Strickland was a slow-talking, methodical man. You didn’t listen to his speeches for entertainment. Yet Grey, Evangelou and Malevsky were hanging on his every word.
‘I now come to my view of the sustainability of market activity,’ said Strickland on the screen.
Ed Grey leaned forward in his seat. This was the so-called bubble statement, an element in the chairman’s report in which he gave a view of sustainability of activity in critical investment markets – stocks, bonds, commodities, housing. Veiled references to irrational exuberance were no longer thought to be enough and the statement had been introduced as one of the responses to the failure of the Greenspan–Bernanke period of chairmanship to deal with bubbles inflating across asset markets. It remained a controversial element, much hated by Wall Street.
Strickland continued in his customary monotone.
‘While we see no evidence of bubble-type activity, we remain alert to the possibility that the upside view over the short- to medium-term horizon will encourage an increasing level of activity in a number of asset classes. Pricing and volume data indicate an increasing risk appetite among certain investor segments backed by rising levels of leverage. In particular, we continue to see a notable increase in the market uptake of certain collateralized derivatives, and although these are a legitimate means of diversifying portfolio risk they also carry a systemic risk through secondary and tertiary markets and, as I have reported before, we believe could exacerbate overheating should this begin to develop. We remain particularly watchful of a number of segments of the equities derivatives markets and remain vigilant to the exposure of the banking sector, which would be a key concern should overexposure develop.’ Strickland paused portentously. ‘We will use monetary policy if overheating appears to be taking place. We will use it rapidly, decisively, and are prepared to do so.’
Grey glanced at Malevsky. He was frowning as he gazed at the screen. Evangelou caught Grey’s eye and shrugged.
When Strickland had finished his prepared remarks, the questions from the senators began. After a few questions one of the Democratic senators brought him back to the bubble statement.
‘Mr Chairman, you talked about rising risk appetite and leverage. Can you be more specific about the levels of these rises?’
‘If I had to characterize them, Senator, I would describe them as moderate to medium. My office can supply the data.’
‘That would be helpful. But I take it you’re saying you do have significant concerns at the moment.’
‘It depends, Senator, what you mean by significant.’
The senator sighed impatiently. ‘I think most people would understand what I mean, Mr Chairman. It sounds as if you have significant concerns that you will need to intervene.’
‘Senator, let me try to be clearer. We monitor these parameters. Will the day come when we need to intervene? Logically the answer to that must be yes, because every single cycle that we have ever seen in this country has culminated in a bubble and then gone on to a bust, and part of my mandate is to ensure that we don’t get to that point again. And if without intervention we would get to that point, it stands to reason that intervention at some point will be required.’
‘Mr Chairman, that’s a wonderful theoretical answer.’
‘Thank you, sir.’
There was a ripple of laughter from the audience.
Strickland’s craggy face remained serious. He had little in the way of a sense of humor and hadn’t seen the irony in the senator’s compliment. Since taking the post as head of the Fed his technical and ponderous communication style had been the target of much criticism.
‘Mr Chairman,’ said the senator in a show of exasperation, ‘what point is there if you have concerns and don’t make the extent of these concerns known? Surely the point of these concerns is to warn unsuspecting investors in good time to help them make informed decisions. Quarter after quarter, you come before this committee and tell us you have concerns and yet you do not tell us how strong they are. If I heard you correctly, I think you’re telling us your concerns are strong. Is that correct?’
‘Mr Senator, I have said repeatedly, and I think I have said it again today in the clearest terms I can, that the Federal Reserve will not hesitate to act should this be required. That is a responsibility the president has laid upon me and I take it with all seriousness. I think the unsuspecting investor, as you have described him or her, can take comfort in that.’
The senator gazed at Strickland, then shook his head in a calculated show of dissatisfaction.
Bill Givens, the Republican chair of the committee, knew what the other senator had been trying to do. The Democrats would want nothing more than to have the Fed chairman admit that a bust was imminent in his last testimony before the midterm elections. Givens wanted to make sure that impression was reversed.
