Shadow Banking

by C. M. Albright

  They all said, ‘Hi,’ and Al reciprocated.

  ‘It’s great to see you Sam, what are you up to?’

  ‘We’re just on our way back from visiting Mum and Dad in the UK. We live in Melbourne. Mark’s a house master at a boarding school.’

  ‘That’s great.’

  ‘It is, I’m really happy although it’s hectic. I’ve got forty boys in the house whose pastoral care I’m responsible for and I’ve got these three to look after full time and another on the way.’ Al managed to squeeze in a congratulations before Sam asked him, ‘What do you do nowadays, Al?’

  What did Al do? He sat in front of a bank of computer screens, then picked up a phone and talked to people about numbers going up and down. He encouraged people to deal with him so he could make as much money out of them as was humanly possible. It meant nothing. It was intellectually and socially bereft.

  ‘I still work in the City. I’m working at Hartmann Milner.’

  ‘Hartmann Milner, wow! Congratulations to you too. Even I’ve heard of Hartmann Milner. I always knew you’d do well in business.’

  ‘It’s not all that great if truth be told.’ He sounded more downbeat than he had intended and despite the fact that they hadn’t seen each other in fourteen years, Sam knew him well enough to sense his disquiet.

  ‘How about you, Al? Do you have a family?’

  ‘Yeah, I’m married to Krystina and we’ve got a baby boy, Felix.’

  ‘Have you got a picture of him?’

  Al patted himself down for signs of his mobile phone but he had left it with Melody.

  ‘Oh I’ve left it in the lounge.’

  ‘Sam?’ Sam’s husband, Mark, raised his eyebrows and tapped his watch.

  ‘Sorry Al,’ said Sam. ‘We’ve got a flight to catch. Why don’t you look me up on the web and email me a picture?’

  Al nodded and smiled knowing that he wouldn’t.

  ‘And if you ever find yourself in Melbourne, you must come and stay.’

  ‘I will, I’d love to.’

  ‘Bye Al.’

  ‘Bye Sam. Bye Mark. Bye.’

  Al turned and walked on. Sam seemed so happy and contented with her place in the world. What she did was worthwhile. He knew he couldn’t say the same. Meeting Sam and her family had suddenly left him with a crushing sense of despair. Al stopped dead in his tracks as people rushed past. It was only half past nine in the morning local time but there was only one thing for it. He was going to the bar.

  28 The Price of Money

  SP500: 1518

  EUR/USD: 1.374

  AUD/USD: 0.841

  As Miles walked back along the beach after his early morning swim in the sea, he glanced across at the house next to his that had formerly belonged to an Italian shipping magnate. Miles had bought it from him the year before and now had the whole cove to himself. It was something that he had wanted to do for years, ever since he had owned his house in Hvar, but now that he owned the neighbouring property, he didn’t really know what to do with it. In fact, since he had bought it, no one had spent a night in it. He had thought that he might uproot the hedges between the two houses and unify the gardens, so that the two houses could become one property at which he could host summer parties. But who would he invite?

