‘Looks like we got a mini crisis going here.’
‘What the hell did Strickland say?’ demanded the president.
‘I’m still waiting on the transcript. From what I understand, he’s been taken out of context. Some journalist from the
Economic Review
pushed him to name the banks the Fed thinks are weak and he obviously refused and they’ve taken that and built this so-called story. I think he got into some kind of a shouting match, which didn’t help.’
‘But this is bullshit?’ said Abrahams.
‘Absolutely. This journalist has a thing about the Fed. The others are hyping it to see where it’ll go. It’s election fever. What can you say? Anything for a headline.’
‘You still haven’t got the transcript?’
‘I’m waiting on it, Ed.’
‘Well, get it down to us as soon as you’ve got it.’
‘Sure. And in terms of what we’re going to say …?’
‘We’ll get back to you,’ said Abrahams, and cut the line.
Knowles looked at him. ‘What do you think?’
Abrahams frowned. ‘Not sure.’
‘Do we ignore it or do we try to nip it in the bud?’
‘That’s the question.’
Knowles glanced out the window at the view of north Miami rushing by. ‘Is this the kind of thing Strickland thinks is helpful? He’s supposed to provide reassurance, not start a panic three weeks before the midterms.’
Abrahams was silent.
‘What the
hell
has he been saying?’
‘I’m sure we’ll find he put forward a very sensible position. His problem is he’s an academic. The guy doesn’t see what people are doing to him until he reads it in the papers the next day.’
Knowles thought about the speech he was giving just about every day now in support of one Republican candidate or another. Trust. Rectitude. Stability. Scrutiny. Prosperity and growth without the fear of a crash.
‘Before we overreact,’ said Abrahams, ‘let’s find out whether there’s anything going on. Let’s talk to Strickland. And the Treasury secretary. I’ll set up a call. You go in and do your town hall with Logan. Chances are no one in there will have heard about this.’
‘They’ve got cell phones. The Democrat plants will know all about it.’
Abrahams smiled. ‘Then do the presidential thing you do so well.’
‘And then?’
‘Then,’ said Abrahams, ‘I’ll have figured out whether we should ignore it or not.’
AIR FORCE ONE
was on the tarmac at Jacksonville, having flown the president from the Fort Lauderdale meeting. Marine One, the presidential helicopter, waited to take the president the sixty-mile hop to the University of Florida at Gainesville for his next speech. It should have left twenty minutes previously, but the president still hadn’t emerged from the plane.
He sat in his office on Air Force One with Ed Abrahams and Josh Bentner. On the line from various places in Washington were Ron Strickland and Treasury Secretary Susan Opitz as well as the president’s senior aides.
By now Knowles had seen footage of the key parts of Strickland’s remarks, including his exchange with the
Economic Review
journalist. The Fed chairman hadn’t said anything wrong in itself, but it had been a hamfisted performance. He could have handled the questions with a lot more grace and sophistication. Instead, he had looked tetchy, impatient and uncomfortable, and in the end had almost blown his top. He had handed anyone who wanted to distort his remarks a choice selection of lines.
The Dow had closed three per cent down. First off, Knowles wanted to be sure there was no genuine crisis underlying what was happening in the markets.
Opitz and Strickland were both confident. Neither of them knew anything to suggest that a crash was coming.
‘I think the market’s just saying things have been a bit too good for a bit too long,’ said Strickland, ‘and we’ve got a modest correction going on.’
‘Mr Chairman,’ said Abrahams, ‘it doesn’t feel modest.’
‘They never do when they start. There’s always the fear of how far they’re going to go.’
‘And you’re saying this isn’t going to go far,’ said the president.
‘There’s no reason for it to.’
Knowles glanced at Abrahams, who rolled his eyes. ‘Well, Ron,’ said the president, ‘I think we all need to use language that’s a little more respectful of people’s fears.’
‘There’s nothing to fear,’ said Strickland. ‘Hand on heart, Mr President, I’m telling you that I know of nothing out there that’s comparable. Unless someone’s hiding something, and hiding it well, we don’t have a Bear Stearns, we don’t have a Lehman.’
‘Can you be sure?’
‘I don’t see one. And even if there is something, we don’t have the level of insane systemic risk exposure that we had in ’08. We just don’t have it.’
