Storm Front: A Derrick Storm Thriller (14 page)

“Well, now, let me put it to you another way: What’s it worth to you for me to not mention that you were the one who asked me to put the rider in? Is that worth five million? Because, you know, I could just keep on keeping on. Or I could have my press office put out a big ol’ press release, saying that the world has
you
to thank for this change to Federal Reserve policy. What would you think about that?”

This, as Donny suspected, got the man’s interest. In fact, it changed his whole tone. And his answer.

“Sure, I can give you some time to think about it. But not much time. We’ll talk tomorrow?”

Suddenly, they were back to small talk again.

“Well, thank you. And you give my best to your lovely bride, you hear?… All right, then. You have a nice night now.”

He disconnected the call and let out a long breath. He was shaking slightly. He went over to the Clyde May and took a slug from the bottle.

There were a lot of emotions coursing through him, perhaps none stronger than disbelief. He knew he might try to spin it in his own mind, but he’d only be fooling himself. The fact was he had—for the first time in a long and otherwise distinguished political career—just committed extortion.

T
he man looked like he had been hiding for at least a decade off the grid in Montana, in a place where he subsisted on squirrel, elk meat, and indigenous berries. His beard covered his entire face and hung to the top of his chest. His straggly hair was at least that long in the back. He had an offensive lineman’s body, both in height and girth, which only made the thick, John Lennon–style glasses on the end of his nose that much more incongruous.

“Derrick, I’d like you to meet Dr. Rodney Click, assistant professor of economics here at Iowa State,” Ling Xi Bang said. “Is it correct for me to call you a quantitative economist? Do I have that right?”

“ ‘Geek’ will also do nicely,” Click said, offering Storm a good-natured smile and a handshake.

“I’ll just call you Doc, if it’s okay,” Storm said, pumping his hand.

“I’m sure I’ve been called worse. Anyhow, come into my office,” Click said, turning and calling over his shoulder: “I just can’t believe the CIA is interested enough in my theory to pay me another visit.”

Storm shot a glance at Xi Bang that seemed to say
Another visit, huh?
It didn’t take being a quantitative economist to do the
math: Xi Bang had been here before, and had told the guy she was with the CIA. Xi Bang just smiled at Storm demurely. Their trip out to Iowa, which had included a brief stop at a hotel room near Kennedy Airport, had given whole new dimension to the word
layover
.

“You have to understand, most of the time when I do a paper like this, I assume it’s just going to be read by other academics,” Click continued as he led them into a small rabbit den of an office, with walls lined by packed bookshelves. “The
Journal of Global Economics
isn’t going to be confused with a page-turning thriller. It’s not like I’m Michael Connelly here.”

Click settled himself into his chair, which groaned accordingly. Storm and Xi Bang took chairs on the other side of his desk.

“Trust me when I say I found it riveting,” Xi Bang said. “And I’d like you to explain it to my CIA colleague here the same way you did to me.”

“Then I guess I’ll start in the same place, with a little background,” Click said, aiming his attention at Storm. “I don’t mean to sound like I’m talking down to you, but how much do you understand about the foreign currency exchange markets?”

“Enough to fill a thimble,” Storm admitted.

“Okay, the basics: The foreign exchange market, sometimes called ForEx, or just FX, is the largest and most liquid market in the world. In some ways, it’s the most volatile, too. Roughly four trillion dollars’ worth of currency is traded every single day. Now, a minority of that volume is what you would think it is: Individuals or corporations that do business in one currency suddenly need to pay for something in another currency. So, say you’re vacationing in India. You land in Mumbai and you change dollars for rupees.”

“Except I always save some greenbacks for bribes,” Storm interjected.

“Of course. In any event, that kind of transaction—which you could argue is what FX was created for—is maybe twenty percent of the market. Eighty percent is banks, hedge funds, and other large financial institutions making speculative trades. That’s
why there’s so much volatility. There are all kinds of complicated ways they can make money on these trades, some of which rely on factors the average investor wouldn’t think of. So, for example, there’s one kind of trade, a carry trade, that works because of differing interest rates being offered by the central banks of various countries. Other trades are more straightforward: investors betting which way a currency will head based on some intuition or knowledge about that country’s economy.”

