At the Dagenham factory, he asked Mrs Hine, his secretary, to track down Sophie Topping and find out how to reach Tranter. Before long, Mrs Hine had sent an e-mail to
[email protected]. ‘Dear Mr Tranter, please forgive this message from out the blue, my employer a very distinguished gentleman is desirous of making a business connection with you in regard of a Literary matter and would be most obliged if you would telephone the above telephone number in the strictest confidence and ask for Mr al-Rashid. Your truly, Mrs Doris Hine.’
II
John Veals walked down the steps of the sixteen-seater PetJet at Zurich airport. He had a rental share in the plane, and if he booked ahead and filled it up – two families going on holiday, for instance – it was no more expensive per head than buying good seats on an airline. His last-minute travel decision, however, meant there were only three other passengers, so the flight was expensive. Sometimes you had to spend to earn. After immigration, he found the modest grey car that was waiting to take him to Pfäffikon, a discreetly drab town that might have been invented to help people like him make large trades away from prying eyes.
There was grey snow along the edges of the streets, neatly shovelled by municipal workers in the early hours. Veals met Kieran Duffy, the head of High Level’s trade execution team, at the usual coffee shop, well away from the insipid food and high prices of the restaurants designed for their kind. Veals had first met Duffy in New York, where Duffy had worked for twenty-five years for a rival bank. Duffy was one of the few competitors they had really feared; what he didn’t know about shafting the client could be written, according to Godley, on the sharp end of a golf tee. Despite his name, Duffy was Jewish and had always been known to Veals as O’Bagel, O’Shlo or even once, when he’d messed up, as O’Kike. (There had been an awkward moment early in Veals’s and Godley’s partnership when Godley had wondered whether Veals, being at least nominally Jewish, if irreligious, himself, would mind the banter of the office. ‘Don’t be fucking feeble, Steve,’ Veals told him. ‘Most of my best friends are anti-Semites.’)
At the age of forty-nine, Duffy had retired from Wall Street to stare at his millions in Connecticut. Veals gave him nine months to get bored, then offered him a job as chief of his own ‘buy side’: to be the man who no longer sold opaque products for an eye-watering commission but who had the power to decide when, what and from whom to buy. Duffy decamped to Zurich six weeks later. His wife was to join him ‘in due course’, and meanwhile he had set up house with a twenty-eight-year-old Italian girl he’d met in his last days on Wall Street.
Over dry croissants and strong coffee, Veals began to outline to Duffy his thoughts about Allied Royal Bank. He told him as little as was necessary for Duffy to begin to design the positions. Even in his own man, hand-picked, and with a strong record with High Level already behind him, Veals saw only risks. High Level’s trades generated tens of millions in commission for the brokers and investment banks they dealt with; this meant everyone wanted to know Kieran Duffy and that he was the target of ‘cash rebates’ and other under-the-table favours. Veals knew that Duffy had banked enough not to be prey to such clownish temptation; that was one reason he’d hired him. Still, he had thought it wise to pay all of Duffy’s annual salary and bonus in the shape of shares in High Level. Veals trusted Duffy all right, but – just to be sure – it made sense to lock him in for more than any bribe could match. ‘Making certain our interests are aligned’ was how Veals put it; ‘Not throwing out a hospital pass’ was Godley’s term.
Veals was ever thrifty with details. ‘I think silver’s likely to get hammered,’ he might tell Duffy on his orange cellphone from the alleyway off Old Pye Street. ‘Put us in for five per cent of the fund by Friday.’ It was up to Duffy to decide what market instruments to use; it went without saying, ever, that listed markets should be avoided. With what Veals had in mind for ARB, however, he needed face-to-face time with Duffy. It was going to take the lightest and most ingenious of touches by both men; it would involve all their experience and guile. If Duffy had started work in London or New York, the compliance officers would have asked if the amounts at stake were not in breach of the fund’s own published risk-tolerance statements; in Pfäffikon he was more likely to be asked whether he fancied another glass of the fruity local Malvoisie.
