As Tom Barton boarded the sleek sixty metre long motor yacht, moored off the Greek island of Santorini in Aegean, he could not help thinking how quickly things had changed. Only nine months earlier his mortgage brokerage firm in the City had been prospering, though storm clouds had been gathering on the horizon, now mortgage brokers were seeing a seventy percent fall in their business whilst the average real estate agent sold just one house a month as the UK’s economy went into crisis mode.
It was early days and perhaps governments would come up with a plan to resolve the crisis that was now threatening to overwhelm the world, after all credit had fuelled a decade of spectacular growth, bringing prosperity and employment to many. Was debt really such a bad a thing, Barton mused, as he recalled to mind the words of Thomas Macaulay he had read on the pages of the Financial Times on his flight to Athens: At every stage in the growth of the debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing, and still bankruptcy and ruin were as remote as ever.
On the other hand the scale of Britain’s debt, accumulated during the booming years of New Labour, was truly horrendous, a mind-boggling mountain of money borrowed at low interest rates with almost no thought as to how it could be paid back. Looking back it was incredible to think how blind people had been, there was however no doubt the public had been lulled into complacency by Blair’s ‘Cool Britannia’ and his almost sneering attitude vis-à-vis the country’s uncool European old fashioned neighbours. Tony Blair had in fact taken the UK for its greatest ride in history. The reality was Britain had put its future at risk for an unforeseeably long period of time, building up trillions of pounds in debt tied into homes on the greatly mistaken supposition that prices would continue to grow for ever, as would the means necessary to repay those debts.
Barton remembered the special deals of the now defunct West Mercian Finance, which had allowed homebuyers to borrow extravagantly through the combination of a secured 95% mortgage with the remainder on a low interest unsecured personal loan. West Mercian was not alone; it had simply been following the way shown by Northern Rock and Bradford & Bingley.
Barton’s own worst deal concerned the Dublin BTLs he had bought with a Euro loan. He shuddered to think of it, his only comfort was the loan, contracted from the West Mercian via a Dublin broker and on which he had now defaulted, was now submerged in an extricable tangle of bankruptcy and international legal procedures and the properties now almost certainly been disposed of in some way.
He was a world away from those concerns when to his great surprise and pleasure he was welcomed aboard personally by Sergei Tarasov. The Russian oligarch, like his country, seemed full of confidence as oil prices reached unheard of heights.
Russia was unaffected by the financial crisis that was spreading like a bushfire across the US and the UK, now reaching the countries of the former Soviet bloc where highly leveraged European banks had accumulated over three trillion euros in cross-border loans. Romania, one of the least prosperous members of the EU, was forced to raise its overnight lending rate to 900% to stem capital flight, as one of the most extraordinary waves of property speculation the country’s history hit the rocks.
Aboard their flight to Athens, Barton had expressed his thanks to Steve Howard for the handsome profit he had made betting on oil futures. Thanks to his friend, and the knowledge indirectly gleaned from Sergei Tarasov, Barton’s foray into the futures market had been crowned with success.
Barton was surprised, even a little dismayed, when Steve tried to talk him into upping the anti and putting more money into oil, to his mind the risk seemed unreasonable. This time however, Howard explained to him, the betting was on a steep fall in the price, which at first glance seemed absurd given the barrel was currently hovering at the $140 mark, and certainly heading up.
Howard simply laughed at his concern.
‘Remember Tom what goes up will surely come down, you know Newton’s law or something like that.’
‘I’m not so sure, we need oil and the producers are holding all the cards. Imagine what would happen if they turned off the taps? No transport and no electricity, everything would come to a stop.’
‘That’s not our problem Tom.’
‘What did Lord Cameron say — it would take just three full days without food on supermarket shelves before law and order started to break down.’
‘That’s just scaremongering.’
‘I’m not too sure, maybe oil will go down, but I’m sure it will go up in the long run.’
‘Then when the time comes we’ll bet on it going up, but for the moment it’s the other way around!’
Barton had trusted his friend’s judgement once and did not regret it, now he tried to convince himself he was right again. Steve explained the price of oil had to fall; it was untenable at its present price in a world on the verge of economic collapse. Barton accepted the logic, but it still seemed like risky a gamble — if they got the market wrong he would have to pay out some real money.