“So it’s a lot like the stock market: rich guys gambling with other people’s money,” Storm said.

“Yes, but there’s an important difference,” Click said. “The FX is not a regulated exchange. Every deal is essentially done on a handshake, or a virtual handshake. There’s no government watching over it, no special clearing house, no rules about the size of the trades, no one watching out for insider traders, no safeguards put in place to prevent large swings in the market. The New York Stock Exchange suspends trading if stock prices are dropping too far too fast or if there’s some kind of disruption in the markets that everyone needs to stop and digest. Not so with FX. It is open twenty-four hours during business days. If traders choose to bail on a certain currency, its value can—at least in theory—drop to zero, and no one will stop it. It’s a marketplace that relies solely on market forces for regulation.”

“Sounds like the Wild West,” Storm said.

“More than you know,” Click said. “Because another key principle is this: All major currencies in the world today are what we call fiat currencies. They’re not backed by any gold or silver or other commodities. They have value because the government that issues the currency says it has value, and the marketplace chooses to agree with it because the economy supporting the currency is fundamentally sound.”

Storm shook his head. “So it’s all based on shared faith.”

“Exactly. Especially with the U.S. dollar. A certain percentage of the value of our money comes from the fact that we’re considered the one unassailable currency—the too-big-to-fail currency.
If you’re an international investor and you have a pile of money sitting somewhere, chances are you’re going to have it there in U.S. dollars. But economists have always speculated about what would happen if that stopped being the case.

“Now, bear that in mind when I tell you about October 2, 2008,” Click said. “If you think back to what was happening then, the financial world had pretty much gone haywire. Lehman Brothers had failed. Fannie and Freddie were teetering. AIG was about to collapse. Banks were petrified to lend each other money. There were runs on mutual funds. People were selling their entire portfolios and burying the cash in the backyard. It was a wild time, and pretty much every other day brought some news that no one ever thought they’d see. I think that’s why what happened on October 2 didn’t get much attention. Well, that, and it was over so quickly. The mainstream media didn’t even have time to understand it.”

“Understand what?” Storm asked. He realized he had scooted to the edge of his chair. Click, likewise, had leaned forward, so that his large body was smothering the edge of his desk.

“For about twelve minutes on October 2, 2008, the U.S. dollar lost roughly fifty percent of its value,” Click said, with all due drama.

“But… but wouldn’t that be impossible?”

“You would think so. You would have thought it was impossible for GM to go bankrupt, but that happened, too. Like I said, it was a wild time.”

“So what happened?” Storm asked.

“Well, that’s the question I have spent the last four years researching,” Click said. “The short version is that one of the most active and largest currency traders in South Korea decided he was done with the U.S. dollar. It wasn’t a particularly rational decision on his part. But, mind you, the Koreans were watching everything going on with the U.S. economy with disgust. They saw it as our lack of financial discipline over many years finally coming back to haunt us. So this guy essentially just cashed out and moved all his money into other currencies.”

“But… I mean, how many dollars are in circulation in the world?” Storm asked. “One person couldn’t possibly make that big a difference.”

“To answer your question, it depends how you define what ‘in circulation’ means. For sake of conversation, let’s just call it ten trillion. So, no, you wouldn’t think one investor, no matter how rich, would matter that much. But it turns out he did what’s called a double-back trade. I’m not sure I could explain the mechanism in a way that would make sense to you—no offense. Suffice it to say, it’s a trade whose impact on the value of the currency involved is not just double. It’s more like quadruple. And it was a huge trade to start with. It ended up triggering a classic negative feedback loop—a trend that started feeding on itself. Most of the trades were being done by computers that had been programmed to make certain moves when a preset value threshold was breached. The major stock markets around the world have checks against that sort of thing getting too far out of control. But, again, FX is an unregulated market. So there was nothing to stop these computers from doing their thing, and for twelve minutes, the value of the U.S. dollar collapsed in a way no one could have ever imagined.”

