The Land of the Free

by TJ Tucker

  Torres nodded to acknowledge Matheson then added, “Let’s keep on top of the situation. Hanna, Tyler, keep me informed of any anomalous actions by the Chinese or North Koreans. Tom, convene the Working Group on Financial Markets. Be ready to intervene in suppressing gold and boosting Treasuries. I don’t want any signs of a financial panic spreading beyond your office.”

  Gallant looked lost, and Morgensen noticed this. “Tom, it’s the Plunge Protection Team, and you’re the chairman, remember?”

  The Plunge Protection Team, as it was called informally, was created by an executive order signed by Ronald Reagan in response to the 1987 market crash known as “Black Monday.” It consisted of the Fed Chairman, the Treasury Secretary, and the heads of the SEC and CFTC (commodity trading regulatory body). The group existed officially to give recommendations to keep markets functioning smoothly, but it was widely believed that they regularly exceeded their mandate and purchased securities to prop them up. Critics argued that this amounted to a destabilizing influence, since they never intervened to prevent markets from becoming overvalued, only to prevent an overvalued state from correcting.

  Gallant replied to Morgensen’s taunt with a terse “of course I do,” and excused himself as the meeting adjourned.

  …

  When the Plunge Protection Team intervened in markets, the scope of the intervention was always limited by the willingness of the Federal Reserve to create new dollars to purchase assets. But today, Torres’ instructions were that there could be no hesitation. There could be no losses in the major indices, in Treasury bonds, or any run on gold. If the Fed ran up big positions, it could unwind them in coming weeks.

  Gallant raised his hand and asked “How do we prevent gold from running up? We don’t really have any unencumbered inventory.”

  Torres looked at Gallant, puzzled. “We have over 8,000 tons of gold according to my notes.”

  “Yes Sir, we technically own over 8,000 tons,” replied Gallant. “But we don’t actually have possession of it. It’s been leased to banks who’ve sold it. So while we own it, other people also own it, and they have it in their possession.”

  “Is anything in government transparent?” asked Torres in obvious disgust.

  Fed Chairman Rudolph Havenstein answered him. “That’s not too complicated. We can sell short digital gold. There’s no real requirement for having unencumbered inventory. And doing so will help offset the expansion of our balance sheet in any case.”

  Torres was still not convinced. “So what happens if everyone asks for their physical gold at once?”

  Havenstein replied calmly, “It won’t happen. Everyone knows they’ll get the market value of their gold paid out in cash.”

  “But it’s happened recently, where the futures contracts for gold failed to deliver, I think to the Chinese specifically,” objected Torres.

  CFTC chairman David Kone tried to put Torres at ease. “Sir, the exchange is only obligated to pay the dollar equivalent of the gold. The Chinese knew they would get their money, and they did. They simply chose to demand physical gold to make a point.”

  “They sure did,” said Torres, not willing to give Kone all the details. He was about to leave when Havenstein stopped him.

  “Mr. President, I need to see you about certain fiscal matters once this issue is settled.”

  “Of course. Ask Gerry Levine to set something up.”

  Chapter 16: Fallout, the Day After the Response

  Yellow Sea, Earlier That Day

  Ensign Kim Soo-Yun was resentful that this exercise was called so abruptly. His wedding had been planned for a long time, but was now suspended just days before it was to happen. The expense and inconvenience both families incurred was unreasonable, and he was afraid it would lead to ill will towards him. As chief sonar technician, his role on the Teukbyeol Frigate was critical to any mission, but he was sure the mission itself was not critical. The Americans were probably just sending another message to the North. The drill was routine. They would sail into disputed waters, the North would get edgy and make threats, a lot of ruckus would be raised in diplomatic circles, and he would return home to two angered families. North Korean submarines were primitive and very noisy. He was confident he did not need his listening gear to hear them. He could literally pick them up in his sleep, if his head was anywhere near the hull of the ship. He sat at his post, dutifully but unenthusiastically, listening to a background of surface ships’ propellers, with the occasional sound of a sea mammal punctuating the boredom. In the midst of a yawn, he heard something unusual. In a split second his attitude changed to alarm when he made out the high pitched whirring sound, quickly building in its intensity. He had heard this before, in training, but never in the field. It was a torpedo, and it was closing in. His mind raced for a way to alert the crew, but it was too late. The explosion came just a few seconds later and he was killed instantly. The rest of the crew joined him over the next few minutes as the frigate exploded and sank to the bottom.

  The South Koreans issued angry diplomatic statements, accusing the North of murder, and the Chinese did the same, privately. Fragments of the torpedo that were recovered by the Americans promptly disappeared into classified archives. All that was ever issued was a brief communiqué stating that “markings on the torpedo match those known to be used by the North.” The media picked up the comment as fact and there was immediate international outrage at the North. There was no coverage given to the North’s protest that they lacked the technology to penetrate the defensive zone around the American and South Korean fleet with their antiquated submarines.

