Josh had seen a couple of his managers come and go. They usually departed to ‘pursue other opportunities’, he mused with a mental smirk. The most recent casualty was Trevor, who arrived one morning without any advance notice. He was gone within a month. Blimey! How do they ever make these bloody decisions!
Soon after Trevor's departure, a new Chief Executive for Global Commodities appeared. Josh was immediately summoned to her office.
And ‘summoned’ was a word not chosen in haste. Indeed, when Josh walked into Mikaela Bradford’s office, he greeted a rather tall, slim, dark-haired woman. She projected an air of grace – of power – as though she should be called 'Her Majesty'. And with her high cheekbones enhancing and magnifying her presence, she sized him up with penetrating eyes.
Josh knew of Mikaela Bradford’s achievements and of her career – it was hard to hide these things in the incestuous (sic) industry of investment banking. He knew she was hard as nails, and that she made her bones at the commodities desk at Goldman. It was at Goldman where she gained notoriety for ‘managing’ prices in the global oil commodities markets.
The powers that be clearly wanted a heavy hitter to run AB Jorday’s commodities trading, and they got it in the person of Mikaela Bradford.
With introductions out of the way, she leaned back in her chair and gazed across the desk at Joshua.
“Well Josh, I’ve looked over your work here. You’ve done a fine job with the metals – and over a long period of time.”
Josh nodded, accepting her compliment.
“I’d like you to continue on. We’ll soon run into a very tough economy, and we foresee gold and silver coming under intense pricing pressure.” Leaning forward, she engaged him with her eyes. “It's imperative that we have someone with your talents and experience to manage metals trading.”
Josh’s eyebrows rose. “What sort of problems do you anticipate?”
Mikaela bit her lip and said, “We’ll soon hit an economic crisis. According to plan, the crisis will be the beginning of a long and steep downward spiral of the world economy. That’s all I can say at this time, and I ask that you not disclose this to anyone.”
Josh gazed at her and stroked his chin. And then he posed a question. “Do you want us to continue with our charter? To keep gold and silver prices low?”
“Yes.” She leaned back in her chair and met his gaze with steady eyes. “In fact, that remains your prime directive. Especially because central banks will be injecting additional liquidity into the financial system. You see, a lot of assets are being sold off, and this is bringing about insolvency in the banking sector.”[3]
“How will the downward spiral happen.”
“We don’t know all the details, but we expect it will begin with Bear Stearns.” And then Mikaela said something startling. “You must keep metals prices down at all costs. We are prepared to take whatever losses are necessary to do this.”[4]
The rest of the meeting went as meetings normally do. But after Josh left her office, he was still shaking his head. What, pray tell, could happen that would make a banker – ANY BANKER – be willing to take a loss?
* * * * *
James Martin was at his desk in the Federal Reserve building, busily writing into a leather-bound book...
The Mortgage Backed Securities and other derivatives bubbles are soon to reach the consciousness of average Americans. And soon after, they shall intrude on the world economy. For Austrian economics teaches that this kind of bubble – created by paper money, loose monetary policy and easy credit – will always blow up. The only question is when.
Ring! Ring!
Jim put down his pen and eyed the telephone with some irritation. Then he picked up the receiver and held it to his ear. He immediately heard the soft, yet firm voice of the Fed Chairman’s administrative assistant.
“Jim?”
“Oh. Hi Carol,” Jim replied
“Chairman Cohan would like to see you.”
Jim sighed and said, “When?”
“Now. He said he wanted to see his Chief Economist immediately.”
“Right now? He just moved into his office.” Jim glanced at his wristwatch. “Did he say what it’s about?”
“No. But I presume that it’s a meet ‘n greet sort of thing. After all, you two have not yet even talked – at least, not in private.
“Okay. I’ll be up in ten minutes.”
“Thanks.”
Jim put the receiver back on the cradle and looked down at his writings. He sighed. There’s always more to be recorded, and never enough time to do it. He closed the book, grabbed his suit coat, and made his way to the Fed Chairman’s office.