  He had a bad feeling about this weekend. It wasn’t the first time that he had hosted a weekend here with Artem Babich, Hans Huerliman and Roger Ellwood. His three business partners had visited a few times. It had become something of a guilty pleasure for the four prime movers at Aden Partners to use Miles’s house on Hvar as a weekend retreat, particularly when Artem had taken to flying in some high class female company from Rome. But this trip was different for two reasons. Firstly, Artem hadn’t waited for an invitation and secondly, he’d said, ‘No women – we need to talk.’ He had also wanted all four of them to travel down together in the fund’s Learjet but Miles had insisted that he went on alone the night before. Artem’s desire for a close tight-knit team was beginning to feel stifling. Miles needed some time alone even if it was only for a few hours. Artem had started behaving as though he was the team leader on a bank heist. He had even taken to speaking in hushed tones no matter the topic under discussion as though he might be overheard – or bugged. This had only compounded Miles’s fears regarding Aden Partners. Artem had drawn him in, closer and closer, tantalising him with the truth of what was really going on without ever fully revealing it. And all the while, his accumulated wealth grew exponentially. Doing something as patently absurd as raising his concerns with the appropriate authorities had never crossed his mind. And never would. This was not the sort of company where that course of action would ever be viable. Aside from money, within the fund’s own internal borders, the currency was pure paranoia. The toxic mood was evident in the appearance and demeanour of all four of them. Miles felt as though he had aged. The past few years had taken their toll, and it could only get worse. For anyone who could be bothered to look, it was clear to see that the international flow of credit was going to take a pounding in the coming months and years. The trouble was that seemingly no one could be bothered to look. No one wanted to believe that the golden goose was anything other than in rude health. Miles and Artem had discussed this on many occasions – the world was intoxicated by the supply of money; banks and their customers were giddy on their seemingly never-ending ability to raise finance no matter what the quality of the credit. When he thought about the situation at play, he was often reminded of his training course at Trenchart Colville and the fundamental rules that were drummed into him regarding basic balance sheet funding and the dangers of too much leverage. It felt as though basic lessons were being forgotten. He had brought up this subject many times with Roger Ellwood who ran the credit portfolio at Aden Partners. Roger was theoretically the fund’s brakeman but any suggestion of him possibly stemming the flow of accumulated assets was anathema to him.

  It was clear to Miles that there was far more capital in the fund than he knew about and the greater frequency of Vadim Titov’s visits had made him certain that he was inextricably involved. But whilst Miles hated the feeling that he wasn’t party to all the information that he felt he should be, it was difficult to raise too many objections. Since his arrival there in 2003, he estimated that he had personally accumulated about three hundred and fifty million dollars that he had carefully distributed between various banks in various jurisdictions throughout the world. As his worries and concerns had increased of late, he had concentrated on achieving greater liquidity with his own money; he felt it reassuring to know that if he needed cash, he could get his hands on it, fast. In the past few weeks, this had become something of a personal crusade, as he put more and more money into bonds while at the same time selling stocks. He could see that things were coming to a head. This had been brought on in no small part by Artem’s and Hans’s apparent feelings towards Roger. Though still very much a member of the inner sanctum at Aden, Miles could sense that Roger was increasingly out of favour and this had found a direct correlation with Roger’s moods and behaviour which only went further to alienate his fellow prime movers. What Miles had found increasingly irksome of late, was Ellwood’s apparent desire to secure him as some sort of ally.

  Things had come to a head the day before Miles flew to Hvar when Roger had insisted on taking him out for lunch. In a little lakeside Italian restaurant over pizzas and Barolo that Roger gulped and Miles sipped, it all came tumbling out. Much of it was what Miles had suspected all along. Whilst Aden Partners had many outside investors, the main purpose of the fund was effectively a money laundering operation on behalf of the Russian oligarch, Vadim Titov.

  ‘I gotta tell you Miles,’ said Ellwood, leaning across the table speaking in a drunken stage whisper, ‘I’m totally freaked out by the way that Artem and Hans are behaving at the moment. I can’t help but feel that I’m being shut out, if you know what I’m saying. There were always three of us in the club – well, four when you came along – and
now all of a sudden, there are conversations I know that are taking place that I’m not party to.’ He took another deep mouthful of the Barolo. ‘And I don’t like it.’ He moved even closer across the table, so close that Miles could smell the vapour of alcohol and pizza on his breath. ‘Haven’t you noticed it?’

  ‘This wine’s not great is it, Roger?’

  Ellwood ignored the question. ‘You must have seen how they’re behaving?’ He took Miles’s impassive demeanour as an affirmative and blundered on. ‘So, Miles, what are we going to do about it?’

  Ellwood was a clever guy. He had made a huge amount of money in the years that he had been at Aden Partners but it was clear to see that he was losing his grip on the situation. Miles had thought that he would be altogether more subtle in his attempt to find an ally and get him on side. What are we going to do about it? If that was Roger’s best shot to split the coalition at the top of the fund, then he was in worse shape than Miles had suspected. It was obvious to Miles that Artem and Hans were shutting Roger out – they had been doing it for months. What made him feel a little sick with trepidation was the way that Ellwood was being treated; it was the same way that he worried that he was being treated from time to time. The way that Artem and Hans behaved – virtually sharing each other’s offices – it could do nothing other than make you paranoid. It had clearly made Roger Ellwood very paranoid. He was a man who needed a friend. Things were going wrong. Miles could smell the fear coming off him. This intricately balanced and architecturally designed house of cards that represented his career and the money that he had made from it, was all looking very shaky.