The simple, but perhaps too simple, thing to do was to short-sell the stock. This meant first borrowing a vast number of ARB shares from an insurance company or some other registered owner who specialised in lending stock; then selling it at whatever the market would offer; and, finally, repurchasing it at a much cheaper price when the market had collapsed and returning it to its owner. The profit was in the difference between the price at which they’d sold and the lower one at which they had rebought. The exposure, the risk – if the stock price rose – was almost limitless. ‘Shorting takes rugby-sized balls,’ as Godley was fond of saying. But the ARB price wasn’t going to rise, not in the long run – not with what Veals knew about the debt covenant.
The second obvious thing to do was to buy ‘put’ options on ARB stock. These gave them the right to sell the stock at a pre-agreed or ‘strike’ price. If the strike price was fifteen but the market price had fallen to ten, you bought a million at ten and sold them to the party who’d agreed to buy them at fifteen. Easy. The price of buying these ‘puts’ was determined by the strike price (and the further that was from the current price, the cheaper it was to buy the option); the ‘time value’ before the option expired; and the volatility of the underlying market. Each was given a Greek letter, and the relationships between them further Greek letters, so that some of the quants ended up with worksheets that looked like a page from the Iliad.
It was mostly, in Veals’s view, absolute piffle. A trade was a trade, and it was driven by two things only: greed and fear. Gamma for Greed if you insisted on talking Greek, said Veals; but, well, ‘The Greeks had no letter for F,’ he had more than once remarked.
For two hours they discussed the virtues of ‘puts’ and ‘calls’. Traditionally such instruments had existed as insurance: by limiting their exposure to future price fluctuations, companies could use them to smooth out their forecasts and their cash flows. But turn a safety mechanism upside down and, hey presto, you have a gambling instrument. Through ‘calls’, High Level could trade with people who took the view that the ARB price would rise, or were at least prepared to name a figure that would reward them if it did; through ‘puts’ High Level could express their own conviction that the price would fall. The danger in the dual strategy Veals outlined was that they were not using one position to ‘hedge’ against the other; on the contrary, the success of both trades relied on the same thing: they were simply doubling their bet on the chosen outcome.
‘Shit.’ Duffy seldom swore. ‘Do you know something I don’t know, John?’
‘Trust me,’ said Veals.
Duffy stared into his coffee, saying nothing for a minute. Eventually he lifted his head. ‘OK, John. It’s not my fund. It’s your baby. I’ll do what you ask.’
Veals nodded. ‘But I’m worried that we might blow out the counterparty. I don’t want one of them to collapse and default on the trade.’
‘We have to spread it across the whole industry,’ said Duffy. ‘It’s time we called in a few favours. You’ve got every prime broker in the world as well as half the hedge funds gagging for a bit of the action. I can get some special terms. Then people will see the banks’ names not ours listed on the trades. They won’t know it’s us they’re dealing with.’
Veals ordered more coffee. ‘If ARB goes down,’ he said, ‘it’s possible the amount of bad debt in all the other banks will make their share prices plummet too. The whole banking sector could be in trouble. There’d be panic on the high street. Mrs Smith’s £10,000 life savings. Queues round the block. The government would have to guarantee the savers. And to do that, they’d have to increase their own borrowing by half overnight.’
‘And that would hav
e a huge effect on the price of government debt,’ said Duffy.
‘Yes it would,’ said Veals. ‘On gilts. So we take a position on gilts.’
Duffy smiled slowly. ‘And then,’ he said, ‘there’s the currency. The extra government debt would mean that sterling gets hammered – even against a shaky dollar.’
‘Well,’ said Veals, putting down his cup. ‘I think we have the makings of something.’
He almost smiled. The reason he particularly liked the sterling aspect of the trade was that the currency market was almost completely unregulated.
‘Do you want lunch?’ said Duffy. ‘We could go to that Spanish place I’m always telling you about.’
