The Prince of Risk

by Christopher Reich

  Comstock Newton was a quantitative fund. Frankly, Astor had no idea what its team did, except that they did it with lots of math and sophisticated algorithms that predicted whether stocks or gold or oil, or whatever you might want to bet on, would go up or down. Much of their work involved high-frequency trading, which meant buying and selling stocks hundreds of times an hour. Competition among high-frequency traders to see who got their orders in first had become so intense that the New York Stock Exchange even allowed firms to position their computers in the same building as the Exchange’s, a prisonlike facility in the wilds of New Jersey. Even a delay of a millionth of a second could mean significant losses.

  Astor’s quant team didn’t work in Manhattan but in a locked-down bunker in Greenwich, Connecticut, where they could bang out code day and night. Rumor was that from time to time they threw geek orgies, which involved drinking the latest microbrew, gobbling Slim Jims, and formulating new and ever more sophisticated algorithms. All math, all the time.

  Together, these three funds managed $2 billion. Quant was doing best this year, boasting a 27 percent return. The Risk fund was faring poorest, returning only 4 percent.

  And then there was Comstock Astor, the fund that Astor managed himself. Comstock Astor was a macro fund, which meant that it bet on the bigger picture, specifically the direction of currencies. Since currencies didn’t move very much, the Astor fund relied on leverage to amplify its bets. Borrow enough and a 2 percent move up or down meant a 20 percent gain or loss. Keep borrowing and the gain could become 200 percent. Leverage was a drug. The more you used, the more you wanted to use. Making money…up your leverage and hit a home run. Losing money…borrow more and make your money back.

  Traders were never wrong…until they were.

  The Astor fund managed $3 billion on its own. As of this morning $1 billion was invested in “the position.”

  Finally, at eleven o’clock, there was the weekly Monday review, when Astor’s managers met to discuss the status of their funds, what had gone up, what had gone down, to bitch about the market if things were going badly, and to brag if things were going well.

  “Time for the conference to start,” said Shank.

  Astor checked the screen. A news feed ran across the bottom: Press conference rescheduled to 0800 Chinese time. “Looks like we’re out of luck.”

  “What?” Shank shuffled over and read the banner. “Oh eight hundred Chinese time, that’s nine tonight our time. I’ll have to catch that at—” Shank ended his words midsentence. “Holy crap.”

  “What is it?”

  Shank stood transfixed in front of the currency monitor. “The position.”

  “What about it?”

  “6.295,” said Shank. “6.292. The fucker is strengthening.”

  Astor rolled his chair closer to the screen. “It can’t move that fast.”

  “It” was the Chinese currency, officially named the renminbi but better known as the yuan. And the 6.292 referred to how many yuan it took to buy one American greenback. If the number went down, the yuan was said to be strengthening versus the dollar. Fewer yuan were needed to buy one dollar. (Conversely, the dollar was weakening.) If the number went up, the yuan was weakening. More yuan were needed to buy one dollar. (And conversely, the dollar was strengthening.)

  Another screen broadcast the value of Comstock Astor’s investment in the position. One minute earlier, the digits had blazed a healthy black and showed a $50 million gain. The digits were red now. All nine of them.

  “Are we down a hundred million?” said Astor.

  “Looks like it,” said Shank.

  Bobby Astor was betting that the yuan would weaken against the dollar. He was sure that soon it would require more yuan to purchase one dollar. He wanted the number to increase. He had bet $2 billion of his fund’s money that he was right.

  And then, before Astor could say another word, before he could blink, the digits turned black again.

  6.30.

  “We’re back in the black.”

  Shank looked at the screen as if it had bit him in the ass. “What just happened?”

  “No idea,” said Astor. “But I’m guessing it has to do with why the trade representative rescheduled the press conference.”

  “Jeez—ya think?” said Shank.

