Trigger Point

by Matthew Glass

  ‘Which, fundamentally, we believe it is,’ said Evangelou.

  ‘Correct. And when Strickland says that, and people are asking if we’ve got the next Lehman, I think Strickland’s going to have exactly the opposite effect of what he wants. People are going to say, hell, the Fed’s saying that, I’m getting out of banks!’

  Grey laughed.

  ‘I’m serious,’ said Malevsky.

  ‘I know you are. So why doesn’t Strickland realize it? He’s not dumb. You know, he might even remember Lehman as well as you, Boris.’

  ‘So what else does he say? He’s got no out. If he’s lukewarm on it, it looks as if there’s something wrong. If he doesn’t address it, he looks complacent.’

  ‘Then he shouldn’t speak at all,’ said Evangelou.

  ‘You’re right. He should cancel the talk. But it’s been publicized. So what does it look like if he cancels? It’s a catch 22.’

  Grey frowned. ‘Fundamentally, Boris, what you’re saying is there’s no way Strickland can calm the market.’

  ‘Not if it wants to correct. Maybe there’s a little panic out there. I’m not saying this is a crash. I still think we’re in line for a correction, a small one. It’ll overshoot, that’s all, but if there’s panic out there, it’ll overshoot even more.’

  Evangelou snorted. ‘This is just guesswork. What Strickland’s going to say, what he isn’t going to say …’

  ‘But what Boris is saying is that whatever Strickland says, it makes things worse. That’s no-risk, Tony.’

  ‘Only if you believe everyone’s ready to panic.’

  Ed Grey didn’t believe the market was ready to fall into a full-blown panic, but the stock movements in the past few days did make him think it was jittery. Everyone felt the market was due a correction and were wondering if this was it. If it was, it would be the first correction that both this Fed chairman and Treasury secretary had faced, which would make everyone even more nervous.

  ‘Ed,’ said Evangelou, ‘you can bet on this, but you’re betting blind.’

  ‘Boris?’

  ‘I don’t know what Strickland’s going to say. I just think he’s got a hard job to say the right thing and he’s not someone who’s too slick with his communication. He’s probably the last guy you want to have standing up and talking right now. But what do I know? Personally, right now, I’ve got one point six million. That’s nothing compared with what I’ll have if it goes our way. If it doesn’t, I lose one point six I never even had and a job I’ve had for two months.’ He shrugged and said something in Russian.

  ‘What does that mean?’

  ‘Fuck it!’

  Grey laughed. Malevsky reminded him of himself.

  Ed Grey contemplated the screens on the wall. He had no research or quantitative rationale to back this. But out on the floor he had a bunch of portfolio managers doing exactly those kind of trades, grinding out the steady, low-margin business that brought the fund a reliable eight or ten per cent per annum. The big trades, the ones that took the returns up into the stratosphere, always had an element of hunch about them.

  But not as much as this. Normally there was more research and a better rationale behind it. This really was betting blind, as Evangelou had said. Or almost blind. They did have one solid fact – that Fidelian was coming to the market for cash. But the fall in stock price had already factored in a capital raising of nine billion, which was more than Fidelian could possibly be expecting to raise. The rest was emotion.

  But emotion could make you a lot of money, as long as you didn’t make the mistake of feeling it yourself.

  Say they took their exposure up to half a billion, thought Grey. Say the market turned against them and prices climbed, say by five per cent before they could close out. That gave them a loss of twenty-five million. On the other hand, say Fidelian and the others they had shorted went down another twenty per cent.

  The risk-reward ratio wasn’t great. It wasn’t as high as he would normally demand for a bet like this. But the rest of the fund was strong. The analysts ran scenarios across the entire portfolio on a daily basis. They were up thirty-six per cent for the year, almost double the target return he submitted to his investors. The scenario modeling showed that it would take a coordinated, significant downturn across numerous asset classes and markets to really hurt him. In that context, a loss of twenty-five million, or even a worst-case loss of fifty, was nothing.

  ‘If we were going to do this,’ said Grey eventually, ‘we’d have to increase our positions before Strickland speaks.’

  Malevsky nodded. ‘That’s tomorrow.’

  12

  THE CROWD IN the ballroom was bigger than usual. National Press Club lunches are typically affairs for the connoisseur, arranged far in advance, long on theory, history or nostalgia but rarely aligned with the twenty-four-hour news cycle. For that to happen, the Club needs an extraordinary stroke of luck.

  Ron Strickland’s speech had been scheduled months previously to mark his second anniversary in the post. He took his place at the podium after being introduced by the Club president, Claire Weissman. Behind him was the familiar blue background with the name of the club in white lettering repeated across it. He looked around the room and saw just about every economic journalist of national stature in the audience.

  ‘I’m very grateful to the National Press Club for the opportunity to speak to you today. As it turns out, it probably saves me quite a number of interviews.’

  There was a smattering of laughter, more at the sight of Ron Strickland trying to open with a joke than at the quality of the witticism.

  ‘Speaking as an economist, an economy of scale, if you will.’