As Chief Staff Economist reporting directly to the Federal Reserve Chairman, Jim was privy to much of the Fed’s business. He had served on Chairman Greenspan’s staff for many years. But now that Greenspan was retired, Jim looked forward to working with the newly-appointed Chairman, Ethan Cohan. Maybe he’ll be more like Volcker, he thought. Willing to defend the dollar rather than print endless streams of money!
* * *
Jim entered the Chairman’s office suite and strode past Carol, the Chairman’s administrative assistant.
He nodded and said, “Hi Carol, how are you today?”
“Fine, Jim,” she replied. “Better get in there. He’s waiting.”
“I’m going,” Jim replied as he quickly approached the entrance. He walked into the Chairman’s office.
Chairman Ethan Cohan was known as a banker's banker. He'd come up through the ranks of the banking industry and was revered as one of the premier deal-makers in finance. He made the big time when he was elected to President of the New York Fed. And he made it really big when he was appointed as Chairman of the Federal Reserve[5], replacing Chairman Greenspan.
“Come in, Jim.” He gestured to a chair across the desk and said, “Please sit down.”
Jim sat down. And as the Fed Chairman leaned back in his chair, the two began talking.
“So,” Chairman Cohan asked, “What do you think about our current policy?”
“With regard to what, sir?”
“Interest rates,” Chairman Cohan replied as he waved his cigar. What do you think?”
“Well, sir. I find our policy toward reducing interest rates very disturbing.”
“Why?”
“Because low interest rates kill capital formation, which in turn reduces long-term job growth.” Jim paused and looked at the Chairman with steady eyes. And then he said, “Of course, bringing interest rates to zero will absolutely kill the economy.”
Chairman Cohan’s eyes narrowed as he looked back at the chief economist. And then he said, “But the banks need it, Jim. Can’t you see how these derivatives are unwinding? It’s going to cause big problems for the banks – and some of them could fail.”
“But if management makes bad decisions, they should be allowed to fail,” Jim replied, “that’s the way free markets are supposed to work.” Jim paused and then said, “Surely, sir. Can’t you see that bailing out the banks on the backs of Americans is wrong? And surely you’re aware that low interest rates will cause capital to flee the U.S. and kill job creation – especially over the long term.”
Jim paused and gazed at the Chairman. A big difference from Chairman Greenspan, he reflected. This Chairman was more like a model – fifty-ish, slender, with a tailored pin-stripe suit and starched white shirt. Even his hair was full and dark – combed straight back.
Jim went on. “That’s truth, sir! Can you not see that?”
The Chairman held his cigar in front of him and rolled it in his fingers as he pondered Jim’s words. And then he said, “We allowed interest rates to go too high; and now we’re looking at a downward slope into a recession. If we don't stop the slide, the banks will suffer.” The Chairman glanced at the smoke roll off his cigar and said, “Hell. Look at what's already happening to Bear Stearns.”
“I see that,” Jim replied. “But if you continue to push do
wn interest rates, then jobs will disappear. It'll be devastating for the entire economy and the American people.”
“But it could be devastating anyway, Jim. Don’t you know a big reason for the great depression was the failure of the banks?”
“But sir,” Jim replied, “the cause of the great depression was a contraction in the supply of money. And fluctuating interest rates are a direct cause of the business cycle and ultimately lead to a reduction in the supply of money with a corresponding recession. So when you lower interest rates now, you will have to raise them later – you’re just pushing a recession off into the future and making it worse!”
The Chairman eyed Jim shrewdly. And then a knowing smile crossed his face. “Now I remember ... They told me about you!” He nodded as he sized Jim up even more. “You're that Austrian economist, aren't you?”
Jim felt his shoulders tighten at the Chairman's question. “Yes – I am, Mr. Chairman. But –”
The Chairman pointed his finger at Jim. “You guys think that paper money and credit expansion is a bad thing – don't you!”