  For the past ten years, China had been allowing the value of the yuan to appreciate versus the dollar. The movements were slow and steady, just 1 or 2 percent a year. Five years ago, it had taken seven yuan to buy one dollar. Today it was only six and a third. This “revaluing” or appreciation of the yuan made Chinese exports more expensive and U.S. imports cheaper. The United States liked this. China did not.

  “You want to give your guy a ring?” asked Shank. “Ask him what he thinks.”

  “No,” said Astor. “I don’t need to bother him with this. He’s busy.”

  “He’s the expert on these things.”

  “We’re good.” Astor called his assistant. “Barb,” he said when she answered. “Push my meetings to this afternoon.”

  “Septimus Reventlow is already here. Reception just announced him.”

  “Marv can take him.”

  “Me?” said Shank. “What am I supposed to say?”

  “Tell him we don’t need his money right now. We’re fully invested. If that bothers him, he’ll have an opportunity to withdraw his funds after the next accounting period. I think that’s September thirtieth.”

  “He won’t like that.”

  “I imagine he won’t.”

  “Too late, anyway,” said Shank.

  “Why’s that?” Astor looked out the window and saw a tall, narrow-shouldered man in a three-piece suit crossing the trading floor. Septimus Reventlow spotted him and lifted a hand in greeting.

  Shank shot Astor a look. “Hot money’s here.”

  8

  “Septimus, a pleasure.”

  A soft hand, white as snow, gripped Astor’s. “Bobby, so nice to see you. Though I wish it were under happier circumstances. Have you learned anything more?”

  “Only what I hear on the television.”

  “The police haven’t contacted you?” asked Reventlow. “Or is the Secret Service heading up things?”

  “I wouldn’t know. No one’s called yet. My father and I weren’t close. I’m the last person who could help.”

  “What a shame. Family is precious. When’s the last time you spoke?”

  “Actually, he—” Astor began, only to cut himself off. His personal affairs were none of Reventlow’s business. “It’s been years. Like I said, we weren’t close.”

  Astor showed Reventlow to a chair in the corner of his office. Astor flew fixed-wing aircraft as well as helicopters, and the room had a sleek aeronautical feel to it. Stainless steel surfaces, a titanium-colored carpet, even a vintage poster for Pan American Airways.

  “Marv’s bringing in a printout of your portfolio,” began Astor. “He’ll go over the positions and show you where we stand.”

  “That won’t be necessary,” said Reventlow. “I’d prefer to speak with you. My family has decided that we would like to increase our holdings in Comstock.”

  “I heard that. I appreciate your vote of confidence. If I’m not mistaken, you have one hundred million in the Astor fund. Are you looking to invest in one of the others? Our quant fund is having a spectacular year.”

  “Actually, we’d prefer to stay in the fund you manage personally.”

  Septimus Reventlow was a reed of a man. He had sharp cheekbones and dark hooded eyes, and his thinning black hair was meticulously combed and swept off his forehead with a generous dollop of pomade. He was impeccably dressed in a black suit, a bold checked shirt, and a maroon tie that he had knotted loosely, almost casually. He wore his wealth like a birthright, the lord to the manor born, and it never failed to rub Astor the wrong way.

  “The Astor fund?”

  Reventlow nodded.

  “That’s a tough one. We’ve closed that fund. W
e’re a hundred percent invested as it is. Not much we can do.”

  “We were hoping to deposit three hundred million dollars.”

  Astor smiled inwardly. Three hundred million dollars was big money. There was a time not so long ago when he would have begged, beaten, and killed for half that amount. “As I said, Septimus, we’re not taking any more investors in that particular fund. It’s nothing personal. There’s no way I can add to my position for the time being. It’s more administrative than anything else. I’d be happy to revisit the issue in a few months.”

  Astor’s excuse was not entirely truthful. In fact the reason was personal. Reventlow’s was a little different from other family offices. The source of his money was always a bit hazy. Reventlow claimed it hailed from a German industrial dynasty dating to the era of Bismarck and the first kaiser. Astor knew about the Krupps, the Thyssens, and the German branch of the Rothschilds, but he’d never heard of a Reventlow, except for an obscure count who’d married Barbara Hutton, the heiress to the Woolworth fortune. And of course there was the question of the man’s looks. It was not that he didn’t look German so much as that he didn’t look anything. He was some kind of strange Eurasian mongrel.