  …

  South China Sea, USS Ronald Reagan

  Having recently arrived in the South China Sea on short notice, the officers of the aircraft carrier USS Ronald Reagan began to organize their battle group to create a defensive perimeter. China had been modernizing their submarine fleet, so they had to take that danger into account, ensuring that they would detect any intrusion into the secure waters occupied by the battle group. Only after assuring their own security could they effectively serve as a deterrent to any actions towards Taiwan. As they sat down at the Captain’s conference table, the mood was light. The weather was much nicer offshore than on the mainland at this time of year, where the monsoon was in full swing.

  As the meeting began, they were taken aback when an alert from the sonar technician rang. The Captain had to pause the meeting to take the call. “You’re kidding,” he said. “I’ll sound general quarters immediately.”

  “Gentlemen we’ve been pinged several times, as have a half dozen other ships in the fleet. I’m sounding general quarters.”

  The pings stopped as quickly as they had begun, but the fleet was now aware that it was vulnerable. Submarines could not have infiltrated their position without being heard, so they must have been waiting for them since before they arrived.

  …

  New York, Universal Investment Bank

  Junior trader Fanni Ronaldi had been on a hot streak, and it seemed like every time he used more leverage, his timing of the market improved. He could extract tens of millions in profit on an investment of only a million or so, as a result of small movements in various indices. Universal’s risk managers, whose role is normally to oversee traders and limit their exposure, were more than happy to ride his hot hand, and had turned a blind eye to the risk involved in those levels of leverage. Hehehe, they’ve never busted a rogue trader for making money he thought to himself. This morning, Fanni was betting on a combination of higher bond prices (lower interest rates), lower gold prices, and higher stock prices. His algorithms predicted these movements, and his gut told him the economy was improving rapidly, yet these indices had not yet showed it, so the price movements had to be imminent.

  The trading day had begun slowly enough, and Ronaldi gradually levered up his positions, particularly in Treasury bonds. He had built up a huge position by 11:00 am, far beyond what the firm could cover, but confident it would not have t
o. After all, his track record proved he was a sage trader. He was sure he would be a hero by this afternoon. Gold was down slightly and Treasuries were up slightly. At his levels of leverage, this would make the firm a fortune.

  Shortly after 11:30, gold abruptly shot up 50 dollars an ounce on strong volume. Fanni started to break a sweat, but was sure this would correct quickly enough and was relieved when it fell 10 or so, now up 40 dollars on the day. But then just as quickly it shot up another 50. It was now up 90 dollars for the day. This was looking dangerous. Stocks fell slightly, compounding the problem. As long as Treasuries held, he would be okay. Before he could finish thinking this, Treasury prices started to plunge, again on heavy volume.

  In only a few minutes, Ronaldi had incurred losses that would bankrupt Universal, among the largest of investment banks on Wall Street, many times over. Things can’t happen like this, he rebuked himself angrily. Yet it was happening exactly like that and it was getting worse. He felt sick to the stomach, yet he was still too paralyzed with disbelief to change course.

  It’s going to reverse any second now. It has to. If I cover my positions right now, the company goes broke and I’m going to jail thought Ronaldi. When you lose money, everyone insists you acted alone.

  Ronaldi saw things only getting worse, with spikes of heavy volume, putting his positions further and further underwater. Finally unable to face the situation, he walked out of the building for lunch. Those who saw him leave that day saw tears in his eyes, and a bereaved expression on his face. They assumed there must have been a death in his family. His abandoned car was found near the George Washington Bridge. His body was never recovered.

  Had Ronaldi persevered until the end of the day, he would have experienced the effects of an unseen hand at work, correcting each of the moves in the market that had initially worked against him. Universal’s automated loss warnings alerted them of his positions, and by the time those positions were liquidated, the losses had been recovered with the recovery in the market. At the end of the day, they had realized a small profit.

  …

  Washington, DC, Federal Reserve

  “Dr. Havenstein, I’m concerned about today’s 10 year bond auction,” said Tom Gallant. “Interest rates have spiked 20 basis points on this auction, and it’s not nearly over. Also, gold just popped, and Treasury bills are selling off.”

  “Are the foreigners not stepping in?” asked Havenstein.

  Gallant made a few phone calls, and answered. “It looks like the Chinese are not buying the 10-year bonds this time. I think that’s one thing the President was concerned about. Gold and T-bills were the others.”

  “I see,” said Havenstein. “We’ll have to step in here.”

  Havenstein then spent about 15 minutes making calls to various investment banks. “Tom, check the rates now. You should see some improvement.”

  When Gallant checked, he found that Havenstein’s phone calls had quickly brought rates back to their previous levels. “How’d you pull that off?”

  “I told several investment banks I wanted rates back to where they started, and I would buy any bonds from them that they had to buy today to bring those rates down. They’re making obscene profits off this, but it’s the price we pay to keep the fingerprints of the Fed off the actual auction.”

  A half hour and a few more phone calls later, Havenstein was able to bring gold prices and T-bill yields back down. “The President was right, Tom. My deputy Gil Gonneau called and confirmed it. There was someone who wanted to bring a panic to the markets today. The Fed has loaded up on a lot of securities. We’d better be able to unload most of them before our next reports go out or there will be hell to pay.”