‘Well, let’s be sensitive in the way we say that,’ said Knowles. ‘If journalists are going to bait you, Ron, you’re going to have to deal with it.’
‘Alright,’ said Strickland. ‘Okay. Fine. I don’t mean to cause any problems.’
There was silence for a moment ‘Marty,’ said the president. ‘You there?’
‘Yes, sir,’ said Marty Perez, his economic advisor.
‘You agree with Ron and Susan?’
‘Yes, I do. The market’s ripe for a minor correction. It’s October. This is the month when it always happens. A few people are taking profits. Once they’ve done that they’ll come back in and buy the stocks back. In a few weeks it’s going to look a lot less bad than it feels now.’
Knowles glanced at Abrahams. There was only one date that concerned him, November 6. It wasn’t possible for this correction, as everyone kept calling it, to have happened at a worse time.
‘What about that bank? What’s it called, that bank I keep hearing about?’
‘Fidelian,’ said Abrahams.
‘It’s getting slammed,’ said Strickland. ‘There’s no doubt about that. You get that in any correction. Rumors go round and a couple of companies get it in the neck. As far as we know, Fidelian’s okay. It’s not great, but it’s okay.’
‘Has anyone talked to them?’
‘The New York Fed talked to them a couple of days back. The CEO’s a guy by the name of Bill Custler. Jerry Rabin knows him. He’s a good guy. He’d tell us if there was anything we needed to know.’
‘Maybe you should talk to him yourself.’
‘I could.’
‘What about you, Susan?’
‘I’m planning to,’ said the Treasury secretary.
‘Okay.’ Knowles paused. ‘We have to get control of this.’ He looked at Abrahams. ‘I don’t care if it’s October or whatever the heck it is. We’re not having a panic now.’
‘I don’t think we should ignore this,’ said Abrahams. ‘Whatever the
Economic Review
would like us to believe, there’s no story here. It’ll blow itself out, but so close to the midterms we can’t take the chance that it blows up first. We need to put this to bed. I think you should use your speech tonight to make a strong statement.’
‘Anyone disagree with that?’
There was silence.
‘Okay, let’s go back to the start. I want to be a hundred per cent clear on this. First of all, Susan, Ron and Marty, you’re all saying we don’t have a significant concern?’
‘That’s right, Mr President,’ said Opitz. ‘We have the normal range of activity and no systemic risk beyond what we would expect to see.’
‘Ron, you comfortable with that statement as well?’
‘Yes, sir.’
‘You got that, Josh?’ said Knowles to his speechwriter, who was sitting on the other side of the Air Force One office.
Bentner nodded.
‘So I’m going to say my number one priority is the stability and growth of our economy, that all my administration’s policies are geared towards that.’ He glanced at Bentner, who was taking notes. ‘Josh, can we fill that out with some examples?’
Bentner nodded again.
‘Then given the recent movements in the markets, I’ve asked the Treasury secretary and the chairman of the Fed to undertake a thorough review of the financial system and they …’
‘Sir,’ said Abrahams, ‘I would say you have today had discussions with the Treasury secretary and the chairman of the Fed to discuss in depth the financial system and you’re satisfied that they’re exercising strong supervision … no, they have assured you that the system remains in sound health and there’s no risk of disruption such as we saw in 2008.’
‘You think we get it out there like that? 2008? Ron did that and look what happened.’
‘With due respect to the chairman,’ said Abrahams, ‘it’ll be the president who’s speaking. I would take 2008 head on. I would show the seriousness and gravity with which you’re addressing this.’
Knowles glanced at Bentner. ‘You got that?’
Bentner nodded.
‘Then I would say something about continuing scrutiny so we’re ready to take action at the first sign of any need …’ Abrahams paused. ‘No, actually, I wouldn’t say that. It sounds like you think there is a problem.’
‘I think we should recognize that people are concerned about volatility,’ said Marty Perez. ‘They’re concerned about stock prices going down. I think we need some words about that because that’s what’s really worrying people. Let’s address it and not minimize it.’
‘So what does the president say?’ said Bentner. ‘That he recognizes it’s happening and he understands the anxiety it causes but the fundamentals are sound?’
‘Something like that,’ said Perez.
‘Look,’ said the president, ‘basically I want to say there’s no underlying problem, but in case there is one, I’m here, and if there is, we’ll deal with it right away, but there isn’t one.’ The president paused. ‘Something like that. Josh, figure out how to say it. That’s what you do, right?’