“Well, yes sir. And –”
“Well,” the Chairman interrupted, “what the blazes are you doing working at the Federal Reserve?”
“Well sir, ah –”
“How long have you been here, Jim?”
“About fifteen years, sir.” By this time, Jim stopped trying to explain himself.
“And how do you expect to do your job when you don't believe in what we do?”
Jim paused before answering. “Mr. Chairman, I'm an economist who supervises the acquisition and analysis of economic data. It doesn't matter that I adhere to the Austrian school; it only matters that the data I provide is unbiased.”
The Chairman looked at Jim and frowned. And then he seemed to make up his mind. “It does matter, Jim. It's important, even necessary, that you're on board with our program.”
The Chairman stood up and walked around his desk, all the while looking at Jim as though he were some kind of two-headed monster. “Jim, I want your resignation on my desk by tomorrow morning.”
Jim just stood and looked at him. And then he said, “What? What did you say?”
The Chairman now seemed impatient. “I said, I want your resignation on my desk by tomorrow morning.”
Holy shit! What's going on with this guy? Jim thought. “I – I don't understand, sir. Your predecessor had no issues with my work.”
“But I do, Jim. We’re going to run monetary policy strictly according to Keynesian[6] economic theory. I don't want anyone around who's second guessing our actions.”
“Sir?”
“I don't want you around here anymore, Jim.”
Jim hesitated for just a moment, and then said, “Okay. My resignation will be on your desk as soon as I can deliver it.”
“Thank you, Jim. You may go.”
Jim turned and walked toward the exit door.
“And Jim.” the Chairman called out as he was nearing the door. Jim stopped in his tracks and turned to face the Chairman. The Chairman was smiling.
“You do remember the nondisclosure agreement you signed when you first came on; don't you?”
“Yes sir.”
“Well,” the smile remained on the Chairman's face, “please remember that nothing that has gone on in here may be revealed. Nothing.”
“Yes sir. I remember.” With that, Jim turned and walked out of the room.
As he walked through the outer office, he passed a tall, dark, and lanky gentleman seated in the waiting area. Where have I seen him before? Jim slowed his pace to a crawl. He heard Carol speak into the intercom. “Mr. Chairman. Mr. Daniel Elsbach is here to see you.”
“Thank you Carol. Please ask him to come in.”
Carol turned to the man. “Chairman Cohan will see you now.”
Chapter 2 – Circa 2008
Several months later ...
Federal Reserve Chairman Ethan Cohan brandished his drink as he swaggered across the plush carpet of his inner sanctum. “Let's play ... kill the Bear,” he slurred. A grin was pasted across his face.
“You're drunk, Ethan,” Pete Simmons replied. “Maybe we ought to talk about this tomorrow.”
“Tomorrow, schmorrow. I want to kill me some Bear.” Ethan tilted off balance and almost stumbled over his own feet.
“What say you, Pete? Tom?” Ethan grinned from ear to ear as he looked at the other two. “You sorry asses! I would think that the Secretary of Treasury and the President of the New York Fed would have something to say about killing a bear. Hey?”
Quiet, sixty-ish, chubby, and bald, Tom Turin spoke in his soft, articulate voice. “What do you have in mind?”
“Let's get Bear Stearns!” Ethan said.
“I think you need to get some sleep, Ethan.” Tom replied.
“Bullshit! We need to get us some Bear.” Ethan's posture tilted as he replied.
Tom and Pete looked at each other and smiled – as though they were quietly laughing at Ethan.
Ethan’s frame tilted again as he said, “Bear didn't step up when LTCM[7] needed a bailout.”
Tom chuckled softly. “So what?”
“So – they need to be taught a lesson. Don't ya think?” Ethan tilted and then said, “Bear is gonna give us problems if we don't handle 'em. And soon.”
“What kind of problems?”
“They've got a shitload of naked silver shorts. And naked gold shorts too.”[8]
“So what?”
