by Paul Torday
Table of Contents
Cover
Prologue
One
Two
Three
Four
Five
Six
Seven
Eight
Nine
Ten
Eleven
Twelve
Thirteen
Fourteen
Fifteen
Sixteen
Seventeen
Eighteen
Epilogue
Prologue
The money came out of nowhere. In the first years of the first decade of the new century, money flowed around the world as it had never done before. The newspapers called it a ‘tsunami of cash’, with an enthusiasm that exceeded their accuracy. But that described how it felt to those of us in the money business at the time. Investment banks, hedge funds, prime brokers, mortgage lenders, retail banks: all of them threw money at everything and everyone. Did you want to buy a house? Then the industry would lend you the price of the house, plus another few tens of thousands on top to fit new carpets and hang new curtains and pay the stamp duty, and with luck there would be enough left over for a good long holiday once the deal was done. All you had to do was sign on the dotted line. You didn’t really have to prove you had an income; all you had to do was sign your name.
Did you want to buy a car? The lease finance company barely needed your address in order to lend you the purchase price of almost any model you wanted: why buy a Ford; why not buy a Porsche? Did you want to buy the girl you love a diamond ring, but found that your credit card was at its limit? The solution, in these days of prosperity, was simple: get another credit card, at zero per cent interest for two years.
Around the world a metasphere of invisible, intangible money flowed through the Internet, coursed through the arteries of the electronic banking and trading systems that had sprung up in the last few decades of the previous century.
No one knew where the money really was: it was everywhere, and it was nowhere. It was a wonderful time to be in the business. We called our industry ‘Financial Services’ because that had a nice ring to it: as if we were a group of grey, respectable bankers cautiously managing your money and avoiding risk. But, while there were still a few of those around, most of them had been sidelined, or forced into early retirement owing to their lack of panache and imagination.
The people who had the money nowadays knew how to enjoy life, and how to spend their bonuses. Shortly after I started working in the City, after several years in the army and a brief spell in the private security industry, the first ten-million-pound flat was sold. Ten million pounds! For a flat! The mind boggled; but it was not long before you could spend twenty million pounds on a flat, thirty million, eighty million. It proved, if proof were needed, that the normal laws of economics - that boring, dusty subject as it used to be taught in universities - had been banished. The boom-and-bust cycle had been broken. It was official. One leading central banker cautioned the market against ‘irrational exuberance’. But why was it irrational to be exuberant when you were making lots of money? The price of nearly everything almost always went up. If you didn’t present it that way, it was probably your fault for being a bit slow, a bit nit-picking about detail, a bit painfully, boringly honest.
I was in the City myself for a few years: not a player, as some of them called themselves, but a minor character, a walk-on part. I had taken the most basic Financial Services Authority exams, which enabled me to offer advice to investors and still be legal. It didn’t really matter: I was not one of the elite who had their own trading desks; or one of the mathematicians who occupied the top floor of our premises in Bloomsbury, devising investment strategies expressed in strings of algorithms, a language that few could understand; nor was I charged, like Bilbo, with the high priest’s job of making this new religion comprehensible, irrefutable and irresistible. My business card said ‘Director — Client Relations’ but the job was humbler than that: I was what was known disrespectfully in the trade as a ‘greeter’. I knew people, you see. I knew lots of people: from school, from army days; friends, and friends of friends. Some of them had money to invest, and I would lunch with them at White’s, or entertain them in our hospitality tent at Cheltenham, or at Ascot, or at Wimbledon. I would take them for a couple of days’ shooting in Devon or Yorkshire. I went every other week to assist at roadshows where high-net-worth individuals whose names had been gleaned from lists, no doubt bought from a bank or credit card company, were lured to the conference rooms of expensive provincial hotels with promises of free champagne, canapes and financial insights.