‘Mr Strickland,’ he said, ‘perhaps it would be helpful if you could tell us how close you are to taking action over these concerns. From what I heard you say, you don’t actually believe there’s imminent danger of a bubble, do you?’
‘It depends what you mean by imminent, Senator.’
There were more smiles amongst the audience.
‘You talked about taking monetary action. Would you say you’re close or far from taking a further step?’
‘I don’t know if there’s any absolute measure of that distance, Senator Givens.’
‘Then a relative one,’ said Givens in frustration. ‘Are you closer or further than you were before? Nothing I’ve heard says to me you’re any closer. What you’ve said, I think, is that in fact we’re no closer to that because of the vigilance you and the rest of the administration are constantly exercising.’
Givens stopped, wishing that Strickland would just say yes. That was all he needed to say. Yes.
Strickland frowned. ‘Senator, we’re continually vigilant, as you say. We will not allow irrational market activity to develop without intervening to put a stop to it. We will not tolerate irrational exuberance or anything approaching it. We’re very clear on our responsibilities on that point. I’m very clear on my responsibilities on that point.’
Givens shook his head. Strickland didn’t know a line when he was fed it.
The questioning on the screen went on, now focusing on a detail of the inflation outlook that Strickland had presented. Eventually it came to an end and Strickland got to his feet.
Grey muted the volume and looked at the stock price data Malevsky had brought with him before Strickland started speaking. Fidelian Bank was down a couple of percentage points over the past week. The other three banks Malevesky had picked were flat. But the banking sector as a whole was up slightly, so in relative terms, they too had fallen. Yet relative falls didn’t make him any money.
The previous week, Ed Grey had put an exposure of $50 million behind Malevsky’s idea. Half of it was committed to shorting Fidelian, the rest distributed among the other three banks. If he closed out the trade now, he would show a minuscule gain from Fidelian’s decline and nothing from the others.
Malevsky had argued that Strickland’s statement would help to create a climate in which the market might correct. Now the statement had been made.
‘No one’s dumping banks over this,’ said Evangelou.
‘He was a little stronger than usual,’ said Malevsky. ‘That sentence – rapidly, decisively, whatever it was – that was very explicit. And he wanted to get that point across in the questions as well.’
‘He’s said it before. I’m telling you, no one’s dumping banks over this.’
Grey agreed. He looked at Malevsky. ‘So what do you think?’
Malevsky frowned.
‘I’ll tell you what I think,’ said Evangelou impatiently. ‘We’re sitting on a shitload of these stocks, paying for every day we borrow them, and they’re not going anywhere.’
‘Fidelian’s down a couple of per cent,’ said Malevsky.
‘That’s us, Boris. That’s us doing the
selling. I don’t see anyone joining us. Ed, let’s close this out and forget about it. Let’s go back to making money. Nice idea, Boris, but no cigar.’
Grey gazed at Malevsky. ‘What do you think?’ he said again.
‘Tony’s right, no one’s dumping banks on this.’
‘So you want to close it out?’
‘No, I’d hold. Fidelian’s coming to the market for cash. That’s still there.’
‘When?’ demanded Evangelou.
Malevsky shrugged.
‘I’m not interested in holding and hoping,’ said Grey. ‘We close it out unless something’s going to happen.’ He paused. ‘By the way, Boris, I meant to tell you. This is your idea, so I’m going to give you five per cent of what we earn. That’s the good news. The bad news? I’m going to sack you if this trade makes a loss.’
Evangelou smiled.
Grey wanted to see what Malevsky was made of. That was what this trade was about at least as much as the money it might make or lose. Identifying a rookie who had what it took to become a great trader was no easy task. As often as not, even someone as experienced as Ed Grey got it wrong until he saw that person act under fire. Blowing a few million in losses now was nothing if it helped you find someone who could earn you billions in the future – or if it helped you see that this same person would lose you billions instead.
