Everything suggested that there could be a market correction but it was going to be shallow and short. It was possible, as Malevsky said, that the administration would want to show how tough it was in the next couple of months, and talk out of the Fed might make the correction a little deeper, if it happened at all. Even so, the risk-reward profile just wasn’t there for Red River to take a position.
And yet there was something more than this that Malevsky was thinking of, Grey understood. Something he knew.
HE PULLED HIM
into his office and asked Evangelou to come in as well.
‘So who are they, Boris?’ he said. ‘Who are these banks?’
‘I’ve got four in mind.’
‘How have you identified them?’ demanded Evangelou.
‘Basic analysis. Leverage, capital ratios, loan books … I’m not saying these banks are going to fail. I’m just saying they’re the most vulnerable. When Strickland feels he needs to start talking the market down, they’re the ones that are going to drop.’
‘How much?’ said Grey.
‘I’m guessing ten, fifteen per cent. Maybe twenty.’
‘Why isn’t everyone else shorting them?’ said Evangelou.
‘Because no one thinks they’re the ones that are going to hurt. And no one’s prepared yet to bet on a correction. But there will be one. Strickland will overreact and haul things back.’
Grey thought about it. It was the perennial paradox in the markets. If no one else was doing something, why should you? On the other hand, if you only did what everyone else did, you never made any money.
‘Ed, this is all hunch,’ said Evangelou.
Grey agreed. There was nothing behind this, it seemed, but some simple analysis and Malevsky’s insistence that the Fed chairman would be too heavy-handed in his statements, which was pure speculation. But he was interested in seeing what Malevsky was made of as a trader. It might be worth putting twenty or thirty million into short positions to find out.
To sell short, a DIV ‘borrowed’ stocks for an agreed period from banks that were holding them on behalf of passive shareholders like pension funds or university endowments. That cost a fee, usually measured in thousandths of a per cent of the stock’s value, for each day you borrowed them. When you got hold of the stock, you sold it for its current price and hoped you could buy it back cheaper before you had to return it to the bank that had lent it. In other words, you were betting on the stock falling. The difference in the price when you sold and the price when you bought the stock back, less the fee for borrowing the stock, was the profit. Or the loss, if the stock price rose. In the meantime, the longer you held the stock, the greater the fee you paid.
And Malevsky, of course, had no idea when this correction of his was going to happen.
‘Strickland’s testifying to Congress next Tuesday,’ said Malevsky. ‘That’s his last testimony before the midterms. We could borrow for a week. Worse case, we lose the fee. What will it be for a week? Nothing. Best case, Strickland says something and we get the dip.’
‘Wrong,’ said Evangelou. ‘Worst case, Strickland says the opposite because he thinks the president wants him to boost the markets and we get a spike. No way he’s talking the market down a month before the midterms.’
‘No way he’s talking it up. That’s not something he does and that’s not what the president wants. If anything, he wants Strickland to push things down a little. Wall Street will yell and Knowles’ll make political hay with his rectitude-and-trust spiel.’
‘Before an election? I don’t think so.’
‘Why not? Doing that before the election is exactly what Knowles wants. He wants to show he’s tough. The markets can’t push him around. There’ll be no bubble on his watch. If he has to take action to stop one developing, he will.’
Evangelou looked at Grey. ‘Ed, this is all a hunch about the psychology of what Strickland’s going to say. This is bullshit.’
Grey was inclined to agree. He had hoped there was something more that Malevsky knew but it looked as if he was all hot air. ‘Boris,’ he said, ‘I don’t think–’
‘There’s one more thing,’ said Malevsky.
Grey stopped.
‘I heard something when I was at Morgan. Not something in the public domain.’
Grey raised an eyebrow.
This
was it.
‘I heard something about one of these banks needing to raise some capital. Something about losses they need to declare.’
Now Grey understood. Malevsky had been hoping to present his idea as the result of some great psychological insight and analytical research. In fact, there was a nugget of very valuable – and very confidential – information underlying it.
Malevsky shrugged.
‘How much capital will they need?’
‘I don’t know. Enough to make people interested.’
‘A couple of billion?’ Grey paused. ‘Five billion?’
