The bosses loved it. His immediate boss, a wiry, hyperactive American named Herbie Exler, was a gambler. He encouraged Chris to do his trades in larger and larger size. The logic was sound. If Chris could make two hundred thousand dollars on a hundred million dollar position, why not give him five hundred million, or a billion? With trepidation, Chris increased the size of his trades. And it worked.
Chris traded European government bonds. He did things like buying a hundred million Deutschmarks of German government bonds and selling an equivalent number of French governments, betting that the relationship between the two would change. Chris had an excellent feel for how the relationships between the European markets moved, and he understood the way the weight of money of the major global investors, most of whom were Bloomfield Weiss's clients, sloshed from one country to another.
As Economic and Monetary Union approached, one trade dominated all others. It was known as 'the convergence trade'. The theory was simple, too simple. The idea was that when the currencies of France, Italy, Spain, Portugal, Germany and the rest were all rolled into the euro, and when the interest rate for the whole euro currency zone was set by the European Central Bank, then the interest rates on these countries' government debt would be broadly similar. So if Italian government bonds yielded two per cent more than German bonds, you bought Italy and sold Germany, confident that you would have a nice capital gain on the euro's birthday, when Italian bond yields would fall to German levels, and Italian bond prices would rise.
It was a no-brainer. Chris did the trade in large size, and so did everyone else on the Street. And off the Street as well. In particular, a large hedge fund in Greenwich, Connecticut put the trade on. And it put it on in the biggest size imaginable. It borrowed many times its capital to buy literally billions of dollars' worth of European government bonds.
At first, all went well. Partly as a result of the weight of money, nice capital gains soon emerged, for Chris, for the hedge fund, for everybody. But then, while they were all off on their summer holidays, Russia defaulted on its debt, causing a tremor of fear to spread around the world's financial markets. This had no direct bearing on the chances of monetary union being disrupted, but it caused what the markets call 'a flight to quality'. Nervous investors switched into what they considered to be the safest investments. They bought German bonds. They didn't buy Italian, Spanish, Portuguese or even French bonds.
The unrealized capital gains became unrealized capital losses. In theory, this shouldn't have been a problem: as the jitters subsided the old unstoppable move towards convergence would continue. But Chris was nervous. He wanted to take his loss, and buy in again when things had settled down. Now, Chris had a big position, and the loss would be several million dollars. Effectively he would be giving back all of his profits for the year. So he spoke to Herbie Exler first.
Herbie was furious. He had just told his own boss, Larry Stewart, that Chris's profits to date were in the bag, and that he could be relied upon for as much again in the remaining months of the year. Herbie's bonus depended on Chris meeting those figures. And the two-million-pound house that Mrs Exler had set her heart on in Kensington depended on that bonus.
Herbie suggested doubling up. Convergence was inevitable, profits were inevitable, doubling up would double these, and double the bonus. To Herbie, this was a no-brainer.
Chris's position was already huge. He wanted to sell, not buy. Herbie and Chris had a series of vigorous discussions, where Herbie accused Chris of being a wimp, and Chris sounded like one. Afterwards Chris asked himself over and over again why he had given in. At the time, there were good reasons. Herbie was Chris's boss. Although Chris was sure there was a chance that the trade could go against them, Herbie was undoubtedly correct that there was a chance the trade would work. But there was another reason that Chris caved in, and one that he couldn't forgive himself for. Despite his impressive track record as a trader, Chris still saw himself as the Polish upstart from Halifax, the boy who scraped into school and university and investment banking, the boy who was lucky just to be doing what he was doing. Herbie Exler was a streetwise New York bond trader, a Bloomfield Weiss man through and through, a king of the market. At the final moment, Chris's confidence defeated him. There was never any risk of that happening to Herbie. So they doubled up.