Grey wanted to see whether Malevksy had the stomach to hold a serious position. There was no way to see that unless Malevsky had skin in the game. Serious skin.
‘Seriously, Boris, I will sack your ass.’
Malevsky shrugged. ‘I get five per cent, right?’
‘You do. Now, what do you think?’
‘I can always get another job.’
‘Not after what I’ll say about you if you fuck this up. You’ll get another job, but it’ll be cleaning toilets.’
Evangelou grinned. He loved seeing his boss in action. At his best, Ed Grey was a big, brash, bone-crunching bully. ‘You want to see what happens to guys Ed sacks. He will hound you, Malevsky. He will hound you out of this industry.’
‘Tony,’ said Grey, ‘you flatter me.’
Malevsky muttered something in Russian.
‘Okay, Boris,’ said Grey, ‘let me give you a clue. If I were you, here’s what I’d be asking. Why is Tony wrong?’
Evangelou raised an eyebrow.
‘Why is he wrong, Boris? He’s just told you no one’s dumping banks over this. Why’s he wrong? Give me a reason.’
‘He’s not wrong,’ said Malevsky.
‘No?’
‘Not today. But tomorrow he will be. People will be looking around. They’re aware. Strickland specifically mentioned banks. He mentioned overexposure. He said he was going to act rapidly, decisively. No one’s dumping banks, but everyone’s aware now at the first sign of trouble they’re going to be in Strickland’s sights.’
‘You’re talking yourself into this, Boris,’ murmured Evangelou with amusement. ‘I love it. Keep going.’
‘People who think banks are a little overvalued,’ said Malevsky, ignoring him, ‘are going to get jittery. Maybe Strickland will push up interest rates after what he just said. If they see some bank stocks dropping, they’ll decide it’s time to get out.’
‘That’s it?’ said Grey.
‘No. We know for a fact one of those banks is going to come to the market for cash.’
Grey smiled. He liked the way Malevsky had said that Tony wasn’t wrong – but that he was. And he was inclined to agree with Malevsky’s logic, or to be interested enough to want to find out. The critical point was that people had to see bank stocks falling. Without that, Strickland’s words wouldn’t have any effect.
The Fed chairman’s words weren’t anywhere near strong enough to create a cause for bank stocks to fall – but they did create a context.
If the timing was right, if someone hit the market with a big bunch of sell orders just when the market itself was wondering whether anyone was going to react to Strickland’s statement, they might inject enough uncertainty to actually start the market moving. But it would take a lot more than the $50 million he had put in to do that.
He glanced at Evangelou. His senior portfolio manager knew exactly what Grey was thinking. Evangelou didn’t like this kind of trading. Intuitive stuff wasn’t his style. He didn’t like anything where he couldn’t get an analyst to turn the rationale into a quantitative model and run two dozen scenarios on it.
‘Ed, you don’t want to put that much in,’ he said.
‘Don’t I?’ said Grey.
9
TOM KNOWLES GLANCED over the two stapled pages in his hand. There was nothing much in them that the uniformed officer in front of him hadn’t already covered in his verbal summary. Ten days into Jungle Peace, the president was still receiving a daily briefing on the operation. The Pentagon’s White House liaison officer came in each morning to present the update at the daily StratCom, the strategy and communications meeting held at 8am in the Oval Office.
The usual participants at the StratCom were White House press secretary Dean Moss, White House chief of staff Roberta Devlin, Gary Rose, Ed Abrahams, Director of the National Economic Council Marty Perez, and Sandra Ruiz-Kellerman, a pollster and political advisor who had made her name in a series of high-profile Republican campaigns. Together they represented Tom Knowles’ closest and most trusted White House advisors.