  In the end, Astor couldn’t really care less where the money came from. It was Reventlow’s reputation as an investor who expected quick returns and who pulled his money if he didn’t get them that bothered him. The hedge fund business had a term for people like Septimus Reventlow: hot money. It was not a compliment.

  “We’re set on investing now,” said Reventlow. “We sold some of our interests in the Far East and enjoyed a rather significant financial event. We don’t like our capital to lie fallow.”

  And that was the problem with hot money, thought Astor. It was always chasing the highest returns, moving in and out of funds like some horny teenager rushing from bar to bar chatting up the girl with the blondest hair and the biggest boobs. If he got lucky in ten minutes, he stayed. If not, he moved on to the next one.

  One stellar quarter did not a track record make.

  Hedge fund managers liked continuity. They sought to build assets quarter after quarter, year after year. They preferred clients who shared their investment philosophy and were with them for the long term (barring a nuclear meltdown or the equivalent, say a loss of 10 percent or more in any one year). Reventlow was as rich as a Rockefeller, but he invested like a riverboat gambler.

  “Look,” said Astor. “I understand your not wanting your money to sit around earning money market rates. I’m sure we can find an arrangement. All of my other funds would welcome your investment. I can get our managers in here in two minutes. I think it would be worth your time to hear what they have to say.”

  “The Astor fund,” said Reventlow, as if stating a decree. “And yes, I’m sure we can find an arrangement.”

  Astor smiled, if only to keep from punching Reventlow in the teeth. There was a method to his madness. Increasing his position in the yuan was not simply a matter of calling up his broker and buying another ten or twenty thousand contracts. Comstock Astor currently held $3 billion in its coffers, give or take. Of that, Astor had a billion down against the yuan, or had shorted it, meaning that he was betting it would depreciate in value versus the dollar.

  Here’s how the math worked. To speculate on currency, you bought contracts that stipulated what that currency might be worth thirty, sixty, or ninety days in the future. One contract controlled $1,000 worth of the currency. Astor had purchased 200,000 contracts, giving him control of $20 billion worth of the currency, or around 126 billion yuan. But Astor didn’t have to put down the entire $20 billion. According to the margin requirements as set forth by the Chicago Board Options Exchange (CBOE), the organization that looked after currency trading, he needed to deposit only 10 percent of the contracts’ value, in this case $2 billion. Astor put in a billion himself. He borrowed the other billion from banks that specialized in this kind of thing, thus leveraging his position twofold.

  If he took $300 million from Reventlow, he would have to go to all his lenders and renegotiate his agreements.

  “No,” said Astor. “We can’t.”

  “Excuse me?”

  Astor stood and made a point of looking at his watch. “We can’t find an arrangement. Fund closed. Is there anything else?”

  Reventlow’s brow tightened, and red arrows fired in his cheeks. “We are both talking about three hundred million dollars?”

  “Three hundred million or three billion, it’s all the same.”

  “But—”

  “I’m sure you’ll be pleased with our returns this quarter, however. We’re expecting a major event ourselves in our primary position. Now, if there’s anything else…”

  “You can’t turn me down. I have to—we have to—invest this money.”

  Astor moved toward the door. “Goodbye, Septimus.”

  Septimus Reventlow rose from his chair, his pale face paler, his calm demeanor ruffled, a man in the first stages of shock. Clearly, no one had ever told him to take $300 million and shove it up his ass.

  Astor allowed Reventlow to walk himself out of the office. Returning to his desk, he opened his drawer and popped a Zantac. It was barely ten o’clock and his stomach was already acting up. He wasn’t sure what was going on inside his gut, only that it felt like Vesuvius getting ready to blow.