‘I don’t know. I really don’t. But I do know they’ve got losses they need to declare and they’re big enough to make them come to the market for funds.’
‘So that was all bullshit?’ said Evangelou. ‘All that stuff about Strickland and the correction and everything?’
‘No, I believe it’s going to happen. That’s the context. Strickland’s going to keep talking hard. Maybe before the election, maybe after. I’m not sure when. But when you get this bank coming to the market for more capital in that context, suddenly there’ll be pressure on banks. The other ones, the other three I’ve identified, are the ones I think most likely to take a hit. I’ve done the analysis on them.’
‘Would you have identified the first bank from your analysis?’
Malevsky shook his head. ‘That’s what’s so beautiful about it. No one’s going to expect it.’
Grey looked at Evangelou. ‘What do you think?’
Evangelou shrugged. ‘It’s a little more interesting, that’s for sure. It’s not exactly kosher.’
Grey didn’t say anything to that. Rumor was rife in every market. In most cases, unless you went about it extremely stupidly, the difference between insider information and informed speculation was almost impossible for an investigator to make out.
Malevksy watched him hopefully.
‘It’s chickenshit,’ said Evangelou. ‘Ed, what is it? What are we going to make? One bank. Who knows what the others will do? Say we put a hundred million on this one bank and it comes off ten per cent. Say twenty per cent. Twenty million? Is it worth it?’
‘Maybe we take a bigger position.’
‘And maybe it goes nowhere. And if we have to short a bunch of others, and they go nowhere …’
Grey nodded. Still, it was interesting. ‘I like the thinking. We have something that’s pretty much a sure-fire thing, which derisks the trade, and if Strickland does his bit like Boris says, we get a bonus on the other three. I like the structure.’
Malevsky smiled.
‘Which one is it, Boris, this bank of yours? Is it a serious player?’
Malevsky nodded.
‘Which bank?’
‘Fidelian.’
7
MARION ELLMAN PUT
her points succinctly. Efforts to deal with climate change since Copenhagen had so far largely been a failure not only because the targets set at successive meetings were insufficient, but because enforcement had been nonexistent. But recognition of this problem was increasing. With recognition would come action to address the problem. The place for that was the next major round of negotiations, scheduled for Santiago in two years’ time. The Santiago round had to create a global enforcement mechanism that would ensure compliance. She was confident it would do that and cited a number of reasons for believing so. One of the key foreign policy objectives of the United States in the coming two years leading up to Santiago was to provide the leadership to ensure that goal was reached.
The moderator of the panel nodded. Further along the table Marion saw Joel Ehrenreich raise an eyebrow skeptically. Joel was a short, tubby guy with receded hair and a thick moustache. He was a good friend of Marion’s. Typically, when he got his chance, he proceeded to challenge her position point for point.
They had been invited to sit on the panel discussion as part of a series on global governance that was being held by the Council on Foreign Relations. Joel was a professor of international relations at Yale, but prior to that had been on the faculty at Berkeley during the time that Marion held a professorship there. Their natural ways of looking at the world were different, which always made for robust arguments.
Joel was a conceptual thinker, he looked at events in the context of long historical trends – decades, centuries – and was never happier than in an ivory tower. His academic work was on the evolution and decline of empires. Marion was more interested in the pragmatics of international relations, the dynamics between governments, the incremental year-to-year steps by which change was achieved – and being a part of it. After having provided a certain amount of foreign policy thinking to the Knowles campaign, she jumped at the opportunity when she was offered the position of UN ambassador. Joel Ehrenreich would have run a mile.
The panel was over by seven o’clock and Marion took Joel back to her apartment for dinner. They had take-in Japanese together with Marion’s husband, Dave Bartok, and their nine-year-old, Ella. Marion and Dave also had a four-year-old, Benjamin, but he was in bed by the time Marion got back. She went in to see if he was awake. He was lying curled up, asleep, his face bathed yellow by a night light.
Ella had grown up around adult conversation on international affairs and took an interest that somewhat outstripped her understanding. She wanted to know what Joel had said at the meeting.
‘I argued that we haven’t taken a significant step towards more effective global governance since the United Nations was set up,’ replied Joel.