Everybody knew me as Eck, even though my proper name is Hector Chetwode-Talbot. I was Eck, good old Eck, not the sharpest tool in the box, but an officer in a decent regiment once upon a time, and thoroughly trustworthy. If Eck thinks it’s a good thing to be in, then it must be a no-brainer. I would set up a meeting between the punter and Bilbo, and perhaps one of the traders from upstairs to add a whiff of cordite from the markets, and the rest was up to them. It wasn’t only people I knew socially: there were acquaintances who worked as pension fund managers, or as corporate treasurers, who wanted some hedge fund action. I was at one end of the conveyor belt, buying large gin and tonics, shaking hands and making jokes; at the other end was the moneymaking machine.
The name of our particular machine was Mountwilliam Partners: one of dozens of similar firms that had set themselves up in the last few years in or near to the West End of London, and in the equivalent districts of New York, Paris and half a dozen other capital cities. We knew how to make your money work better than you did. You’re getting a seven per cent compound growth already? Don’t be pathetic! We offered ten, fifteen, twenty-five per cent compound. It would be negligent of you, we argued persuasively, to ignore these opportunities at the expense of your children, or your clients, and especially at the expense of yourself. Mountwilliam Partners was what was called a ‘multi-strategy’ hedge fund: we analysed other people’s trading strategies and imitated the ones we liked. Our motto was: we can pick and choose, duck and dive, cut and run, just as the market dictates. For this you paid us a two per cent management fee, and a twenty per cent gross performance fee: two per cent per annum of a few hundred million pounds under management is a good income shared among twenty or thirty people, even after paying the rent. That was before the capital gain, the twenty per cent, which was reserved for the equity partners such as Bilbo. My calculator overheated every time I tried to work out what Bilbo might take home at the end of the year. The numbers were so big, they meant nothing to me.
I didn’t care; I was incredibly well paid for what I did.
After I left the army, I had a brief spell working for a private security consultancy. I left that outfit too, after a nasty moment in Colombia. By then I was at my wits’ end as to what to do with the rest of my life. That was when Bilbo rang, and what he told me over the phone and afterwards at lunch was enough to persuade me that the doors of Aladdin’s cave had opened just a fraction; just enough for me to glimpse the sparkle of what lay inside.
Within two years of moving to London, joining Bilbo and then passing my exams, my salary was a multiple of what I had been contemplating before, and my bonus, if everything went to plan, would be a multiple of my salary. Everything always did go to plan: it was the best of times.
*
What Bilbo had discovered, along with everyone else in those wonderful years, was debt. It wasn’t always called debt. It wasn’t always recognised as debt. Sometimes it sat on one side of the balance sheet; sometimes on the other. The pension funds paid hedge funds to look after some of their money; the
hedge funds borrowed money from prime brokers on margin, or deposited funds with banks, or spent the money on buying up senior and subordinated debt. It was hard to say who owed what to whom. Then money became too boring, too finite. After all, this market wasn’t about tangible things like pound coins and dollar bills: it was about the pricing of risk. Our view of the right price for a risk was always going to be different to anyone else’s: we bought something - a share, a bond - from people who perceived higher risk in it than we did; we sold to other people who perceived lower risk in it than we did - or sometimes didn’t understand that there was any risk at all.
We bought subordinated debt from banks that wanted to get it off their balance sheets, and from bankers prepared to accept sixty cents in the dollar, because that way their bonus was less likely to be cut than if they had to write off the debt. We bought the debt because we believed we could move it on to other banks, or private equity traders at eighty cents in the dollar - or even wait, in the hope it might one day be redeemed at par value. Then all those debts suddenly became an asset: alchemy! We called them collateralised loan obligations, or collateralised debt obligations, but mostly we just used acronyms such as ‘CLOs’ or ‘CDOs’: it sounded more punchy, and we bought them and sold them as if they were US Treasury or British government gilts, with no distinction as to risk. We bought them and sold them as if they were sheep at the mart. We swapped futures contracts; we swapped interest rates; we swapped swaptions. We didn’t need to buy shares: we borrowed them from stock lenders and traded on margin. We believed the market always went up in the long run, and usually bought long, or else bought contracts for difference so that we never actually needed to own the shares, just pocketed the difference in price between buy and sell. We didn’t just use our own money. We leveraged twenty pounds for every one we deposited on margin with the prime broker. Bilbo once told me, in one of his confiding moods: ‘To stay ahead in this industry, you need to leverage your balance sheet. We need to maximise our fire-power.’