  There was a little more laughter. But the wooden jokes, if Strickland had calculated them to lighten the atmosphere, only heightened the sense of expectation in the room. After the reaction in the markets to his comments before Congress the previous week, the journalists had come with high anticipation. Claire Weissman looked around the audience. People were standing at the back. It was the stuff her dreams were made of.

  Strickland cleared his throat.

  ‘I was asked to become chairman of the Federal Reserve somewhat over two years ago,’ he read from his prepared remarks, ‘and I can honestly say this has been the most important and fulfilling two years in my career. No chairman of the Fed deals with exactly the same run of economic events that any other chairman faces and therefore probably the single most important quality in being able to do this job properly is flexibility both in terms of policy goals and use of the instruments the Fed has at its disposal. When I look back over these two years I have to say I think it has been a pretty benign period, which is a credit to the single-minded leadership of my predecessor, Jeff Kohler, who I think was a truly outstanding Fed chairman. If Jeff was still with us I’m pretty sure I wouldn’t be the one standing in front of you today.’ Strickland paused, and there were a few polite nods in the audience. ‘So, let me tell you some of the things that I think are most important in what we’ve done over the past couple of years.’

  He continued reading. The first nine-tenths of the speech was the exact one that he and his staff had prepared prior to the latest events in the markets. Strickland was puzzled at the apparent effect of his report to Congress, which he had expected to be the exact opposite. He knew the White House wanted him to take a firm line with the markets and use his public announcements to give that message. He still didn’t know how, but perhaps he had overdone it slightly. Strickland didn’t believe there were any exceptional problems in the market that were going to require his intervention any time soon, and he certainly didn’t believe there were any fundamental problems with the banking system. He was determined to use this occasion to reassure the markets that the Fed was on the ball and that the banking system in the US was as safe and well regulated as it had ever been. More so, in fact.

  Eventually he got to it.

  ‘Now, I don’t mean to ignore the gorilla in the room.
The outlook for the economy is extremely favorable and we see healthy growth continuing both in the short and medium terms, as I outlined in my testimony to Congress last week. And as far as I can tell, nothing has changed since then, although we have seen some volatility in certain sectors of our markets. But within a growth trajectory such as I have described inevitably we are going to see market volatility of varying degrees and in my opinion that’s an absolutely normal part of the market’s own self-correcting process and is nothing to cause alarm. When that volatility impacts the financial sector, however, and in particular the banking sector, then understandably people start to become a little more nervous and I guess it’s natural for people to cast their minds back to events of ten years ago and ask themselves whether our system is about to go into a similar crisis. And you’ll be relieved to know the answer is no.’

  Strickland paused, expecting at least a little laughter. There was silence.

  ‘Well, this is when the supervisory role of the Fed and the things I talked about earlier become paramount. And that goes as well for the other authorities that are responsible for regulating banks and financial institutions that don’t fall under the Fed’s jurisdiction. So naturally we’re looking at every institution to assess its compliance and its financial soundness and if there’s any doubt over any of them then we have mechanisms in place, as you know, to ensure compliance and to use our policy tools to relieve any pressures, if there are any, and even to take control of the deposit-taking banks through the Federal Deposit Insurance Corporation and protect depositors if that’s required. I think that’s what people are concerned to know, that no matter what the stock price happens to be on a given day our banks are sound and deposits are safe and there hasn’t been a return to the risky practices that led to 2008. When I say that we’ll take action if necessary, that’s preventive action. It’s not action that happens after there’s been a crisis, but action to prevent one, so we never get left in a situation again where we’re picking up the pieces. That’s the reassurance that I can categorically give today and which I think is the reassurance that people are looking for from the Federal Reserve. We have a good, solid, sound banking system that is in no way comparable to the corroded situation that existed in 2008. Ten years ago, our banking system and just about the entire international banking system was a disaster waiting to happen and had been for a couple of years. There is no disaster waiting to happen today. What we have is a system that is strong, solid and tightly overseen and regulated by ourselves and the other responsible bodies.’

  Strickland paused again. The silence coming back at him felt stony. He didn’t feel he was getting through. Ron Strickland had no idea how wooden and predictable he sounded to those listening to him. As far as he was concerned, what he was saying was so self-evidently true that he wondered how anyone could fail to get it. For a split second he wondered whether he should go off the cuff, but decided to stick to the script. All he had left were his concluding remarks. A minute later he was done.

  Clare Weissman asked if he would take questions.

  ‘Sure,’ he said. ‘I’ll take a couple.’

  The hand of just about every financial journalist in the room went up. The lead business correspondent of the Wall Street Journal was first.

  ‘Mr Chairman, I’m very interested in your comments about the gorilla in the room, as you call it. I’m not quite clear what you’ve been saying to us. Are you saying the movements that we’ve seen in the stock prices in the banking sector over the past few days aren’t of any concern to you?’

  ‘No, I’m not saying they’re of no concern,’ said Strickland. ‘Clearly we watch this very carefully.’

  ‘Then of how much concern are they?’

