The Warning

by Davis Bunn

  Even so, the view from the back of a company limo wasn’t all bad. The street life was as entertaining as a new Broadway musical. New Yorkers were constantly auditioning for roles they had already won, where the world was their audience and the admission was free. Laughter was canned and loud enough to carry. Everything was done at full speed. People even relaxed in high gear.

  The city’s energy amplified the closer he drew to Wall Street. He spent the remaining minutes of the drive going over the documents delivered from his Realtor that morning. Thad had put in an offer on a brownstone at Ninety-third and Park. Those who lived closer in called this area the hem of Harlem. He didn’t mind. It was still Upper East Side, and it was a building that would soon be all his.

  The objective for most New Yorkers was to rise to a higher floor. The lower down one lived, the greater the threat of being impacted by too many other human bodies. So everybody was on the move, trying to go from the first floor to the fifth, from the fifth to the twelfth, from the twelfth to the penthouse. Then it was time to keep the penthouse and buy the weekend place in Connecticut, which was as far as most New Yorkers’ umbilical cords would stretch.

  Thad was still enough of an outsider to prefer a bit of green to a more spacious view, and so he was looking to buy a house. The place he had selected came with a postage stamp of a garden surrounded by a thirty-foot brick wall topped with electrified barbed wire. All the comforts of home.

  Upper East Side was the place of wealth in action. For about thirty blocks north and south and four or five east to west, it was a high-rent island for the wealthy. The greatest competition was over making an elegant impression. Money was less critical than the time to spend it. The pets were as decorative as the paintings on the walls. Here it was possible to believe there was nothing wrong with either New York or the world. It was a great place to have money and want to flaunt it, which was exactly Thad’s aim.

  He set the real estate papers back into his briefcase as the limo pulled up in front of the Turner Building. Thad bounded up the stairs, gave the receptionists a quick greeting, ignored the myriad stares that tracked his movements toward the elevator.

  Upstairs Thad stopped by his soon-to-be office and checked on the workers laying the new carpet. The old carpet had been fine, but he had changed it anyway, selecting the most expensive silk-and-wool spread he could find. It was good to give the office rumor mill something big to chew on. His private sanctum was a declaration of having arrived.

  The contract negotiations with the Valenti lawyers had been predictably vicious. But Thad had stuck fast, and Larry had backed him up. In the end he had gotten everything he had wanted. The day after signing, a mysterious payment had appeared in his newly opened account. That same afternoon a courier had delivered a pound of beluga caviar, a new solid-gold Rolex, and a note from Turner saying, “Glad to have you on board.” Thad reported the early bonus to Larry and then used it as down payment on his brownstone.

  He entered the trading floor and did a quick scouting. Activity remained at the same fever pitch. Everybody was on edge, stretched by positions that shifted from tenable to terrorizing in the space of a few minutes.

  A guy whose name he could not recall looked up from his calculations to grin as Thad passed. Thad slapped the offered palm and asked, “How’s it going?”

  “Awful. This market needs a daily injection of Tylenol. It’s one giant headache. Been that way for weeks.” He swiveled to track Thad’s progress past his desk. “Hey, what’s the scoop for today?”

  “Not a chance.”

  “Come on, be a pal.”

  Thad arrived at the final desk before the door leading to Larry’s private sanctum. He dropped his case and turned to grin at the guy and feast on all the other eyes following him. “If you need a pal, go buy a dog.”

  In fact, Thad was working on his third idea for Larry. It was a major deal, one that would have been impossible to get by the bank’s senior monitors had the market been any less nervous. As it was, however, nobody was making much money and losses were mounting. The sort of alternatives he had offered Larry his second day here were one of a kind. There was no chance to repeat them, not without risking being caught by the SEC. No, what he needed was a new way to guarantee profits, one that remained within legal boundaries. Barely.

  As it was, the trading floors were structured along fairly normal lines—equities, currencies, futures, options, and so on. Thad opened his briefcase and pulled out the copy of a file he had left with Larry the day before. His plan was not to add, but rather to restructure on a massive scale. What he wanted was to shake up the entire trading operation, to put his stamp on the bank and its future in a major way. The great secret of New York was, take a chance. Thad was planning to do just that.

  The over-the-counter derivatives market was bigger even than the one for money futures, and far more dangerous. Here, companies could hedge against any risk they cared to name, and for any amount. It remained almost entirely unregulated, as it essentially comprised contracts between two private parties. The crowning glory was that it was also completely legal.

  Thad had watched its rise for years. He knew this sort of legalized piracy could spell major profits for years to come.

  Over the previous eighteen months, OTC derivatives had suddenly started growing at an electric rate. Even so, many banks were afraid to touch them—Valenti included. Thad proposed to change all that, drawing a hundred traders from other less profitable areas and concentrating them on these ventures. The bank’s first entry had already started, a project Thad had managed personally in interest-rate swaps. He was two days into the deal, and the bank already had a paper profit of $2.2 million.