Bentner grinned. He got up. ‘I’ll go get started.’
He left the room.
‘Okay,’ said Knowles, ‘do we need to do anything else about this? Apart from making statements, I mean.’
‘I don’t know what else we can do,’ said Opitz. ‘It’s the market. If it’s correcting, we have to let it correct. It’s not our role to try to prop it up in any way.’ She paused. ‘I guess we could talk about coming down on the short sellers.’
‘They banned them in 2008 and there’s no evidence it made a difference,’ said Perez.
‘Can it hurt?’ asked the president.
‘It’s interfering with the market. In principle, that’s something we don’t want to. Wall Street will go postal.’
‘Not everyone on Wall Street,’ said Opitz pointedly.
‘Might make us look like we’re doing something,’ said the president.
‘Let me talk to Mike O’Brien,’ said Opitz. O’Brien was the head of the Securities and Exchange Commission. ‘I’ll see what he thinks. I don’t think we want to ban them, not right now, but maybe I’ll drop a hint. Put the shorts on notice.’
‘How?’
‘There are ways.’
‘Okay, Susan, I’ll leave that to you. So that’s it now? We don’t believe there’s anything else we need to be doing? Ron?’
‘No, sir.’
‘I think that’s enough,’ said Opitz. ‘At this stage I don’t think it looks political. If you make your statement tonight, Mr President, and–’
‘Hold up.’ Knowles frowned. What did you just say, Susan? This doesn’t look political? How could it be political?’
‘There is one thing about Fidelian. You look at its major shareholders, and around a quarter of its stock – twenty-six per cent to be exact – is held by something called the People’s Investment Corporation. That’s a sovereign investment fund owned by the Chinese state.’
‘So you’re saying the Chinese state owns a quarter of this bank?’
‘Well, the Chinese state owns the PIC, and the PIC owns a quarter of Fidelian, so effectively, yes. It’s possible they own more. The PIC is a very non-transparent organization, even for a sovereign wealth fund. It has hundreds of subsidiaries, if not thousands, registered in offshore jurisdictions and there are numerous tiers of ownership before you get back to the PIC as the ultimate owner. So what we can say is that they own at least twenty-six per cent. Also, there’s ownership by a Russian sovereign wealth fund and a Qatari one, each of which holds in the region of five to seven per cent.’
‘Is this abnormal?’ asked Abrahams.
‘No. It’s a high level of ownership, but not abnormal. We had a massive influx of sovereign wealth fund capital in the aftermath of the financial crisis and it’s been going on ever since. I’m not saying this is necessarily significant, but it’s a fact we should be aware of that the company leading the rout in the markets right now has a high ownership by foreign state funds. If you add up the foreign government interests in Fidelian – that’s the Chinese, Russian and Qatari stakes – you’re in the region of forty per cent. In reality, the PIC stake alone is so large that this company couldn’t do anything against the PIC’s approval. You can’t go against a twenty-five per cent shareholder.’
‘But if they were driving the price down in some way,’ said the president, ‘that would go against their own interest as an investor.’
‘Absolutely. Even if you want to divest stock, you don’t just dump it on the market.’
‘Mr President,’ said Perez, ‘we should be clear that sovereign investment funds claim to act purely as investors like any other investor in the market. Every government says it’s a hands-off relationship, and that would include China, Russia and Qatar.’
The frown was still on the president’s face. There was something deeply unsettling about what Opitz had just told him. ‘Susan, we don’t have any evidence that one of these funds is doing anything that would influence this, do we?’
‘No, sir. As I said, I don’t think there’s anything to suggest that. I’m just raising the ownership issue so we’ve got it on the table.’
‘They may be using state money, but they’re shareholders like anyone else,’ said Perez. ‘As long as they’re acting as true investors without any other agenda, they’ll hurt as much as anyone.’
The conditional in Marty Perez’s statement rang loud.
‘We wouldn’t tolerate it if they weren’t acting in any way but true investors, would we?’
‘Absolutely not,’ said Opitz. ‘That would be market manipulation.’
There was a knock on the door. The president’s personal aide came in to say that the pilot of Marine One had informed him that if they didn’t leave within the next couple of minutes they would be behind schedule for the speech. The preliminary cocktail reception with university dignitaries had already been canceled.