‘What? And be seen by a whole lot of hedge-fund managers? For fuck’s sake, Kieran. I’m not hungry. My car’s outside. I’ll get him to take me back to the airport. I’ll call tonight at five. On your cellphone.’
‘All right. What are we going to call this trade, John?’
Veals and Duffy always had code names for sensitive trades, just as an extra protection.
‘I suppose,’ said Veals, ‘in view of all the pension business we could call it ... What about “Rheumatism”?’
‘Fine. Rheumatism it is. So long, John. Been nice seeing you.’
Kieran Duffy stood outside the steamed-up coffee shop and watched the lean figure of John Veals crunch a homburg on to his head and climb into the grey saloon.
Some hedge funds had narrow specialisations, but Veals and Godley always intended to deal across the whole financial carte. Veals dreaded boredom and he feared missing any opportunity.
To begin with, until they found their feet, they did some easy deals in his old bank speciality: debt. This seemed an obvious way of ‘getting our eye in’, as Godley put it; there was the further attraction to Veals that bank debt was not regulated. You could pass on market-sensitive information without a problem; what would have got you three years in prison for insider trading if you dealt in equities was quite permissible when discussing bank debt, and here was Veals’s preferred position: the kosher edge.
An early coup came when he noticed that one of the Eastern European countries was owed £30 million by a former French African colony. Veals discovered that the Slavs expected little or no return on what they’d rashly lent the Africans and they were delighted to get the whole debt off their hands to Veals in return for £5 million.
When the Jubilee 2000 movement for the cancellation of debt persuaded the G7 countries to write off the African debt, Veals at once sued the African government in the London High Court for repayment of the £25 million shortfall. The judge expressed distaste at the action, but said his hands were tied by law. Veals owned the bonds; the Africans were obliged to reroute the G7 refund straight into Veals’s recently opened private Allied Royal bank account in Victoria Street, London SW1. It was a happy result for High Level Capital in its infant days.
There was a large industry in London which existed to exploit the ‘rights’ of junior debtors in companies on their deathbed: it involved taking extreme legal positions of doubtful morality. Veals viewed it as a boring and mechanical trade, with irritating lawyers’ fees, but admitted it was a dependable revenue earner; it was, as Steve Godley put it, ‘a club we need to have in our bag. A handy seven iron.’
In New York, Veals had given Marc Bézamain carte blanche to do such trades whenever he saw fit. Veals knew that Bézamain had the kosher edge in this area because of his friendship with people in the ratings agencies. If a troubled company’s bonds were downgraded, some mutual funds were obliged to shed them for what Bézamain called ‘non-economic’ reasons: pensioners’ representatives could be just too fussy – the bonds hadn’t lost any real value.
Bézamain had come into Veals’s orbit in New York, via Paris and a grande école or two, but originally from a poor village near Cahors in south-west France. His parents were smallholders – ‘fucking peasants’, as Veals put it to him at interview: his aunt worked stuffing grain down the throat of geese in an industrial foie gras plant. But the young man was good. He was very strong on risk limitation; he had a rustic smallholder’s caution, and Veals and Godley both privately believed he kept his annual bonus ($8 million this January) in cash beneath the mattress.
To John Veals the staffing of High Level Capital was a matter of frantic delicacy, and the most valuable to him were the consultants. They included two East Europeans, whose utilities he had bled white on behalf of his bank in New York in the course of their post-Communist denationalisations. They had gone from being treasurers and chief financial officers to being politicians: finance ministers for their respective governments. Their days of being ‘entertained’ by Veals and Godley with the limitless expense account of the bank in New York had given the men a taste for the exotic which they couldn’t fund themselves. Veals and Godley had made available a few ‘founder shares’ in High Level, then hired them as research specialists on ‘economic trends’. Their job was to deliver inside information on their respective countries; they were paid a retainer, but also on results that accrued from that information.