“But you said it only lasted for twelve minutes. Why?” Storm asked.

“Someone at the Fed saw what was happening, and the Fed swooped in and saved it. One of the ways the Fed controls monetary supply is through a big stockpile of government bonds it owns. It quickly sold a whole bunch of them for bargain prices to banks that recognized what a good deal they were getting. The Fed lost a pile of money, but in doing so it took a whole bunch of money out of circulation. From there, simple supply and demand took over. Supply had been constricted. Fewer greenbacks available made them more valuable, the negative feedback loops reversed themselves, and the dollar bounced back to what it had been twelve minutes before. To the media, it looked like one more bail-out from Uncle Sam, and one that they couldn’t argue with. So it was sort of a nonstory.”

“Okay, so…” Storm said, then turned to Xi Bang. “I’m sorry, what does this have to do with four dead bankers?”

“Well, I can show you if you like,” Click said, hefting himself out from behind his desk. “Come with me.”

Storm and Xi Bang followed click down a hallway, into a stairwell, then down some steps into the basement. Click turned into a room with several towers of servers, most of them at least as tall as he was. He sauntered up to one of them that had a keyboard and monitor built into the middle.

“Sorry to make you walk,” Click said. “I could access this from my desktop, but it takes forever to load, and I already have the model running down here.”

“I think I can handle the exercise,” Storm assured him.

“What you’re about to see in operation is the ISSMDM, the Iowa State Sudden Monetary Depreciation Model.”

“Everyone in the discipline now calls it ‘the Click Theory,’ ” Xi Bang interjected.

“Yes, well…,” Click said, as if all the attention from the enormous world of quantitative economics embarrassed him. He fiddled with the keyboard, then brought up a screen filled with numbers. “Now, bear in mind, this is a computer model of the FX. It’s a re-creation of reality, but it’s one I’ve spent four years perfecting. It allows me to predict the impact of a trade within a ninety-nine percent confidence interval.”

“Okay, so what am I looking at here?” Storm asked.

Click jabbed a finger at the screen, to a column of numbers expressed to the fifth decimal place. “There’s the value of the U.S. dollar relative to a variety of currencies in current market conditions. There’s the euro, the Swissie, the Aussie, the loonie, etcetera. I’ve just put ten up there right now, but obviously I can show you any currency you’d like to see. Here’s what happens to the value of the U.S. dollar when you sell a yard of greenbacks for, say, British pounds.”

“A yard?”

“Sorry. That’s FX slang for a billion.”

“The trades are really that large?”

“Some of them, yes,” Click said. “You have to recall, a lot of these trades are only making money way out on the margins, and only in very small percentages. So you need to make very large trades in order for it to be worth your time. So, anyhow, here’s what happens when I sell a yard of dollars.”

Click touched a button. Storm kept his eyes on the numbers.

“But nothing changed,” he said.

“Exactly. Nor would we expect it to. With ten trillion in circulation, shifting a billion one direction or another is like trying to move a hurricane with a ceiling fan. Now, here’s two yards.”

Storm watched as the last number on the screen, the one five spaces over from the decimal point, changed from 7 to 6. “Okay, I see it,” Storm said.

“Right. Now here’s five yards.”

This time, both the last digit and the second-to-last digit moved.

“Got that? Good. Now, here’s five yards, executed as a double-back trade,” Click said. The third-to-last digit changed, as did the two next to it. “I just affected the value of the U.S. dollar by a tenth of a cent. Still not that big a deal, right? I mean, the value of the dollar can fluctuate more than that on a daily basis and life as we know it goes on just fine.”

“Yeah, this doesn’t exactly look like financial Armageddon,” Storm confirmed.

“Trust me, we’re getting closer to Armageddon. Okay. Watch this. Here’s ten yards double-backed.”

The dollar in Click’s model was suddenly worth two cents less. “Still not much, right? But that’s because the negative feedback loops haven’t swung into action. It takes a little to make that happen. But, in the case of the Korean in 2008, we were talking about a one-hundred-fifty-yard trade—a historically large trade, all in one direction. Nothing like that had ever happened before. And, voilà.”