It didn’t matter if the pound in the balance sheet was eighty pence of sub-prime loans and twenty pence of real money, whatever that was these days. We marked to market, like everyone else. Our balance sheet assets were what we said they were. Who should know better than us?
Farther down the chain, the rest of the world borrowed too: they bought houses with debt, they bought cars with debt, and none of it mattered because everything always went up. If you questioned the risk on a house purchase, the broker arranging your mortgage would say, ‘They’re not making land any more. You can’t go wrong with bricks and mortar.’
The levels of debt rose, invisibly, and exponentially. Our counterparty exposure in Mountwilliam Partners (only we didn’t recognise it as debt) was the same size as the external debt of Guatemala: yet we were only a small player in the hedge fund industry. The bigger funds were into sums of money so large that they could scarcely be computed: what is a trillion dollars? I don’t know.
For a while it seemed as if the music would never stop. I didn’t think about the bigger picture. Bilbo, I think, did know that the music would stop one day, but that is not what he said to the punters, or even to us. However much we made, it was not enough; however much we used our leverage, someone out there was bigger and better than we were, and had to be beaten.
You had to be big, because then the market did what you did. You became like the Pied Piper of Hamelin. You played the tunes, and the rats followed. Just when the music was at its loudest, I bought myself an Audi TT soft top. It was midnight blue, with a black leather interior, and stuffed with every sort of gadget the manufacturer could think of. When I say I bought the car, I didn’t buy it with real money. I used some of my bonus to finance a deposit and borrowed the rest from the bank; the balance was hire-purchase finance. The salesman kept me for what seemed an age, filling out forms that neither he nor I cared much about, setting out my repayment schedules. Then came the champagne moment of sitting in the new car for the first time, smelling the new leather, and polish. I turned the key in the ignition for the first time, and heard the throaty rumble of the engine, growling like a beast not entirely tamed. It was the greatest moment of self-indulgence of my life so far: but, why not? My next bonus might be so huge I could pay off the HP debt; or maybe trade in this car and buy a real beast, a Ferrari or a Maserati.
I drove the car to the South of France to play golf with Flenry Newark. That was how I met Charlie Summers, and this is as much his story as mine. Some of it I heard later from Flenry, some of it from others; mostly from Charlie himself, as he sat for hours in an armchair at Aunt Dorothy’s, clutching a tumbler of whisky. But that was later on. Charlie wanted to get on the money wagon too, and his optimism was, for a while, no less than mine; no less than Bilbo’s. All you needed was an idea, charm and some determination, and then the money would roll in.
Meanwhile, the invisible, locationless money ebbed and flowed around the world, a great tide of wealth. Each high tide was higher than the last; each low tide less marked. No one knew quite where it all was, or which debts were going to be repaid, and which not. Yet, here and there, one or two people were beginning to ask: where’s the money?
For a while these people were dismissed: as lunatics, nutcases, Jeremiahs; people with their own murky agendas. Then there were more of them, and their mutterings could not be ignored. Loan defaulting began, at first in America, then elsewhere. In secure meeting rooms politicians and bankers began to discuss the unthinkable. Scenarios were painted for them by economists who spoke as if they had been asleep, like Rip van Winkle, since the Great Depression and had only now woken up, and were looking about them in dismay.
Then, somewhere, someone asked a new question. It was: ‘Can I have my money back?’
We didn’t know it then, but the money that had come out of nowhere was about to return to exactly the same place.