  If his proposal was accepted, Valenti would soon be doing a roaring business in trades whose names were a foreign language even to most bankers—caps, flaws, spreads, captions, flawtions, spreadtions, and even more exotic fare. Caps set an upper limit on the interest rate paid. Swaps typically changed a fixed rate of interest for a floating rate, or vice versa. For clients it could be a cheap insurance—or an expensive gamble. For everyone seeking to cover a risk, there was another party looking to take a chance.

  Most often, people in positions of decision-making power gradually became hooked into playing the derivatives markets like others did the casinos. Metal-working companies, pension funds, insurance houses, utilities, local city governments—all were involved and actively courted by the traders. It only took one person with a penchant for fast profits and the authority to sign checks to open the company to risks it would never in its wildest dreams consider taking in its normal course of business.

  If things went wrong, the results could be horrendous. Orange County lost over two billion dollars in thirty-six hours on a derivatives deal gone awry. The largest German steel company went bankrupt after just one bad trade. The oldest bank in England lost more than a billion dollars through one rogue trader and was forced to close its doors after 250 years in operation.

  These and a hundred other companies had vanished without a trace, more grist for the gossip mill that circulated among derivatives traders. Here this morning, bankrupt at midday, forgotten the same afternoon. Thad was not the least bit concerned. He had no intention of being on the losing end of anything.

  The magic to OTC derivatives was, there were no rules. None. Traders related the price of oil to the value of the Japanese yen to the cost of unmined Indonesian aluminum. Not even the traders themselves understood some of the risks they were setting up. Nor did it matter, so long as they got in and out fast enough. All they needed to see was the potential to win.

  And if they did win, the payoff was huge. Twenty million dollars on a quarter-million-dollar hedge, payoff time of less than three days. That sort of thing was commonplace. Those who tapped out simply vanished. Their places were taken the next day. There were always more people out there clamoring to take the plunge.

  Wall Street had a name for these high-risk derivatives. They were called nu
clear waste.

  The red light at the top of his bank of phones finally blinked a half hour after Thad’s arrival. He picked it up and said in greeting, “The market’s gyrating like a kid’s yo-yo.”

  “When this volatility finally gets a direction, it’s either taking off like a shuttle launch or dropping like Niagara Falls,” Larry agreed. “Every day we don’t have a direction is just adding to the explosive tension.”

  “Still looking for a leader, just like you said.”

  “Right. Come in here.”

  “On my way.”

  When he arrived, Larry pointed him into a seat and said, “I like your plan.”

  “Just like that?”

  He closed the file and scribbled on the cover. “Something this big will have to be reviewed by the board and okayed by Turner himself. But I want you to go ahead and start implementing the changes.”

  Thad could not repress his grin. “Fantastic.”

  “Just one thing.” Fleiss reached for his mug. “Korda.”

  “I know.” The morning’s high diminished. “The guy’s becoming a bigger nuisance with every passing day.”

  “The Journal called him ‘a phenomenon’ this morning.”

  Thad’s gut took a bitter twist. “I missed that.”

  “On the editorial page. Responding to some press conference in the back of beyond, I forget what the city was called. Made the Times business page yesterday.”

  His gut tightened even further. “I missed that one too.”

  “Just as well. Apparently it was more of the same. The twenties all over again, a major drop on the way, stuff we’ve heard a hundred times before.” Fleiss hit the button to bring his coffee apparatus into view and refilled his mug. “Only now he’s getting national play.”

  Korda remained the only dark spot in Thad’s rapid assent. “I saw he got a mention in Forbes this week.”

  “And Business Week.” Fleiss shook his head. “The man’s gone from being a clown to a menace.”

  “Just like you said.”

  “Yeah, well, being right but being in the red doesn’t get a win. I got a call from the old man this morning. He wants to know why we haven’t done anything about this guy. After he ordered me to drag you off the case last week, it was a little hard to take.”

  “But you didn’t tell him that.”

  “No, what I said was you’d be back on it. Seems our goons from downstairs have had trouble pinning Korda down.”

  Thad nodded. He knew all about that. Wesley Hadden had become a turncoat. He was acting as a one-man security detail, on duty night and day. “Nowadays Korda’s schedule is a national secret. His hotel and airline reservations are being made under block bookings. His movements are impossible to track in advance.”

  “Not next Thursday.” Fleiss picked up the other piece of paper resting on his immaculate central table. “I got word from the guards this morning. There’s been major advance coverage of some rally he’s addressing. You heard about this?”

  “No.” Thad did a quick calculation in his head. “But next Thursday is only five days before Korda’s going to disappear all on his own. The following Tuesday is going to arrive and the market’s going to surge despite all his sour predictions. Korda will be good for one round of Jay Leno jokes before he’s buried for good.”

  “Doesn’t matter. There’s too much chance he’ll push back the date a week or so. That’d just give the cycle more time to build.” Fleiss glanced at the paper in front of him. “Next Thursday Korda’s one of the scheduled speakers at this rally in Richmond.”

  Thad rose to his feet, reached for the paper, and said, “I’ll get started on the changes around here and then go take care of Korda personally.”

  “Stay well back. You’re there only to make sure things get done right this time. I want to get Korda out of the picture, not to lose my number-one trader.” Fleiss’s flat gaze followed him to the door. “‘Just make sure the man disappears.’ Those were Turner’s exact words. The man is to vanish from the face of this earth.”

