End Game

by Matthew Glass

  Ellman didn’t like the way this administration had begun to act over the past few months and the way Bob Livingstone and State were being shut out. She was a moderate Republican, at best, and she had the feeling that she was increasingly out of step with the forces driving policy inside the White House. There were too many compromises and she could only see them getting worse. Marion knew she would have to raise her hand in support of that vote tomorrow, despite the fact that she firmly believed the United States should have acted to prevent it being brought to the Council. That happened. Any diplomat has to expect to put arguments she doesn’t believe in from time to time. But as UN ambassador, she expected at the least to have a say in the debate. If there had been a debate, she hadn’t been part of it.

  In the past few days, Marion Ellman had begun to wonder whether she should resign.

  She knew that she was tired and overworked. She knew her state of mind might be influenced by that. It had been an intense and difficult fall. Christmas was only a week away and psychologically that had become a kind of target for her. She was hanging on for Christmas, and then, with a week off and some time with Dave and the kids, she hoped things would be clearer.

  THE NEXT DAY, Marion Ellman entered the Security Council chamber and took her seat. Antony Seale, already present in the chair beside her, leaned over and welcomed her.

  Her intervention in the debate was short. Seale had already made a long speech setting out the reasons for bringing a Chapter VII resolution calling for the immediate restoration of constitutional rule in South Africa and the holding of free and fair elections within three months, with the threat of sanctions if the ANC government failed to comply. There was little more for her to say than to set out the United States’ support for the British position.

  Liu watched her. Every minute of the debate, she could feel his eyes boring into her.

  When Mohammed Razak, the Malaysian ambassador who was serving as the Council’s president for the month, called for those who were voting in favor, she raised her hand. Liu shook his head and closed his eyes in despair.

  A moment later Razak called for those voting no. Immediately Liu’s hand was in the air.

  46

  FOR TWO DAYS, officials from the Fed, Treasury and SEC had worked around the clock to finalize the necessary measures. While they did, the Chinese threat to dump US stocks and bonds had led to a final collapse in market confidence. The financial system was breaking down. Margin calls were going unpaid as collateral was seized but couldn’t be sold, leaving a multitude of investment funds technically bankrupt at the whim of the banks who held their debt. US government securities already in existence were trading – when they did trade – at discounts of sixty or seventy per cent, reflecting a fear that interest rates would have to skyrocket in order for the US to finance its borrowings. Bonds with redemption dates within the next year were virtually unsaleable at any price, reflecting a fear that the US might be forced into default. Ron Strickland had taken the decision to cancel the Treasury Bill sale for that week, the last before Christmas, after it became obvious there would be no buyers. The holiday break was going to offer temporary respite but they needed an announcement. If the situation remained unresolved for any length of time into the new year the government would be unable to raise debt. The United States would be insolvent.

  At midday, the president met in the Oval Office with his key advisors to review the final package of measures. Opitz led him through it. The measures were extreme. First, on the stock markets, stock holdings by a defined list of named entities, their subsidiaries, agents and representatives would be frozen for an initial three-month period while an investigation was carried out into market manipulation by those entities. If manipulation was found likely to have taken place, a process would be formulated for the recovery and offering to the market of those stocks at a price not lower than the price at the close of the market on the last session prior to the announcement, December 20. Second, on the bond markets, the same named entities and their representatives would be barred from participating in Treasury bond sales for an initial three-month period. In both cases, the idea was to ringfence and remove toxic participants from the market.

  The named entities were all known Chinese sovereign investment funds and their subsidiaries. The list of subsidiaries ran into the hundreds and, as Treasury officials worked around the clock to track ownership structures, was likely to continue to rise.

  The hope was that the measures on the stock markets would put a floor under the price of stocks – guaranteeing that the Chinese investment funds couldn’t dump their huge holdings and, if the stocks did eventually come to the market, they would be priced no lower than the price they held immediately prior to the announcement. On the bond markets, by excluding the Chinese investment funds from upcoming Treasury sales, it ringfenced the new bonds from those already in the market, which were close to valueless, and created the hope that buyers would be found for them when the next Treasury Bill sale took place. As far as the collapse in the value of existing bonds was concerned, no one was selling because it was impossible to find buyers, but on paper the banks and other holders of those bonds had taken enormous losses to add to their losses in other assets. Therefore they were also going to announce a third measure: a three-month suspension of mark-to-market accounting.

  They hadn’t yet worked out what method they were going to accept to replace mark to market. Suspending the accounting method was an extreme step and no one liked it, but there was no choice if the country was to avoid a catastrophic flood of bankruptcies amongst insurance companies, investment funds, banks and even industrial corporations because of the paper losses incurred through artificially depressed asset prices. Hopefully, when all this was over, bond and stock values would recover and mark-to-market accounting could be restored with assets valued at more sensible levels.