‘Believe me Tom, it’s Sergei talking.’
Perhaps it was the rarefied atmosphere of Champagne and yachts that made Barton wonder whether he was getting reckless, allowing himself to be drawn into another gamble on oil futures.
The invitation to the three day birthday party on Sergei Tarasov’s yacht, the Cleopatra, had pleased him. Since meeting the oligarch for the first time in Bangkok with Howard, he had become one of the Russian’s regular guests. Barton was now on close terms with Tarasov, who appreciating the arrival of the evidently affluent, uninterested, Englishman, welcome him into his narrow circle of foreign friends.
The yacht was anchored off the Greek island of Santorini, where Tarasov’s banker friends, including Michael Fitzwilliams of Nassau Asset Management, and other high flying business personalities and socialites had been invited to the party.
Energy derivatives gave Barton the possibility of selling crude oil at a predetermined price by buying put options, if the options were taken at the current oil price of around $140 a barrel and price fell to $50 dollars then the banks who sold the options would have to buy at $140 and as holder of the option Barton would make a profit of $90 a barrel.
It was exactly the inverse to what had happened when oil prices had risen up from $100 to $147. Barton’s initial options were taken up at a fraction of their price so the profit on the original bet had been almost a quarter of a million dollars.
Tarasov had intimated his doubts to Howard over oil futures, not only was there an abundance of oil but there was no way it could rise further given the prevailing economic situation with a crash just around the corner. Barton had only to follow suit, he had won once and odds were he would win again.
In retrospective Barton had chosen the right moment to get out of the mortgage business. As for his properties he had off loaded the last of them at the end of 2007, though admittedly a couple or months or more earlier would have been better. Had he been lucky? Was he being wise after the event? Whatever the answer he now needed to put his money to work, which could not be done as an onlooker sitting on the wall.
Barton checked his watch; it was just after eight in the morning in New York, not too early to contact his broker. He was in luck Bernie Weinfeld replied and he instructed him to buy a December option for ten thousand barrels of NYMEX crude. Weinfeld’s silence was difficult to read. He simply repeated Barton’s instruction and Barton confirmed it. The order was carried out and all that remained to be done was wait.
If the price of oil rose to $200 Barton would lose over $500,000 — if it dropped to $50 he would gain almost $900,000. His anxiety was lessened by the possibility he could sell his options and cut his losses at any point along the way.
After a couple of more phone calls Barton turned his attention to the new arrivals; some of whom like himself had flown in via Athens, others arrived directly in private jets, and some had the leisure of sailing in from neighbouring islands on their own boats.
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Amongst the guests was a British lord, a couple of billionaires, one or two celebrities from the world of fashion and show business, and the odd politician, one of which he recognised as a well known European Commissar. He was most surprised by the presence of Saif Gaddafi, the suave and charismatic son of the strange Colonel, said to be committed to political freedom and free-market reform. Barton felt a little strange amongst such guests and found himself in conversation with a strange bearded messiah, a friend of the Rothschilds, who proned peace between the Arabs and the Jews.
They were all present to celebrate Sergei Tarasov’s fortieth birthday. Informality was the rule and over the three days that followed a flurry of high powered socialites and business people came and went presenting wishes to the oligarch, renewing old links and making new ones in the process.
It was not the first time that Barton found it was as easy to talk to a lord or a billionaire as it was to a market stall holder, with not a few of the former being much less intelligent. Tarasov treated him like an old friend, however, he was under no allusion as to his own somewhat ambiguous position and decided to make the most of it as he sipped Champagne and enjoyed the sun in the splendid Aegean setting.
The following day a traditional Greek evening was organised for the guests in the gardens of an authentic taverna on one of the small nearby islands. Barton found himself seated at the same table as the European Commissar, who seemed to be on more than just friendly terms with Tarasov, no doubt one of the Russian’s power brokers who smoothed the path for complicated City deals where political punch counted.