Knowles put down the paper. It reported a series of drone reconnaissance sorties over northern Uganda. A pair of Chinese destroyers was shadowing the Abraham Lincoln strike group in international waters off Uganda, as they had done since the beginning of the operation. The LRA, which had proven to have the capability of posting messages and even video on the internet, had posted another message threatening to beat the American invaders to death and eat their brains, which was apparently supposed to scare them.
‘So essentially, Colonel,’ he said to the officer, ‘nothing’s changed since yesterday.’
‘I wouldn’t quite say that, sir. As I said, in the past twenty-four hours we’ve flown twenty-seven drone sorties and covered a number of areas that we hadn’t had the opportunity to survey previously.’
‘And found?’
‘We’ve excluded significant enemy concentrations in those areas, Mr President.’
The president shook his head. ‘Zip. That’s what you’re telling me. We found zip. How many of these guys have we actually killed?’
‘We estimate in the region of four to six.’
‘In two weeks?’
‘Somewhat less than two weeks, Mr President.’
Knowles glanced at Gary Rose.
‘Mr President,’ said the colonel, ‘we have significantly reduced their activity amongst the civilian population. Our assessment is they’re laying low, moving between sites in small groups. That’s pretty much what we expected them to do.’
‘I thought we expected to find them with our drones and blow the hell out of them.’
‘Well, we’re hoping to do that, sir. Our strategy is interdict and attrit. This is interdiction. The attrit element takes a little longer. Right now we expect them to break up into small groups and try to lay low for a period, but that’s not something they can sustain over the long term, and when it becomes unsustainable for them, that’s when we will, as you say, begin to eliminate them in larger numbers.’
There was silence. Knowles looked questioningly at the others. There were no remarks.
‘Alright,’ he said. ‘Thank you, Colonel.’
‘Thank you, Mr President.’
The officer picked up his briefcase and left the room.
‘Same story every day,’ muttered Knowles. He looked at Rose. ‘What do you think?’
The national security advisor shrugged. ‘There’ll be a couple of phases in this and we’re still in the first. We’re using a light touch approach. We don’t want to send ground troops into that jungle. I think this approach will work but it does mean it’s go
ing to take more time. The alternative is putting large numbers of troops on the ground and that’s an option we ruled out at the start.’
‘Sandy, how long have we got on this?’
‘At this stage,’ said Ruiz-Kellerman, ‘our polling is saying we have solid support among people who are aware of the operation. They’re glad we went in.’
‘They’re not concerned we don’t have anything to show?’
‘Not yet. The whole thing changes if we take casualties.’
‘That’s the point of the strategy we’ve chosen,’ said Rose.
‘Gary, are you saying we’re not going to get a body count before the midterms?’
‘I’m saying it’s possible. That’s only four weeks now. It could take longer before we get a meaningful success.’
The president looked at Abrahams.
‘I don’t think that’s necessarily a problem,’ said Abrahams. ‘People like the fact we’ve gone in, that’s been a boost. Now everything stays steady and we’re looking at getting the numbers we need on the Hill in the midterms. Would you agree with that, Sandy?’
Ruiz-Kellerman nodded. ‘If the election was tomorrow, we’d get sixty in the Senate. Maybe sixty-one. In the House, we expand our majority ten to twenty.’
‘So it’s risk minimization,’ said Abrahams. ‘A big bunch of dead LRA gets us a little more support, a couple of Americans in body bags loses us a hell of a lot more. Risk-reward, it makes no sense to take a chance. That says we go with the strategy, like Gary says. Unmanned vehicles – no risk. We just need to start adjusting press expectations. Start talking about interdiction, safety of the civilian population, that kind of stuff. Make those the wins. Give it a humanitarian angle. Make if feel good, like we’re achieving something.’
‘That doesn’t sound too exciting,’ said Devlin.
Abrahams glanced at Moss. ‘We can make it sound exciting, right, Dean?’
The press secretary smiled.
Knowles nodded. ‘Okay. Sandy, you agree?’
End Game Page 7