  …

  Beijing, the previous evening

  Yu-Xin Zheng sat in front of the central committee, to give his briefing. The meeting was held in a small board room devoid of the ornate decorations typical of the ceremonial Chinese reception rooms. “Gentlemen, the response of the United States was exactly what I feared it would be. They have no interest in accommodating the needs of the Chinese government to safeguard the value of their savings.”

  “What does Zheng Yu-Xin recommend as our response?” asked one of the leaders.

  “I suggest an incremental response,” replied Zheng, sitting upright in his chair, knowing that despite their protests, the committee would never condone a radical response. “To begin with, do not add further to your portfolio of American Treasury bonds. They have an auction tomorrow, so boycott it. Accumulate gold and sell some short term T-bills. Consider doing this in one swift move, to send a clear message. Tomorrow would be an ideal date. Meanwhile, I will seek a willing buyer of your existing long term debt, so it does not go on the open market and precipitate a collapse in the value of the American dollars you already hold.”

  “The military wants a more forceful response,” said another member.

  “Then restructure your cabinet to give them an enhanced role,” said Zheng. “The Americans think your Generals are all radicals who hate them. Pick a few Generals you can control and put them into the cabinet. The Americans will understand that the stability of China is not to be taken for granted.”

  “What about a concrete military response? We believe the incident with the Koreans was set up by Washington to pressure us. North Korea is incapable of that kind of attack.”

  “Of course it was Washington,” said Zheng, still sitting upright and relatively motionless. “This is to be expected from them. But remember, you cannot undertake a bigger response than you can sustain in the long run. A symbolic move is certainly appropriate. You may send a message by exposing the vulnerability of the fleet the Americans have in the South China Sea, but you cannot risk starting a war without exhausting diplomacy. Move some assets to the Taiwan Strait. The Americans will understand that and will position their forces accordingly, but they will also understand it is a symbolic gesture, and not a declaration of war.”

  “How will this move us closer to resolving our issues with American finances?” asked another leader.

  “I will speak with my contacts in the international community and develop a long term solution to the problem of America’s fiscal irresponsibility,” said Zheng. “This is a problem for the world, not just for China.”

  Chapter 17: Reaching Out

  “I need to see you John. Soon.” Robbie rarely called this late, and John was concerned to hear the agitation in his voice.

  “What’s up, Robbie? I hope everything’s okay.”

  “It’s not anything personal. I’m not in trouble, at least not yet.”

  “Is it related to what we spoke about in the spring, at Jessie’s graduation?” asked John.

  “Yes, that and more. I’ve got the scoop on it, John. They’re planning something alright. It starts in San Marcos and involves refitted shipping containers.”

  “What?”

  “Does ‘security to be maintained by any means necessary’ sound serious to you?”

  “Yeah, sounds serious,” agreed John. “And it also sounds like something you should have left alone. Are you sure you want to stay involved in this?”

  “It’s too late for that consideration now. The guy who faxed me the memo with the proof just disappeared. He was supposed to call tonight but never did. I called his wife and she says he never came home tonight.”

  “That’s awful. I wish you had never gotten into this. I may have hinted at this over the years, but I don’t think I’ve said it to you plainly. I’ve always suspected the accident that killed Joanne and little Sarah was rigged. I stumbled on a scandal where the senior executives of a military contractor had loaded up on derivatives backed by shares in a small oil services company. Their timing was exquisite, because the company promptly announced a sweet deal to rebuild Kuwait’s oil infrastructure after the Gulf War. I tried to get the SEC to start an investigation, and they refused. So I wrote a memo to the chair of the House Banking committee, explaining the issue. Not only was there
no follow-up, but the accident happened shortly after that. There were other incidents that made it clear in no uncertain terms that I’d be better served not going down this road. This kind of thing is just not worth the tragedy it can bring you.

  “I never knew you suspected it was a hit, John. That’s awful. You’d probably trade anything to go back in time and stay out of it. I don’t blame you in the slightest. But this is no financial scandal. I don’t know how I could live with myself if I did nothing. I don’t expect to be called a hero. I don’t care about that.”

  “What are you on to? And what can I do to help? I’ve been out of touch with the process too long to be able to start any kind of investigation.”

  “I’m not interested in an investigation. The FBI doesn’t seem interested at all. I need to decide what to do with the information.” Do you have any plans this weekend?”

  “No, I’m free. Where do you want to meet?”

  “I thought it might be good to come up to my camp in the Adirondacks. It would make for a nice weekend in any event.”

  John couldn’t resist. It had been a long, sticky summer in Philadelphia and he hadn’t properly stretched his legs or breathed cool mountain air in a long while. And Robbie’s place on Silver Lake was just the place. It was right beneath Whiteface Mountain, which separated it from the slightly busier but still charming Lake Placid. He could almost taste the air already. “I’ll make my arrangements right away. Is Jess coming up?”

  “No, she’s got a new job with some New York State Environment Department and they’re involved with testing for toxins in the Hudson River. She’s too busy to join us, and has been all summer.”

  “Well, tell her I’ll miss her. See you this weekend.”

  “Looking forward to it, John. I’ll head up late tomorrow, after I arrange for a little insurance for the information I have.”