Tarasov went from table to table preening his guests, encouraging them to eat, drink and dance to the basooki music that echoed into the silky night sky. Toasts were exchanged with heady local wines, guests bathed in the magic of the Aegean night. The perfume of spices and olive trees wafted through the warm air mixed with the delicious smell of roasting lamb. Beyond, from the shadows of the night, came the all pervading drone of the cicadae, rising and falling, punctuating the animated conversation of the convives.
The simplicity of the evening in the small island taverna belied Tarasov’s enormous wealth. Not only was he rich, he now exuded the prestige of Russia’s newly found power and riches as oil peaked at almost one hundred and fifty dollars a barrel: with Russia exporting more oil and gas than Saudi Arabia the Kremlin could once again bully the world.
Behind Russia’s newly found pride the ghosts of once would-be powerful nations looked on. Japan for one had been the darling of crystal gazers, the star of the eighties, a time when economists predicted the Land of the Rising Sun would dominate the world. That vision was long forgotten. During the country’s lost decades Japanese interest rates hovered around the zero mark, the Nikkei had fallen from its peak of nearly 40000 points to a mere 8500, its comatose banks survived on life support and property prices were halved.
Pundits now pointed to Russia, China and India as rising powers. Barton for one was not convinced, he had seen India first hand and the enormous problems it faced. He also knew that the Asian economies were interlocked with the fortunes of the West, as were those of oil producing nations.
It was late; the sound of the music had fallen as thick black coffee was served accompanied by the local cognac. Across the table from Barton, Mark Dangerfeld, who ran a Mayfair based hedge fund, was explaining that many such funds were dollar denominated which was why money was pouring into US bonds as investors retreated from emerging markets.
Barton himself had diversified his capital into a basket of currencies: dollars, Swiss francs, euros and pounds, parked in his different accounts, where he was at least earning interest, and what he lost on one currency he gained on the other. If his money had been in shares he would have said goodbye to almost half of it. But he had not and had earned enough in interest to more than cover his new style of living, for the moment cash was king.
As the cognac flowed so did the conversation with Barton entering into the debate, suggesting liquidities, notably cash, were the best safe havens as falling asset values and fire sales threatened emerging markets.
‘I agree Tom,’ said Dangerfeld, ‘hedge funds that have invested heavily in emerging markets are unwinding with credit drying up in places like the Ukraine.’
‘And they don’t have any oil or gas,’ said a small stiff Russian, one of Tarasov’s friends from the giant Gazprom.
‘The hryvnia has lost a fifth of its value in the last week or so, we pulled out of those markets months ago,’ continued Dangerfeld talking over the Russian.
‘Da, Hungary and Belarus have asked the IMF for bailouts,’ persisted the man from Gazprom.
There was a silence.
‘There’s also Baltic States, they’re appealing to Brussels for help,’ the European Commissar balefully added.
‘Do you think oil will reach two hundred dollars?’ said Tom addressing the man from Gazprom.
‘Confidentially,’ said the stiff Russian, ‘I can assure you our prime minister is doing the best he can to hold the price down, but I’m afraid to say there’s a good chance we’ll be at two hundred before Christmas.’
That’s from the horse’s mouth, thought Barton, wondering if he had made a big mistake.
Amongst Sergei Tarasov’s Russian friends was a quiet grandfatherly figure, who with his white moustache looked to Barton like a cross between Zorba and Stalin. The grandfatherly figure appeared to be the subject of a low and urgent conversation between Tarasov and the European Commissar, a creepy looking Englishman. It was something about a UK visa. From what Barton could catch of the conversation, it concerned Tarasov’s friend, a certain Demirshian. The old man, a Russian-Armenian, had been consistently refused a UK visa.
Unknown to Barton this refusal arranged everybody, except the person in question, who did however have a Schengen visa, which allowed him to move freely around a good part of the EU, including Greece, which he said reminded him of Armenia.
The party slowly unwound, new friends met, promises made, and confidential cell phone numbers swapped on small pieces of plain paper. The guests had done their best to reassure each other, hoping their futures would be as glowing as in the years just past, the longest period of non-inflationary growth in modern times. It had been a golden era; one during which the principal task of central banks had been to decide whether to increase or decrease interest rates by a quarter of a percent.
The New World