  There was no way he was going to sit this one out. “Don’t worry. In a week’s time Korda is history.”

  –|| THIRTY–NINE ||–

  Five Days . . .

  Thursday morning Buddy gave what he hoped would be his last press conference of the week. He spent the time between breakfast and the conference reviewing the whirlwind that his life had become. Their Friday and Saturday itinerary had called for St. Louis to Dallas, Oklahoma City, and Wichita, and then a long leap to Omaha and Des Moines. On and on, pushing harder and harder, moving farther and farther from home. Television lights and reporters had begun meeting them at the airports, and with each stop their questions became more mocking. Yet the crowds had grown ever larger, and the message’s power had continued to resound.

  Sunday had been Seattle and Portland; Monday, San Francisco and Sacramento and San Diego; Tuesday, a flight halfway across the nation to Little Rock. In his daily conversations with the home office, Alex and Agatha had sounded increasingly like robots. Every day Buddy heard more voices in the background, more telephones and excited chatter filling the spaces between words with his brother. Buddy had known better than to even ask what was going on. Wednesday had been Atlanta and Charlotte, and that night the drive to Richmond. The entire way up Clarke and Wesley had chattered excitedly over the Richmond rally scheduled for the following afternoon. Buddy had spent the hours drifting in and out of a strange half doze, never really connecting with anything that had been said. In their nightly conversation the previous evening, Molly had offered to join him for the final push. Buddy had told her not to bother. He missed her, but he could not ask her to endure the road. Besides, it would not be long now.

  When Buddy arrived at the hotel’s grand ballroom that morning, he discovered waiting for him a crowd of journalists larger than the first few groups who had gathered to hear his message. He did not mind the number. He scarcely saw them. All he could think about was that the countdown continued. Tomorrow was the final chance for people to make their investments. He wanted to pound the podium and scream the words with every shred of energy he had left.

  Instead, Buddy found the words were there waiting for him when the television lights flashed on. He began without preamble, “Analysts are now saying that there is every reason for the market to sustain its climb for years to come.” Buddy shook his head. “I have been a banker for more than thirty years. I can still remember the late seventies, when the Dow was stuck below a thousand for over three years. That particular generation of analysts claimed that the market had permanently anchored itself. That was the expression of the time. It was permanently anchored, and there was no reason to believe that it would ever rise again.

  “Now we are looking at a Dow that has broken every record a dozen times over. Now we in our wisdom can look down our noses and say how wrong they were.” Buddy gripped the podium, leaned forward, and said, “But how will the next generation of analysts view our confident assessment that this unprecedented rise in the market will continue for years to come?”

  He gave them a moment, hoping and praying that the message would get through. But there was no response from the field of faces, just a sense of staring out at silhouettes rather than people. “No nation on earth has ever experienced growth without downward slides. Never, in all of history. Why? Because there are too many factors underpinning any economic rise. We tend to forget them when all is going well. But the truth is, if two or three of these structural factors fall in tandem, there is every likelihood that the entire economy will decline as well.

  “Let us talk about one of these vital unseen factors that help to hold up our economy—our nation’s banking structure. Never in recent memory has the banking system been as unstable as it is now. And the reason for this is the current trading craze. It is, in my opinion, a cancer eating at the heart of our nation’s financial system.

  “Before I explain why trading is so hazardous, let us take a look back
at the Great Depression. After the Crash of 1929 on Wall Street, the world’s economies crumbled like a house of cards. Poverty struck like a worldwide plague. Nobody thought it could happen. But it did. Wall Street’s collapse was caused by gambling, pure and simple. People borrowed to gamble, because the returns were great. The more they made, the more they gambled. Their debts rose just as fast as their incomes, sometimes even faster.

  “After the Crash of 1929, the government instituted financial reforms that were supposed to make this gambling impossible. And it stopped things for a while, or at least slowed things down. But now two related markets are sidestepping these laws. These are the new trading markets that I say hold a disastrous level of risk for all of us. One is called futures, the other derivatives. Ten years ago, the market in financial futures barely existed. This year, the Chicago financial futures market will have a turnover in excess of fifty trillion dollars.”

  Finally, finally, he saw a few of them stirring. A few were leaning toward their neighbors, a few were making notes. Buddy felt a note of desperation enter his voice. He pleaded, “These modern-day traders dress their actions in fancy jargons and glossy brochures, but the bare truth is that they are simply buying and selling risk. The world’s financial underpinning is based on a gambling pit unlike anything seen since 1929.

  “America’s top five banks hold on average three trillion dollars in derivatives on their books, and from this obtain almost half their total profits. This means they hold ten times more in high-risk paper than they have in total equity capital. Ten times. These banks have no choice but to ride the tiger.

  “The biggest worry for the banks is not that they might have gotten things wrong. No. The biggest danger is that they have customers who will lose big and then not be able to cover their losses. One such major loss would be enough to wipe out a bank’s total cash reserves. That could happen in the space of just one day. The bank would be insolvent. Everyone who has placed their money in one of these banks, everyone who is relying on these banks to meet their own financial obligations, would lose every cent.