Things swiftly fell apart. While the rest of the Street were unanimous that the trade would come back their way, they had no choice but to cut their losses. Investment banks had spent hundreds of millions on computer systems that could tell their managements instantaneously what unrealized losses their traders were sitting on, and as these losses grew, the word came down to the trading floors to sell.
So they sold. Of course, this drove prices further against Chris. And against the large Greenwich hedge fund. It had bet everything on this trade; it couldn't afford to quit. But the brokers that had fallen over themselves to lend money to it now fell over themselves to get their money back. So eventually the hedge fund had to sell.
But everyone else was selling. There were no buyers. The most liquid markets in the world, those for government bonds, dried up. There was a global crisis, which was only prevented from spinning completely out of control by the US Federal Reserve who encouraged a bail out of the hedge fund by the big international investment banks.
Those were terrible days for Chris. His losses had become astronomical, and there was absolutely nothing he could do about it. He couldn't have sold even if Herbie had let him; the market could never have absorbed the size of his positions. He was stuck with them.
Every day was like a nightmare, each worse than the last. Every evening he would check the unrealized loss before he went home. He would try not to think about the position overnight, but with no success. He couldn't concentrate on a book or a television programme for more than ten minutes without the horror of his losses encroaching. He tried getting drunk a couple of times, but that didn't work either. It just made the morning worse. He would arrive at his desk to see that while he had been asleep the market had added another few million to the already enormous negative figure on his position report.
It was the loss of control that he found hardest to deal with. The market had gone against him before, but he had always been able to cut and start again. This was different. It was as though he was driving a fast car on a mountain road and had skidded on ice. The car was in a spin, the tyres wouldn't grip, and the cliff edge was coming nearer and nearer. Except that it was taking him days, not milliseconds, to reach it.
Chris tried to take it professionally. He kept a straight stony face from seven in the morning until eight at night. He struggled to produce a smile for anyone who cracked a joke, or even said hello. But there were few of those. Everyone knew what was happening. They all knew he was being killed. And they avoided him, as though his disastrous luck was contagious.
Herbie felt the pressure even worse than Chris. He spent most of the day locked in his office, literally staring at the screens in the hope that the little figures would move his way. He had some friends at the Greenwich hedge fund whom he called several times a day, and who consistently said that the trade would come back their way imminently. Herbie would tell Chris this at great length, along with Herbie's assessment of how smart these guys were. If Chris raised doubts about the position, Herbie would growl at him that it was a great trade, and he should believe in it. Any of the other traders who tried to talk to Herbie about anything else got nowhere. He was irascible and dangerous.
Chris couldn't work out why Bloomfield Weiss's management hadn't followed the other firms on the Street and ordered Herbie to cut the position. It was true that Bloomfield Weiss had the reputation for having bigger balls than anyone else. Chris assumed he must be living through the proof. Yet another mistake.
Then a piece appeared in the Wall Street Journal that Bloomfield Weiss was sitting on a loss of five hundred million dollars. As Chris read this early in the morning at his desk, he knew that it was inaccurate
. His losses were actually six hundred and twelve million dollars. The phones were soon ringing from brokers, clients, journalists. The answers were all the same. No comment. No comment. No comment.
Herbie came in, paced around Chris for a few minutes, and then was hauled off to talk to his bosses. Chris spent a miserable couple of hours at his desk. There was nothing he could do. Nothing he could say. No comment.
Then at twelve o'clock he was summoned to see Simon Bibby, the head of the London office. With Bibby were Larry Stewart, the American head of fixed income in Europe, and Herbie. Needless to say, they all looked like men who had lost more than half a billion dollars.
Bibby was English, forty-five, and ruthless. Larry was usually friendly to Chris, but he didn't appear so now. And Herbie had a look in his eyes. A look that said to Chris: 'I'm going to screw you, and you're not going to escape, so don't even try.'