“When they go down – and you know they're going down – their shorts will have to be covered. Can you imagine the run-up in silver prices when someone starts buying silver to cover all those shorts?”[9]
An awkward silence came over the room. Tom and Pete looked at each other, uneasy, knowing the truth of what Ethan was saying.
Tom was the first to speak. “A quick run-up in silver could cause a collapse of paper assets.”
“Damn!” Pete sighed. “There goes the world economy!” And then he looked across the room at Tom. “So what are we going to do?”
“We need to keep Bear out of bankruptcy,” Tom replied.
“And get someone to take them over?”
“Yeah. I think that's the best way.”
Ethan was unusually silent as he tried to stand up. Pete and Tom continued talking.
“But who?”
“How about AB Jorday? They already manipulate silver with their naked shorts; and they’re probably able to handle still more. In fact, they may even be able to use the short positions to further drive silver down.”
“But no one can afford Bear at the current stock price.”
Tom looked down at the floor. And then he raised his head and looked at Ethan. “So, what do you think? How do you want to do it?”
Ethan stumbled as he sat down.
“Ethan?” Tom repeated. “How do you want to do it?”
Ethan settled in his chair and slurped on his twenty-five year old scotch. “We take down Bear's stock.”
Ethan took a breath and then continued. “You guys know the drill as well as I do. We kill Bear's stock price so that no one will loan them money.” Ethan seemed to be tilting in his chair. “And when they can't get money, they can't open for business.”
Pete was sitting on the edge of his seat. “And then what?”
Ethan looked him in the eye. “We'll tell Bear Stearns that Jorday is gonna buy 'em.” He took another swig.
Pete put his hand up to his chin. “Will the Federal Reserve loan Jorday the money to buy Bear?”
“Does a bear shit in the woods?” Ethan guffawed as he gestured with his glass. “Of course we will. We'll print up the money and give it to Jorday. It'll cause some inflation – but so what?”[10]
“I like it!” Said Tom. “I think it's a great way to handle all of these tidy details. But you know, this will cause a ruckus in the financial markets.”
“But that's the beauty of it all,” Ethan said as he waved his glass. “Everyon
e will want us to step in and fix the problem. It gives us the opportunity to inflate an even bigger bubble before it collapses!” Ethan chortled. “And we'll look like heroes in the process!”
“I'll get on it tomorrow,” Pete said. “They'll never know what hit 'em.”
* * * * *
“I received word today that Bear Stearns is going under.” Mikaela crossed her arms and focused her attention on Josh. “Your group will be taking over Bears' gold and silver short positions.”
“Blimey,” Josh sighed. “We're already at our bloody wits end on prices.”
“Well. You'll just have to buck up and get control.” And then she looked into his eyes and said, “You can do it. Just sell more naked shorts – get those prices down. Way down!”
Josh nodded his understanding. “Okay. I'll do it.” And then he smiled. “We'll sell so many shorts that the price will drop like a stone!”
Mikaela rose from her chair and walked around her desk. Josh couldn't help but notice – her clothing, shoes, and even the look of her skin and hair – they all said affluence, money, power. Josh felt his loins stir as he watched her. He listened.
“Good,” she replied. “And the greater success your group achieves, the larger the bonuses you'll get.”
She stopped and looked down at Josh, her lips pursed and her arms folded. “You may go.”
Josh walked out of her office. Blimey, he reflected, she's hot!!!
* * * * *
At 7:55 am, Tim O'Brien's quick strides brought him onto the trading floor of L&J Brokerage. He moved swiftly down the aisle between the rows of racks, consoles, and desks populated with computer workstations and printers; walking past a couple of traders bantering back and forth about their profits. He nodded to them and shouted, “Hey!” He passed yet another trader, fast-talking into the telephone. Must be trying to make a sale, he thought. Soon, the place will be crowded with traders and staff – all shouting through the chaos and pandemonium as they copy and dispatch orders. When the markets open, the pressure will be on.
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