  Each of these was an unprecedented measure. They didn’t require congressional approval, since they dealt with regulatory and market issues that came under the remit of the SEC and the Federal Reserve, but that didn’t diminish the extreme sweep of their intent. Together, they created a package of radical constraints such as had never before been seen in the previously free American markets. They weren’t intended to be permanent. And they wouldn’t restore the markets to normal. At best, they would stabilize the markets at current prices and at an extremely low level of activity while people watched to see what would happen next, giving time for the political crisis underlying the collapse to be resolved. Their ability to do even that, even for a period of a few days, would depend crucially on whether the markets believed the authorities could implement the measures they had announced. Market participants would be watching intently for any evidence of stocks being dumped or new bonds being discounted after the sales. At the first hint of that, any fragile stability that had been achieved would be fractured and the markets would be in freefall again.

  The principal risk would come from an inability to enforce the exclusions. The Treasury knew there must be entities related to Chinese investment funds that they didn’t know about and would never know about, no matter how much work was done to identify them. They knew that much of the activity of those funds was carried out by chains of agents and representatives who often didn’t know the ultimate client, who might be two or three or ten links away in the chain. For that reason, they were announcing a fourth measure aimed at brokers who might, wittingly or unwittingly, break the embargo. Emergency legislation would be introduced to make it a federal felony, punishable by a minimum of two years’ imprisonment and a $100,000 fine, to deal on behalf of the named entities – even indirectly. Strickland and Opitz had already warned congressional leaders that this legislation was on its way. Roberta Devlin had started applying pressure. In the country’s current mood, and before the new Congress took office, they believed they would have the numbers to pass the measure, despite resistance in some parts of the Republican Party. To the inevitable protest that brok
ers often didn’t know the identity of the ultimate customer, the answer would be: find out, and if you can’t find out, don’t do the trade. The idea wasn’t to encourage activity on the markets, it was to shut it down.

  Finally there was a question of legality over what they were doing under international law, and specifically World Trade Organization regulations. Advice had been sought from a number of experts and opinion was divided. There was an argument that the US had the right to introduce these measures as a national emergency derogation under WTO rules. Another view held that even under the emergency derogation these actions could be regarded as discriminatory in that they singled out Chinese entities, although a third opinion offered that the charge of discrimination might be found baseless since the action was aimed not against Chinese entities, but against entities that merely happened to be Chinese. Opitz had considered applying the restrictions to every foreign government-owned investment fund, but had rejected the idea because it was likely to make the US a lot of enemies just when it needed a lot of friends. China could and almost certainly would bring a complaint to the WTO but it would take a minimum of one year to be heard, and with careful maneuvering would more likely take three. The markets were trading today. That was their mentality. If you were lucky they looked maybe three months ahead. What the WTO was going to say in three years’ time couldn’t have concerned them less.

  A briefing paper in the file that was in the president’s hands outlined the likely reaction. Outrage was expected from many quarters at this interference with the markets, not least from within the Republican Party. Following on from the meetings Strickland, Opitz and Devlin had been having with congressional leaders over the past two days, the president would need to weigh in heavily, starting as soon as this meeting was over. As for the markets themselves, certain participants who had made money on the way down would squeal, but there were vanishingly few of them. Although others would object on principle – and possibly loudly – the devastation had been so extreme that at this stage most would seek some kind of stability, any kind of stability, with private relief. At this point survival, not profit, was their objective. Opitz pointed out that the suspension of mark-to-market accounting rules, however distasteful it might seem, would remove the specter of bankruptcy from many of them and would garner their support.

  After the initial shock of the plan’s announcement, success would come down to the question of whether brokers seriously believed they would go to jail if they traded for the wrong people, even if they had no way of knowing who the ultimate client was. The administration had to be insistent that that would be the case. There could be no ambiguity in the legislation. There were certain to be people who would test the new regulations. Those people had to be quickly identified and shut down.

  At last Opitz was finished.

  There was silence in the Oval Office.

  Knowles leafed through the pages in the file, conscious of everyone’s eyes on him. Nothing in here was new to him. Over the past two days he had been kept up to date as the measures were developed. Yet seeing them like this for the first time, together, as a final broad package of proposals that he was going to have to stand up and introduce, he couldn’t help but be awed by the sheer scale of the intervention that was being proposed. If that was the effect on someone who already knew what was under consideration, he didn’t want to imagine the effect it would have on others.