Bibby did the talking. He said that he had spoken to Sidney Stahl, the chairman, who had demanded immediate action to come clean and clear up the mess. Then Bibby asked Chris why he had misled them over the revaluation of his position. At first, Chris didn't understand. Then it became clear that Bibby had been told that the losses that were showing up on their reports weren't real, and were offset by understated profits on derivatives positions. This was incorrect, and Chris began to explain why. Herbie interrupted. He looked Chris straight in the eye and told him that he had been misled by Chris, and had therefore unwittingly misled his superiors.
Chris protested, but Herbie was implacable. He recalled conversations that never existed that buried Chris. Then, when Chris looked at the other two, he understood. Bibby was glaring at Chris as though he were a criminal, but Larry, whom Chris liked and trusted, was looking at his hands, at the table in front of him, anywhere but at Chris. One of the four people in that room would have to take the blame for what had happened. The other three had decided that it would be Chris. Believing Herbie's story was the easiest way to achieve this.
Chris protested for a further quarter of an hour, until the in-house lawyer came in with a two-page letter. Bibby told Chris that he was fired with immediate effect, but that he would receive six months' salary, and Bloomfield Weiss would not seek to prosecute, as long as he signed the letter. Chris read it through carefully. Under it, he promised not to discuss the disaster with the press or anyone else, and not to take legal action against Bloomfield Weiss. Bibby handed Chris a pen, and said that if he didn't sign the letter immediately, Bibby would be forced to call in the SFA, the City watchdogs.
Suddenly, Chris felt crushed. It was as though he had expected this moment ever since he had joined Bloomfield Weiss. He wasn't an investment banker and he had been found out. Like it or not, he had put the trade on. He had acquiesced to Herbie's demand that he double up. Of course he hadn't misled Herbie, or Bibby, or anyone else, but it was his word against Herbie's and he knew Herbie would win. Herbie was a ruthless street fighter. If there wasn't evidence against Chris, he would fabricate it. And Bibby and Larry would believe Herbie. They didn't want to believe the truth; they wanted to believe a lie, their careers depended on it. Chris now knew what he had long suspected: he wasn't cut out for investment banking. He had no business to be in the room at all. He signed.
Bloomfield Weiss didn't come right out and say that he had lost them six hundred million dollars. But they did say he had been dismissed. His name appeared in all the British press. Journalists wanted to interview him, his home phone rang constantly, people took photographs. He stood by the agreement he had signed; he didn't talk to any of them. But he was famous. Famous as the man who had dropped over half a billion.
Ironically, the trade did come right in the end, monetary union happened and the government bonds converged. Some people made a lot of money. But not Bloomfield Weiss. Under Sidney Stahl's insistence, they bared their chest, took their losses and moved on.
Chris tried to do the same. He called back the headhunters who had been calling him every week for a year. They didn't want to know. Nobody wanted to know. He couldn't get a job. He could probably have tried harder, but he didn't have it in him. He didn't want to be an investment banker anyway. So he gave up.
In time, Lenka pulled him out of it. They set up Carpathian together and everything went well, until suddenly, at the crucial moment, that loss came back to kick him in the balls again.
Except that this time, he wouldn't just take it. He owed Lenka that much, if not himself.
He straightened up and lengthened his stride as he made his way down Harley Street back towards the office. He would try to talk Rudy out of his decision. But if that didn't work, he would figure out a way to keeping going. He was determined to.
Back at the office, he examined the portfolio. The fund was set up so that there were two choices when an investor wanted to redeem: either find a new investor to take his place, or sell assets to raise the cash needed. Finding a new investor was out of the question without Lenka. She had the contacts, and it would be impossible for Chris to persuade someone he didn't know to invest ten million euros with him when half the management team had been murdered.
So he would have to sell some bonds. Which ones?