  ‘What are we going to do about it?’ Miles repeated Ellwood’s question right back at him and then answered it himself. ‘I think we’re going to have to get another bottle from deeper on the wine list.’

  Roger might have missed Miles’s first attempt at dodging his questions but his senses weren’t so dulled as to mistake it a second time. Instead of putting him off, it just made him try all the harder.

  ‘Look Miles, I’m going to level with you now, OK?’ Another big mouthful of the dodgy Barolo. ‘There are books that the others don’t know about. Loads of junior tranches of CDOs. It’s all tucked away.’ Ellwood was back to the stage whisper again. ‘You remember King Arthur and the Knights of the Round Table?’ Miles didn’t nod, didn’t so much as move, but it was enough for Roger to continue. ‘It’s like that at Aden. You’re either in or you’re out. You spend your whole time trying to work out where the fuck you’re meant to sit.’

  Miles wasn’t listening to Roger’s Round Table analogy as he had succumbed to the horrific notion that what he was witnessing, drunk and paranoid on the opposite side of the table, was not Roger Ellwood but himself in a couple of years’ time.

  ‘Miles, I’m going to tell you something now that I know I shouldn’t but I’m going to trust you, OK?’ Miles didn’t move. Ellwood continued. ‘I’ve been a little – how can I put it?’ He slurped at the wine and looked around the room as though hoping to see the word that he was searching for written on the wall or a piece of furniture. ‘Imprudent recently. Oh shit man, I’m going to tell you. I falsified some of my returns.’

  As soon as Miles heard him say this, he knew that Roger Ellwood was fucked. He had only suspected that he was fucked up until then but at that moment, he knew it.

  ‘The real revals on my books are much worse than where I’ve got them marked.’ Ellwood looked Miles in the eye and said, ‘I’m starting to get margin calls and there’s a lot more risk than you think. So it looks like there might be some blood on the walls but I kind of figure that they need me as much as I need them. What with everything that I know and all.’

  Miles found himself feeling nothing but antipathy for Roger Ellwood. Any sympathy he might have felt for his predicament – and its reminder of his own – had gone.

  ‘I’m going to tell you something now, OK?’ said Roger. ‘I’m going to tell you this and maybe it’s something that you’ve already considered but this is what I think, OK? Vadim Titov, Russian oligarch, international player, owner of opera houses, golf complexes and soccer clubs, well, you know what I think? I think he’s a shadow. I think he’s a mask. Have you noticed something about him, right? You never ever hear him talk about the markets. You know why that is? Because he doesn’t know anything. He’s just a front. There’s someone else involved.’

  Miles knew that if he let him, Roger would keep talking all afternoon, fuelled on bad wine and fear. But Miles knew instantly that this conversation had to end. Being seen alone in conspiratorial conversation with Ellwood had to stop immediately. These revelations brought into sharp focus how little he actually knew about the fund. But would anyone really believe him that he knew so little about the inner workings at Aden?

  Miles told Roger that he had to get back. As Miles knew he would, Roger swore him to secrecy, told him that he hoped they could maintain a dialogue between them on this subject. He even went so far as to say, ‘I know I can count on you, Miles.’ It was like something out of a television soap opera and despite his own misgivings about all that was going on around him at the fund, he couldn’t help but despise Roger Ellwood.

  The following day on Hvar, Miles showered after his swim, pulled on a polo shirt and shorts and waited for his three guests to arrive. When they did, Roger was already well oiled, having got stuck into the drinks in the company Learjet on the way down from Zurich. Miles was amazed by his unsubtlety. Roger rolled his eyes at comments from Artem and Hans; his knowing glances to Miles were crashingly obvious and after a few minutes, Miles decided to avoid his eye. But this tactic served only to encourage Roger’s inappropriate behaviour.