  It had to be done before Christmas. Opitz and Strickland were in firm agreement on that. There was a psychological element, arbitrary as it might seem, that said a line had to be drawn and it had to be drawn before the holidays. The markets had to believe there was something to come back to. The outgoing Congress was also a lot more likely to pass the required legislation in its final days of session than the new Congress that would take its place in the new year. The president agreed. There was already one thing that looked like it was going to hang unfinished over the holiday. Dewy and Montez were still in Sudan. Admiral Pressler had a set of rescue plans ready for various scenarios, and every element of US intelligence capability was being strained to locate the men, but they hadn’t been able to pin them down with sufficient certainty to launch a mission. Twice already they thought they had a fix but had had to call off the operation before it was launched. If he could get them back before Christmas, Knowles knew, it would feel as if it had been a short period. If it dragged beyond that, if it went into a new year, it would start to feel like a saga. Like a Jimmy Carter, Teheran-style saga.

  With every day that passed, it seemed less likely. He kept telling himself there were still x days, or y days, or z days, for them to be found. But each day that number dwindled. Now there were only five days left. It just didn’t feel as if it was going to happen.

  The president brought his thoughts back to the matter in hand.

  He didn’t like what he had to do. It ran against everything he believed in, acting as some kind of policeman to say who could and couldn’t trade and what price they could trade at. Putting people in jail for executing orders in good faith for their clients. But he had to do it. Opitz said it was the bare minimum that had to be done. Marty Perez talked about Armageddon if they failed to act.

  ‘The upside,’ said Gary Rose, who had sat silently through the discussion, ‘is that the Chinese are probably going to like this.’

  The president would have laughed if the situation wasn’t so grotesque.

  But Rose was serious. ‘They’ll make their complaint to the WTO, of course, but secretly, they’ll be grateful. If I understand the numbers correctly, put their funds and their foreign reserve together and they’re holding north of three trillion in US stock, bonds and cash. They don’t want to actually dump this stuff – that’s their threat. They want a floor and this gives it to them. This way they don’t look like they’re chickening out. They look like the victim. They look like we’re beating up on them again. They love that. This is perfect for them.’

  The president gazed at the national security advisor, still trying to detect if this wasn’t some kind of uncharacteristic joke.

  ‘From a strategic perspective,’ said Rose, ‘this is a circuit breaker. They understand we have to do something. They know we can’t allow a situation to develop where we can’t sell our government bonds. They must want a halt as much as we do, because what’s happening here doesn’t do any good for anyone. This gives them the halt and we look like the bad guys. It’s win win.’

  Tom Knowles thought about it. Maybe Gary Rose was right. Maybe Zhang secretly would be relieved that the US had found a way to break the circuit and let him look like the victim.

  It didn’t matter, anyway. It had to be done.

  ‘So we announce it today?’ he said.

  Opitz nodded. ‘After the markets close.’

  AT 6PM WASHINGTON time, Tom Knowles stood at the lectern in the Press Room in the West Wing with Opitz, Strickland and O’Brien, the head of the SEC, flanking him. He announced that he was taking immediate measures to restore confidence in the markets and ensure a return to fairness and transparency. He listed the measures succinctly. Afterwards, the three officials gave a more detailed briefing to the journalists.

  He went to bed that night wondering if the measures would work when the markets opened the next day. By the time he got up, the Chinese government had attacked him for discriminatory action in contravention of WTO regulations and announced they would be bringing a case at the world body against the United States.

  That was exactly what everyone had predicted, and no one was too worried about it.

  But two days later, on the Sunday two days before Christmas, the Chinese government did something else. Saying that China wasn’t prepared to await the outcome of an interminable WTO process, they imposed a stinging set of tariffs, quotas and exclusions on US trade with the People’s Republic. To be enforced immediately.

  Knowles felt as if he was locked in a struggle with an opponent who wouldn’t pause, wouldn’t stop, wouldn’t bac
k off, but would escalate and simply hit and hit and hit until … he didn’t know. He felt as if he was suffocating. He couldn’t see an end.

  This wasn’t working. Nothing was working.

  He called a meeting of the National Security Council for the next day. That would be Christmas Eve and most of the council members had already left Washington over the weekend to head wherever they were going for the holiday. Knowles didn’t give a damn. They could get on a plane and come back.

  Over the two years since he had become president, Tom Knowles thought he had put together a pretty good team. Now he was wondering if any of them had the slightest idea of what they were doing.

  47

  KNOWLES WENT QUICKLY to the Situation Room. He had just got off an early morning call with the director-general of the WTO, who had pressed him to revoke the measures he had announced, to which the Chinese measures were a response. The director-general assured him that the Chinese would revoke their actions if the US acted first. But he didn’t have answers to the questions Knowles asked him directly. As president, what was he supposed to do as the underpinnings of the American economy were torn out from under it? How else was he supposed to stabilize a market that was sliding into quicksand? The director-general assured him that he was certain the Chinese government had intended no such thing. Tom Knowles assured him the Chinese government had had plenty of opportunity to say so, both in private and public.

  The other members of the National Security Council were waiting.

  ‘I’m sorry to be getting you in here on Christmas Eve,’ he said as he sat down. ‘Wasn’t exactly what I would have planned.’