‘Really?’ said Ella seriously, holding a piece of tuna sushi between two chopsticks. ‘Did you agree with that, Mom?’
‘No, honey, I didn’t.’
‘Okay,’ said Ella. ‘So this is like a disagreement between you two?’
‘You could say that,’ said Marion. ‘A healthy disagreement.’
Ella was silent, chewing her sushi thoughtfully. The adults watched her.
‘I don’t know what global governance is,’ she said eventually.
Joel grinned. ‘Don’t worry, honey. There isn’t any.’
‘Joel, that’s not true!’ said Marion.
Ella looked at Dave. ‘Looks like they’re having another healthy disagreement,’ she said conspiratorially.
Dave laughed. ‘Looks like they are.’
After dinner Ella went to get ready for bed. Marion went with her. When she came back Dave had made coffee. He poured her a cup.
Dave was a lawyer with a small Wall Street firm. His career had played second fiddle to Marion’s as her jobs had taken the family east and then west and then east again across the country. That was a deal they had agreed. They both had a strong sense of public service and while Marion worked in education or the administration, this was Dave’s way of fulfilling it.
‘Joel’s got a book coming out,’ she said to Dave as she took the coffee.
Joel gave him a look of mock apology. ‘What else am I supposed to do with my life?’
‘Don’t act so coy,’ said Marion. ‘I heard you work it in a couple of times tonight.’
‘You can’t blame me for trying.’
‘What’s it called?’ asked Dave.
‘
Switch
.’ Joel grinned. ‘I know, I know. Catchy title, huh?
Switch: The historical imperative for the twenty-first century.
I’ll send you a copy.’ He glanced at Marion. ‘I will, actually.’
‘I’ll look forward to it.’
‘Read it,’ said Joel. ‘Not the whole thing. Chapter 1, chapter 4, chapter 6. That’s enough. Of course, it’s elegantly argued and beautifully written, so if you want extra punishment you can read the whole thing.’
‘I’ll see what I can do.’
Joel nodded. He took a sip of his coffee, then leaned back with a faint smile on his lips.
‘What?’ said Marion.
‘Nothing.’
‘I know that look, Dr Ehrenreich.’
‘Okay. I’ll tell you what it is. This Uganda escapade intrigues me. It’s interesting.’
‘Really? I think it’s very straightforward.’
‘You’re way too smart to think that, Marion. Especially the way the president has chosen to go about it. He might think it’s straightforward, but you don’t.’
Marion didn’t reply.
‘I see we can’t divulge state secrets.’
‘Tell me why you think it’s not straightforward.’
‘Okay.’ Joel hardly needed more of an invitation. ‘Well, for a start, it’s a sign of weakness on the part of the United States.’
Marion nodded non-committally. Typical Joel. Say something as outrageously contrarian as you can and then sit back to see what happens. Everyone saw the intervention as a show of strength. The debate within the administration – to the extent there had been any debate – had centered on whether it was the right time and place for it.
‘How so?’ she said. It was always entertaining to watch Joel scrambling to create a rationale for something he had thrown out for effect.
But this was obviously a view he had thought about. ‘This is a challenge to China. We go into a region in which they see themselves as having established a place as the predominant power and say we’re going to clean something up. But the thing we choose is so straightforward, so black and white that we corner them into a situation where they can’t object. But let’s face it, it’s an issue that’s completely trivial in respect of our own geostrategic interests. So if I’m sitting on the other side, if I’m sitting in Beijing, this doesn’t say to me, hey, you know what, the US is a strong power and it’s going to challenge me on issues of genuine concern. It says to me, the US is a weakening power and knows it can only challenge me on an issue that doesn’t touch on my critical interests.’
Marion glanced at Dave for a moment, then back at Joel. ‘That’s a novel interpretation.’
‘You don’t think it’s right?’
‘No, I don’t think it is right. For a start, you’re looking at this through the lens of geostrategic advantage.’
‘There’s another one?’
‘Joel, this isn’t about that. When he spoke on this the president was very clear in saying that, first, the United States has a duty and obligation to protect its own citizens – thirty-nine of whom were killed in cold blood by this group, if you remember – and, second, that we have a duty and obligation to anyone in the world when they need protection and their own governments aren’t able to give it to them.’