  ‘Oh not you as well,’ said Roger in response to Miles’s attempts to blank him. ‘These two kept trying to freeze me out on the way down. I thought when we arrived here, I might have found an ally.’ While Roger helped himself to another vodka and tonic from the drinks cabinet, Miles looked across at Artem and Hans who were seated on the sofa opposite. They remained impassive as they exchanged a glance and as soon as Miles saw it, he knew that some sort of decision had been reached. It was a look of steely resignation and Miles only had to see it to know that the current situation regarding Roger was untenable. There was no way they could allow someone who was clearly going off the rails in such a spectacular style to autonomously manage so much risk. The fast approaching nervous breakdown was plain for all to see but Miles wondered whether Artem and Hans were aware of Roger’s extravagant miscalculations with regards to the value of the fund’s structured credit portfolio. Roger hurled himself down onto the sofa next to Miles, misjudged it slightly and spilled some vodka and tonic onto a cushion.

  ‘Whoops! Sorry Miles. Don’t want to sully the soft furnishings. I know how particular you are about everything. Send me the dry cleaning bill, won’t you?’ Miles didn’t respond but as he glanced across at Artem and Hans, he could see them watching him. What were they thinking? Maybe they knew about his lunch with Roger in the little Italian restaurant in Zug the day before and were worried about their association? Would they realise that he would never throw his lot in with a car crash like him? And one thing that did niggle at him was why they had bothered to bring Ellwood to Hvar in the first place. If they wanted to make some sort of announcement that his career at Aden Partners was over then it would have been politic to forewarn Miles – or at least discuss it. The sheer logistics of unravelling all of Ellwood’s dealings would be nightmarish in the extreme.

  ‘So, what do you guys fancy doing this afternoon?’ said Miles when it became clear that the topic of conversation was not going to turn to anything business related. Hans shrugged his shoulders, took another sip from his beer and turned to Artem who said, ‘We thought we’d maybe have a few drinks and get some sun. You know, play it by ear.’

  This response was curious in its own right. On previous weekends when Artem, Hans and Roger had joined him on Hvar, the schedule had been very tightly a
dhered to and usually involved lengthy discussions about the fund’s dealings followed by a big dinner prior to the arrival of the female company. Artem’s and Hans’s taciturn manner suggested that this weekend was going to be different. Roger, however, couldn’t help but take advantage of the silence in the room and launched into a story about his time at a boarding school in New England. In his vodka befuddled state, he clearly thought that his story was a cleverly articulated reflection of the current situation with regards to his position at the fund, recounting as it did, the story of two older boys who had taken it upon themselves to subject him to a regime of bullying. It was, in reality, a poorly veiled metaphor for his own perceived persecution at the hands of Artem and Hans who watched him as he spoke and didn’t even bother to interrupt him.

  ‘But I got the fuckers in the end,’ said Roger. ‘The more they picked on me, the deeper the hole they dug themselves. I’d devised all sorts of elaborate methods of engineering their downfall but in the end, it was something very simple that did for them. The year before, a couple of guys in their final year had been expelled after the headmaster had discovered they were smoking grass. It was one thing that he was particularly hot on. Anything drug-related was a guaranteed expulsion. So, I managed to get hold of a couple of Thai-sticks from a friend of my older brother’s back home in Boston and planted them in their lockers. All it took was an anonymous tip off to the headmaster and they were on their way. Disgrace, school careers ruined. It even managed to make a couple of papers in the area.’ Roger stared down into the bottom of his now empty glass before he looked across at Artem and Hans who were doing their best to ignore him. ‘My only regret about the whole thing was they never got to find out for sure that it was me who had been the architect of their downfall. A few years later, I thought about getting in touch with them. But I didn’t. I guessed that they kind of suspected it was me anyway. They’d have spent hours thinking about all the people who might have had a grudge against them, tried to work out who it was that they had bullied the most, and they would inevitably have thought of me.’ There was a tense pause while everyone avoided each other’s eye before Roger said, ‘I’m going to get another drink,’ and levered himself unsteadily out of the deep sofa and navigated the furniture towards the drinks cabinet.