One
People change. I have changed since my army days, even since my days in the City. The other evening I heard a Mozart oratorio being sung in York Minster, an event organised by the charity I now work for. As I listened to the pure notes of the tenor singing Ave Dominus, the tears welled up in my eyes and ran down my cheeks. I prayed that no one would notice. Until a few years ago, the only musical pieces I reacted to, with perhaps a slight prickling at the back of the eyes, were the ‘Eton Boating Song’ and ‘The British Grenadiers’. Now I can scarcely remember the words of either work, especially the latter, which once meant so much to me:
Rum tumtumtumtumtum; rumtum, tumtumtum
Of Hector and Lysander, and such great names as these
But of all the world’s great heroes, there’s none that can compare
With a tow, row, row, row, row row something British Grenadiers
Because people change, one becomes aware that it is difficult, if not impossible, to estimate the true worth of another human being. In the army we learned to sum up people very quickly: good soldier; crooked as a nine-pound note; one prawn short of a sandwich. As a simple system of categorising human types, it served quite well. But it was not adequate to recognise human potentiality: the possibility that, when one shone one’s torch into the coal cellar, a refracted gleam might indicate the presence of a diamond among the sooty lumps of more basic forms of carbon.
Such reflections did not pass through my mind when I first met Charlie Summers. I was, in those days, still very much a man of business; and hoping one day to become a man of leisure, a state of being which I thought I might be able to afford quite soon, if things kept going smoothly for a year or two longer. I did not then reflect much on my life or on others’ lives: I judged people at a glance. In Charlie’s case, when I saw a rather grubby-looking man in his forties, wearing a navy blue blazer with the shine of age upon it and anointed with dandruff about the shoulders, I was inclined to place him as a typical middle-aged drifter; neither use nor ornament, as my mother used to say. The rest of his outfit was in the same vein: well-worn chinos that had
once been white; scuffed suede shoes; brass buttons on the blazer, and a striped tie, hinting at military circumstances without committing to any specific regiment.
I had driven down to the South of France with Henry Newark, and our plan was to play golf and drink wine for a week. Henry was a very old friend, but he was also a potential punter in Mountwilliam Partners, and I felt sure we would find a moment to talk about money and investment in among the golf and the eating and drinking. That morning we were taking some time off from these rigorous obligations, sitting in the square of a small French town, in the hills above the Corniche. We had moved from cups of coffee to a glass of a sour white liquid, which was the only thing available in the form of an aperitif. It was as yet only eleven o’clock. The Daily Mail had been read, and Henry was now working away at the Sudoku puzzle. I was looking at the business pages, and saw that the Footsie 100 Share Index had reached another record high. House prices were up another ten per cent year on year. Everyone everywhere was making money: even me, in a small way. I put aside these reflections with my newspaper and settled back in my chair to watch l he theatre that seems to be an integral part of daily life in small Provencal towns: a sinister-looking man, shuffling down a side street carrying a baguette, clearly intent on murder; a shop girl flirting with a customer who was by no means obviously her husband or her boyfriend.
At intervals, enormous trucks would climb the steep and winding roads from the plains below - vehicles large enough lo be considered a problem to overtake on a motorway, let alone on the small roads that intersected the hillsides. As they arrived in the town square, their progress was impeded by a stone fountain, which might - or might not - have been intended for use as a roundabout. There they might be confronted by a people carrier full of Swedish tourists, whose driver, in the panic following a near-head-on collision with (he oncoming truck, seemed unable to locate reverse gear. In the ensuing impasse the most optimistic outcome one could imagine was the demolition of the side of a house as the truck manoeuvred its way around the fountain, crushing to death the occupants of the people carrier as it did so. At the high point of this drama three madmen on Harley Davidsons flew between the opposing vehicles and roared off down the hillside. Then, all at once, the crisis was resolved, without anyone quite seeing how it happened: the people carrier had gone, and the truck was parked by the local supermarket, its driver handing over the tray of yogurt that he had come all this way to deliver.