  Reventlow.

  Hot money always did that to him.

  Astor passed Shank on the way out.

  “What’s up?” said Shank. “You can’t just skip out.”

  “I have something I need to do.”

  “Like?”

  “I’ll tell you later.”

  “What about the position?”

  Astor stopped at the door. “What about it? Everything’s fine. Just a blip.”

  “Exactly,” said Shank. “But blips never happen with the yuan.”

  Astor didn’t answer. He was already moving across the trading floor. Shank was right. Blips never did happen with the yuan. Unlike other currencies, the yuan was not freely floating. The Chinese government maintained a strong hand on its daily ebb and flow. It was only recently that the government had allowed the currency to be traded by foreigners at all. The sudden move made him anxious. Maybe that’s what was causing his stomach to go haywire. Either way, he’d worry about the position later. Right now he had another priority.

  9

  Halfway across the globe, someone else was worried about the blip.

  “Good afternoon, gentlemen,” said Magnus Lee, chairman of the China Investment Corporation, or CIC. “And lady. We have a full agenda. I suggest we begin.”

  Lee stood at the head of a conference table on the twentieth floor of the New Poly Plaza building in Beijing. It was the last Monday of the month, and as such, time for a meeting of the investment committee.

  Created in 2007, the China Investment Corporation’s sole purpose was to invest the country’s vast foreign exchange reserves. For decades China had exported far more goods and services than it had imported. The result was a cumulative surplus of $3.5 trillion, an amount equal to the annual gross domestic product of the Federal Republic of Germany and less only than those of Japan, China itself, and the United States of America. Three-quarters of that money was placed in the safest, most conservative financial instrument on the planet: United States Treasury bonds. But one quarter was allowed to seek out more attractive returns. The money allocated for investments in equities, corporate bonds, real estate, and what financiers enjoyed calling “special situations” was placed into what was called a “sovereign wealth fund.” It was this money that the committee had met to discuss.

  Lee had established the fund with a stake of $200 billion. Since then he had run the money up to $900 billion. He liked to think of himself as the richest man in the world. Still, $900 billion was only a small portion of his country’s total reserves. Like most rich men, he was congenitally greedy. He wanted more.

  From his place at the head of
the table, Lee silently greeted each committee member with a smile and a look from his glacier-blue eyes. The meeting followed a strict agenda. Each director stood and offered a succinct report of his or her department’s recent activities. Lee began with the director in charge of North American equities. “Please, Mr. Ping, go ahead.”

  “I’m pleased to announce that we have increased our stake in Morgan Stanley to twelve percent. This is our first significant share purchase in the company since our original investment in 2007. Clearly the moment was not ideal.”

  “But Mr. Ping,” said Magnus Lee, “even the loveliest rose cannot bloom in poor soil.”

  Ping beamed, publicly absolved of his poor timing. “During the last month,” he went on, “we purchased an eight percent stake in Noble Energy Group for $900 million, a seven percent stake in Boeing for $5 billion, and a four percent stake in Intel for $5 billion. To date, we hold stakes in eighty-nine U.S. corporations valued at $400 billion. Sixty-seven of them are Fortune 500 corporations. Twenty-five are Fortune 100 corporations. Marked to market, our investments show an increase of two hundred percent.”

  It was CIC policy to take only minority stakes in foreign corporations and never to influence company policy. It was also CIC policy to invest in a spectrum of industries: energy, consumer products, finance, airlines, automobiles, and of course technology.

  Finally, the director of North American equities stated that he had just completed negotiations to purchase a sizable stake in one of the financial service industry’s most prestigious companies, American Express.

  Lee clapped, and the entire table quickly followed suit. “Impressive,” he said. “Perhaps we will all receive platinum cards.”

  “Ah, but Mr. Lee, surely a vice premier deserves the Black Card.”

  The table again clapped to show their support. In a country that worshipped status, the Black Card, issued only to those who spent over $100,000 a year, was the ultimate symbol of wealth.