In the course of the African debt venture, Veals had addressed himself to the British Embassy, where the commercial attaché, a well-spoken young man called Martin Ryman, who was bored with making car-parking arrangements for visiting dignitaries, had been excited by the plans that Veals laid out to him. Ryman showed a commercial acumen and a flexibility that had impressed Veals. He kept an eye on him over the years and, one day, when he sensed that he was bored, offered to double his salary if he would come to High Level as a consultant. Ryman brought to High Level Capital connections in a world that Veals knew he could never penetrate – a place where diplomacy met government and even ‘the arts’ in a kind of fraternity of the educated. His best introduction had been a former Israeli prime minister, who became an ‘undisclosed’ consultant and was paid to inform Ryman of any impending action in the Middle East that was likely to affect the price of oil.
Veals made it a condition of employment that all his consultants had an interest in the fund. This kept them honest. It wasn’t just ‘the Vatican’ – Shields DeWitt – who were straight arrows in Veals’s experience: most people he had met in his life in finance were essentially law-abiding. For many of them the lack of regulation meant that they didn’t need to break the law to make surreal amounts of money. There was also, he’d discovered, a snobbery about being honest: people who believed themselves to be unusually gifted were proud of the fact that they could make millions in a legal way. The distinction between ‘legal’ and ‘ethical’ was of no concern to him – or to anyone he’d ever met.
In the mid-1990s, Veals had been impressed by an exchange with a senior director of an asset management company that had emerged from inside a bank, then been so successful that it bought its parent. The new entity was subsequently sold for more than $3 billion to a huge American brokerage, and each of the asset management company original directors personally made £83 million on the sale.
The happy director gave Veals this information as they strolled round his large estate, where Veals had been trying unsuccessfully to shoot game birds. ‘Still,’ a momentarily nonplussed Veals countered in a rare excursion into humour, ‘after tax, it hardly comes to anything.’ The director looked at him in disbelief: ‘We didn’t pay tax.’
The profit had been capital, not income; it had been deferred, rolled over, swallowed by a specially created vehicle and tapped off only when the coast was clear.
‘And the glory of it is,’ the strolling landowner concluded as he raised his shotgun, ‘that it was all quite kosher.’
Eighty-three million tax-free and kosher. Fuck me, thought Veals. Even he was impressed.
III
For her Monday lunch, Jenni Fortune took a plate of vegetarian lasagne with garlic bread and green salad to a corner table in the Depot canteen.
‘Orright, Jen?’
She looked up at Liverpool Dave and nodded. Although he
was one of the good guys, she didn’t want to talk to him. She preferred to spend her lunch break with a book. She had made her own path into literature. Reading hadn’t been encouraged at her school, where the teachers had been too concerned with crowd control and the non-discriminatory management of the children to have much time for education as such; it was enough to get them back on the bus without offence.
As a teenager, Jenni liked books that took her into unfamiliar worlds, but didn’t differentiate between them. She had read Jilly Jones Gets Married and Almayer’s Folly in the same week; she was drawn in both cases by the title. Joseph Conrad’s jungle and hidden treasure appealed to her, and she was intrigued by the way he dealt with the question of sex between different races, which made her think of her own parents; but Conrad’s sentences, if she was honest, had really been a stretch.
For dessert, she had a chocolate biscuit and a cup of tea. She could feel Liverpool Dave’s eyes fixed on her from the other side of the room, where he was eating his steak pie with chips and peas. She pushed the hair back from her face and sipped the tea beneath the bright strip lights. She should have let him sit with her: it had been unkind. But there was just too much of Dave – too much person, too bulky, too real.
Jenni remembered the first time she had been to see the lawyers, two years ago now. She had been nervous. She wore a navy blue dress, her best coat, black tights and new leather boots, then took the Tube to King’s Cross. She went to the station supervisor’s office and was led back across the concourse by his assistant through a locked ‘Staff Only’ door, down a brightly lit corridor full of fire doors and lined with flame-retardant tiles, until she came to a small kitchen that smelled of curry. Here Margaret from Human Resources was waiting with Barry Gaskell from the union.