Although they only had fifty-five million euros of funds available to them, their portfolio was much bigger. They had borrowed money and used the mysteries of the repo market to build up much larger positions. In fact, most of the portfolio in volume was made up of a new convergence trade, which was managed by Chris. The theory was that most of the Central European countries would be admitted to the European Union. So Chris had bought the government bonds of countries like the Czech Republic, Poland, Estonia, Hungary and Slovenia. He dabbled in some of the second-tier countries as well. At first he had balked at putting himself in such a familiar position, but Lenka had encouraged him, saying he was the best person she knew in the market to manage such a trade, and promising him that whenever he wanted to cut and run, she wouldn't get in his way. He had taken a deep breath and started buying.
The resignation of the Russian Finance Minister had shaken all these positions, but Chris was convinced of their fundamental strength, and wanted to hold on.
The rest of the portfolio was made up of high-yield bonds, otherwise known as junk. Lenka had learned about these in the United States, and the idea was that she would use her experience to analyse the small but growing number of junk bonds issued in Eastern Europe. By far the largest of these junk-bond positions was Eureka Telecom. It was also the position that was performing worst, and the one Chris trusted the least.
Eureka Telecom it would be, then.
It might take a while to sell the bonds, so Chris decided to start the process immediately. If he succeeded in persuading Rudy to maintain his investment in Carpathian, then Chris could always reinvest the money elsewhere. He called Ian.
'Where's Eureka Telecom trading?' he asked, dispensing with any small talk.
'I think we're making them ninety-five to ninety-seven,' Ian answered.
'Ninety-five! But Lenka bought them at par last week, didn't she?'
'I know,' said Ian sounding uncomfortable. 'But the market's spooked by this Russian news. And the latest subscriber numbers came out on Monday. They were, er, disappointing.'
'Bad news the week after the bond was issued!' said Chris. 'Wasn't that in the prospectus?'
'It was a complete surprise to everybody,' said Ian. 'That's why my trader has marked the bonds down.'
In theory, that meant that Bloomfield Weiss would be prepared to buy Chris's bonds at a price of ninety-five, and sell him more at a price of ninety-seven. Lenka had bought her twenty-five million bonds at a price of par, or a hundred. So, in theory, Chris could sell ten million of them for a five per cent loss, which was half a million euros. Not great, but not a total disaster. He had a bad feeling about this one. He wanted to get out straight away.
The trouble was, the junk bond market was illiquid. What this meant was that as soon as Chris said he wanted to sell
the entire position, Bloomfield Weiss would drop their price. By how much, Chris would have to see.
'What would you pay me for ten?' asked Chris.
There was a pause on the phone. 'Ninety-five was only good for a million,' said Ian.
'OK, I understand,' said Chris. 'Now, where can I sell ten million?'
There was a long pause. Eventually Ian returned. 'My trader would like to work an order on that. Say at ninety-three?'
Chris wasn't having any of that. Bloomfield Weiss wanted to tout his bonds around the market at no risk to themselves to try to find a buyer. Chris wanted out, and he wanted out immediately.
'No, Ian. I want a bid for the ten million.'
'I think we'd prefer to work an order.'
'Ian, you sold us twenty-five million euros of this bond last week. You have to be willing to buy ten million back.'
Ian hesitated. 'Chris,' he said. 'You're not familiar with the way this market works. These aren't government bonds. The high-yield market is illiquid; everyone knows that. Let us work the order.'
'Don't patronize me, Ian. Ask your trader where he would buy ten million. Now.'
'But, Chris . . .'
'Ask him.'
'OK.'
Chris was left hanging on the phone for several minutes. Ian was right, Chris wasn't as familiar with the junk market as the government bond market, but he wasn't going to let Bloomfield Weiss take advantage of that. They sold Carpathian the bonds; they'd have to buy them back.
'Chris?' It was Ian. He sounded hesitant, nervous. Chris steeled himself.
'Yes?'
'If you want to sell the bonds on the wire, we'll pay seventy.'
'Seventy!' Chris almost screamed. 'That's absurd. How can you pretend the price is ninety-five when you'll only pay seventy?'
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