“You know wherever you go, I go.”
“Right, two peas in a pod. You look better today. Did you get some sleep last night?”
“Yes, for the first time in a week.”
“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.