Standing in front of the Federal Reserve Bank of New York, pedestrians flowing around him on the broad sidewalk, traffic heavy as usual for this time of a workday, the title “secretary of the Treasury” kept popping up in Spencer Nast’s head.
His name had been mentioned by the president, but he didn’t want the job. Never had. Too much politicking for his tastes. But Don Pennington, president of the New York Fed, was just the opposite, and in Nast’s opinion the bastard was nothing much more than a cheese brain.
The bank was just a short distance from the exchange, and pausing in front of what had become an iconic structure—it was the bedrock of the American economy—Nast had to congratulate himself. He was a White House insider. A man of even more financial importance than Reid Treadwell.
In his days as the chief economist at Burnham Pike, he’d already been well known in the financial world. Almost a superstar even then. He had appeared on a weekly basis on CNBC, and reporters from The Wall Street Journal, Forbes, and a dozen other print-media outlets had come to him for his opinions.
And now as the chief economic adviser for the president of the United States, his celebrity had expanded almost to the moon and back. He was famous, and he loved every minute of it. No longer was he just some schmuck from Jersey, he was the right-hand financial man for POTUS.
The Federal Reserve was the world’s most powerful bank; it was a government institution that rode herd on the nation’s money supply and worked to keep the economy on a good footing.
Other central banks, like China’s PBOC, were little more than knee-jerk extensions of the country’s rulers. On the other hand, the Fed was independent of the White House because its decisions were supposed to have nothing to do with elections.
The Federal Reserve was based in Washington, but there were twelve regional banks, and the New York branch was the largest and most influential of them all. New York was where the country’s monetary policies were conducted—for the most part, trading Treasury bonds and dollars, and setting interest rates. The Fed’s policy makers in Washington made the decisions; New York carried them out.
Looking up at the neo-Renaissance pile of limestone blocks, its windows protected by wrought-iron grilles, Nast almost had to laugh. Besides being the beating heart of the world’s money culture, the edifice also harbored the world’s largest depository of gold. Far below street level, behind a nine-foot-thick door, was the New York Fed’s vault, which held bullion bars worth a quarter of a trillion dollars.
It was one of the reasons why the building, which had opened in 1924, had been designed to look like a fortress; a physical statement that the American economy rested on a solid foundation.
And yet the place was as fragile as a sand castle. Just about every man, woman, and child on the planet was about to find that out after the opening bell tomorrow.
Secretary of the Treasury. Nast couldn’t get the thought out of his head.
Inside he was met by a young man in a blue blazer. “Good morning, Mr. Nast,” he said. “Mr. Pennington is expecting you.”
The ornate arched hallway was busy with people, most of whom turned their heads as he and the kid headed to the bank of elevators. In one of the cars, another young man in a blue blazer waited to escort the Washington man to the top floor. No one here was going to make the president’s economic adviser wait in some anteroom.
Upstairs an attractive young receptionist opened the door to Pennington’s inner office. “Good morning, Mr. Nast,” she said brightly. “Mr. Pennington will see you now.”
Nast nodded, and he could imagine exactly how Reid would react to her.
Pennington got up from behind his expansive leather-topped desk and came around to pump Nast’s hand, his smile as pompous as his silver-streaked hair and five-hundred-dollar haircut.
At Yale he’d been the rush chairman at Alpha Delta Phi, one of the most exclusive fraternities on campus. They had turned down Nast, who’d been an awkward, ugly kid on an academic scholarship.
“Will we be seeing you and Mildred at the thirtieth?” Pennington asked. “We Elis have to stick together.” Mildred was Nast’s wife.
“I wouldn’t know, Don,” Nast said, his tone even. “I was too busy studying to socialize much.” He’d graduated summa cum laude, while Pennington had skated along with gentleman’s Cs. “Reunions aren’t my thing.”
“You were always our academic star,” Pennington said. “And look where it’s taken you.”
He escorted Nast over to a pair of Queen Anne chairs that everyone knew came from the Pennington family mansion on Philadelphia’s Main Line.
“Not to Alpha Delta Phi.”
“Our mistake, for sure, Spence,” Pennington said. “Now, what brings you over here this morning?”
“This isn’t about me, Don, it’s about you. Word is that you want to be the next Treasury secretary.”
“I’ve thought about it, but Bob Nichols has been doing a bang-up job down there. And to tell the truth, I’m happy right here.”
“Nichols has told the president that he wants to step down at the end of the year. And naturally your name came up.”
Treasury secretary was on par with the chairman of the Fed, Pennington’s boss. It was a quantum leap above the president of the New York branch.
“That’s interesting,” Pennington said, his tone nonchalant. “I’m a fan of President Farmer, of course. A fine fellow. I’ll mull over the idea.”
Nast was irked. The bastard was up for a major promotion—to top dog in the financial world—and he was being cagey. It was as if he were saying: Naturally I deserve it, but I don’t know if I want the bother.
“I brought your fucking name up, it wasn’t the president’s idea,” Nast said. “A simple ‘thank you’ would be appropriate.”
Pennington blanched. “Sorry, Spence. I mean it. I was just taken aback, is all. Of course I’d consider it an honor just to be mentioned.”
“Of course it is,” Nast said, setting the hook and yanking on the line. “But you gotta earn it, Don. Play ball with us, and the job is yours.”