  ‘They’re not of concern …’ Strickland stopped. ‘Let me rephrase that. The market makes its own assessment of the value of any given institution. I don’t need to tell you that it does that on the basis of a whole range of factors, the strength of the balance sheet, the growth prospects, the quality of the management team. A whole bunch of things. Those assessments change on a continuous basis. Our role is to make sure that the underlying institution, the thing the market is valuing, is sound, that it has the correct capital reserves, that it’s compliant in its practices, that it’s not getting up to the kind of mischief we saw in 2008, that depositors can be sure their money is being well managed, that shareholders and bondholders know they’re dealing with an honest institution. If we’re satisfied with that, then the market’s valuation is the market’s valuation, and that’s a matter for the market.’

  ‘So are there any banks where you’re not satisfied in those terms?’

  ‘As you know, we have a watch list and we always have some institutions that are under a higher degree of scrutiny. That’s absolutely normal. That’s part of our role, to make sure that if there’s any potential problems we know about them early and we can work with the bank in question – if that’s needed, and most often it isn’t – to help get them through.’

  He took another question.

  ‘Mr Chairman, I’d like to pursue the first question. How many banks are you working with right now in the way you described?’

  Strickland shook his head. He looked around the room. The journalists gazed back.

  ‘You know I can’t comment on that,’ he said.

  ‘Mr Chairman, this has implications. Some of these banks are not going to be able to raise funds if their stocks drop below a certain level. Other banks are not going to lend to them if they think that’s going to happen.’

  ‘Well, the Fed is there to relieve those pressures through its liquidity operations and other measures I described earlier.’

  ‘Was the Fed there in 2008?’

  ‘Yes. I would argue that it was. I would argue, and I don’t think any fair person would disagree, that without the Fed in 2008 and the release of liquidity and the other support it gave we probably would have seen the complete collapse of our banking system and potentially the international banking system. Now, what happened back then wasn’t pretty, but it wasn’t as bad as that.’

  Strickland paused. He found himself getting a little angry. These journalists were experienced financial commentators. They understood this stuff as well as he did. He didn’t know why he was getting these questions.

  He cleared his throat and pointed at another.

  ‘Mr Chairman, do you think it’s short sellers who are driving the market?’

  ‘I wouldn’t know,’ he replied curtly. ‘That’s a question for the folks at the Stock Exchange and the Securities and Exchange Commission.’

  ‘Would it worry you if they were?’

  ‘What would worry me is if people believed we had some kind of a problem when we don’t.’ He pointed at another journalist. ‘Yes?’

  ‘Mr Chairman, you referred to your report to Congress last week and I wonder whether you think in any way that your comments have actually helped to create uncertainty in the market.’

  Strickland shook his head. ‘How would that have helped to create uncertainty?’

  ‘Well, you talked about certain asset classes that you felt were overvalued and more or less threatened to … clamp down in some way on activity around those. When you say you won’t tolerate irrational exuberance or anything approaching it people immediately think we’re looking at monetary tightening. I just wonder whether you think that kind of talk may actually have been counterproductive and whether you may regret having said that.’

  Strickland felt his irritation rising again. ‘Look, first, when you talk about my remarks, let’s get them accurate. I did not say that any asset classes were overvalued. I said that price and volume data showed increasing activity in certain classes of equity derivatives and we were watching that and we would intervene as appropriate. That doesn’t mean we’re going to intervene. It just means we have the weapons.’

  ‘Mr Chairman, you’ve just said you had price data, surely that’s saying they’re overvalued.’


  ‘It’s not saying they’re overvalued. It’s not my role to say whether they’re overvalued. I’m simply saying that we look at the activity levels.’

  He glanced at Weissman, who was standing a few yards to the side. But the president of the National Press Club had no intention of ending the questioning. The coverage of this, she knew, was going to be fantastic.

  ‘I’ll take one more,’ said Strickland. He pointed.

  Bernard Tobin of the Economic Review took the microphone. ‘Mr Chairman, can you comment on Fidelian Bank?’

  ‘No, Bernard,’ he replied impatiently. ‘I can’t comment on Fidelian Bank. I can’t comment on any individual bank and I think you know that.’ Strickland hadn’t been pointing at Tobin, but at the woman behind him. Tobin had a huge bee under his bonnet about the banking failures in the last financial crisis, having lost a personal investment of some hundreds of thousands in Bear Stearns stock. Everyone knew he was always looking for an excuse to slam the Fed, which he held responsible. ‘Bernard, I was actually pointing at–’

  ‘Okay, so here’s my question. Let’s say I’ve got a thousand dollars to invest and I’m thinking maybe I should be putting it into Fidelian Bank. And let’s say with all the scrutiny you’ve been talking about you know that Fidelian Bank is this far away from being bankrupt. Don’t you think you ought to tell me before I put my thousand bucks in?’

  ‘Bernard, I said I was pointing at–’

  ‘Is that a question you don’t want to answer, Mr Chairman?’

  ‘Of course I’ll answer it,’ retorted Strickland angrily. ‘Let’s just get everything very clear. I’m not saying Fidelian Bank is near being bankrupt. In fact, although I don’t comment on individual banks, I can tell you that as far as I’m aware Fidelian Bank is nowhere near being bankrupt. And by the way, you couldn’t put a thousand dollars in there, because it’s not a deposit-taking bank. It’s an investment bank with investment bank activities.’