Pennington’s left eyebrow rose. “I don’t know if I understand exactly what you’re saying.”
“Saving this nation from the debt bomb.”
“You’re talking about the PBOC.”
“What else,” Nast said. And he was tempted to add: You overbred asshole.
“I have it on good authority that their central bank is ready to bail out regional banks that are on the edge of failing,” Pennington said. He didn’t seem overly concerned.
But he never had to be concerned. He had risen to the top of JPMorgan Chase, thanks to his charm and connections, the same qualities that brought him to the New York Fed. He was a major party donor and a world-class networker, and the sec Treasury job would be another easy step.
In Nast’s judgment, Pennington was another Treadwell, but without the intelligence and ruthlessness. Reid, a penniless kid from a small Ohio town, had fought inch by bloody inch to get where he was. There’d never been any high-end family or friends to open doors for him until he married into money. The man had battered them down by sheer will, and Nast was in awe of him, as well as in fear.
“I don’t know what good authority you’re talking about. Liu and PBOC are going to stick it up Hua’s ass. There’ll be no bailouts. If the little banks are too stupid to manage their affairs, too bad.”
Pennington shook his head. “That makes no sense whatsoever. I’m friends with both men, and both of them are just as concerned about their nation’s welfare as we are about ours.”
But they don’t have Abacus, Nast wanted to say. “Don’t be naive. The PBOC is going to serve Beijing a pile of horseshit. It was Chairman Hua and his predecessors heading the government who pushed the commercial banks into making those stupid loans. It’s even worse than our subprime fiasco in ’08. Now they’re going to have to pay for it. And when the system goes south, Liu can blame the chairman and bump him aside.”
“That makes no sense either. Their entire economy would collapse. Real people would suffer, big-time.”
“Don’t be so gullible. China’s power structure has never given a damn about its people. Mao starved and murdered millions of his loyal subjects, his own people, to get what he wanted. It was power, and Liu is no different.”
“Assuming what you say is true—”
Nast interrupted. “No assuming. And that’s why we’re heading to a major economic meltdown.”
“Right here?” Pennington demanded. “So we can’t sell the Chinese our soybeans or buy their cheap toys and clothes for a while. So what?”
Nast tapped his forehead. “Is there anyone home?” he asked. “You’re the president of the New York Federal Reserve Bank, for Christ’s sake. Think!”
Pennington puffed up. “No need to be rude, Spence.”
“There’s no need to be ignorant, either. ’Cause when the shit hits the fan, which it will, we’ll be in danger of going down the chute, Don. And it won’t be just the soybean farmers, it’ll be our entire economy. And would you like to hear why?”
“Yes,” Pennington said, his voice so soft now it was barely audible. He knew that he was in trouble; it was clear by his expression and by how he held himself stiffly erect.
“Our national debt is out of control,” Nast said. “Everyone knows it. We’ve been selling T-bonds like they’d never go out of style, often fifty billion dollars in each auction. Record amounts, Don. We’ve reached the point where investors around the world wonder if they should keep buying. We spend more than we take in from taxes. And nothing can keep going up forever. A day of reckoning is coming.”
Pennington said nothing.
“In fact it’s here.”
“Why’s China the bellwether?” Pennington asked.
Nast couldn’t believe what he was hearing. “They hold two trillion in our T-bonds, because we’ve never defaulted, never refused to redeem our bonds when they came due, and never skipped an interest payment. But right now it’s getting a lot harder for us to keep the pledge. Maybe impossible sooner than we’d like to think.”
Pennington continued to hold his silence.
“Are you with me so far?” Nast asked.
“Yes.”
“The PBOC will almost certainly not bail out the commercial banks. And how will the government react to that? Without the PBOC’s help, Hua is going to start unloading every T-bond of ours that he can get his hands on so that the central government can save the banks. But dumping all those bonds on the open market all at once will cause the price to drop into the cellar overnight. Too much supply, too little demand.”
“Trouble,” Pennington muttered.
Nast, who’d been a college professor, felt like he was lecturing an Economics 101 class. “Our Treasury bonds back an enormous amount of private-sector debt in the U.S. Mortgages, business deals, interbank loans, you name it. They’ve always been great collateral—past tense. When their value drops, all that debt will be called into question. Lenders will want their money, but borrowers won’t have the cash. Catastrophe.”
“Okay, you have my attention. What does the White House suggest we do?”
“We need to pull the economy back from the brink, and the Federal Reserve will be at the center of it. But first we’ll have to slog through a big mess.”
Pennington was actually frightened.
“Look, I wanted to give you the heads-up, but I don’t want you to worry. We can cover it if we work together.”
“Okay,” Pennington said, but he wasn’t convinced yet.
“I have a couple of suggestions, and if we stay the course, everything will turn out okay. When the dust settles, after all the heavy lifting gets done, you’ll come out the hero and the Treasury secretary of the United States. The man who saved the nation.”
“I’m on board here, Spence.”
“Another thing, first,” Nast said. “Some Wall Street firms are going to be in trouble when the crash hits, which it will. But some are going to come out of it okay. Once it’s over, people will want to punish the guys who were smart enough to survive. The Fed has a big role in regulating the Street, but we don’t see a need to penalize success, do we?”
“I agree,” Pennington said. “I’m totally on board.”
“Good,” Nast said. “Mr. Secretary.”