The breathtaking Stanford Week in St John’s, Antigua, could have only been described as a crowning triumph for its sponsor with the richest team prize ever offered for a team event. The climax came at a packed Stanford Cricket Ground when the Stanford Superstars hammered England before the ecstatic crowd to collect a fabulous twenty million dollars in prize money.
The Friday evening final was transmitted to an estimated seven hundred million fans in cricketing nations across the globe: the UK, the Indian subcontinent, South Africa, Australia and New Zealand. It was an event that would be remembered for many years to come, not only for England’s stunning defeat, but because it marked the Stanford banking empire’s most glorious moment.
A magnificent firework display concluded the event celebrating the Stanford Superstars’ immense victory. Even the English cricket fans, in spite of their team’s defeat, would long remember the party. There was music, dancing and celebration with the presence of many Caribbean showbiz stars.
Smeaton was of course present in the VIP tribune. His was one of the many regional banks that had high interest deposits in Stanford’s bank, moving money in and out taking advantage of the always generous terms. He always looked forward to a Stanford event, a first-class show was assured, not something to be missed in Smeaton’s normally sedate life in Dominica.
Malcolm Smeaton came from an old banking family, whose bank, though it was small, had always been profitable and had avoided financial scandals. Surprisingly, in contrast with the family’s cautious banking tradition, Smeaton had been offering five-year certificates of deposit with a yield of two to three percent higher than the average in the region, thanks to his bank’s speciality: loans in South and Central America that naturally implied higher risk.
Like many such small offshore banks in the Caribbean Smeaton’s methods were to say the least opaque. In was not unusual that cagey account holders had on occasions difficulties in knowing exactly what they possessed and where. It was normal, after all the goal was to prevent others, especially fiscal authorities and regulators, from knowing where funds were hidden.
Concerning Standford, Smeaton, being highly astute, understood the Texan’s organization for what it was, which did not prevent him from taking advantage of certain of Stanford’s short term deals. He had his man inside the Antigua Bank to watch over his interests, thus moving his deposits frequently, especially when he felt the temperature had gotten a little too high.
Dominica, which lay to the south of Antigua and Barbuda, separated by the French island of Guadeloupe, could have been described as virgin territory as far as mainstream offshore banking was concerned. It offered a refuge for a certain kind of depositor when Antigua came under the scrutiny of the US Treasury Department, which had become interested by Antigua’s lax banking regulations and its links to money laundering.
Smeaton’s friends and clients included many wealthy individuals resident on the island; one of these was Elliot Stone, a young sexagenarian, who had made a considerable amount of money as a fashionable architect. He spent a good part of his life shuttling backwards and forwards between the Caribbean French islands and Europe, designing and building homes for the very rich. His atelier was long established in Dominica, where he was said to be inspired by the island’s unspoilt landscape.
Stone was enjoying the party, as usual drawn to the pretty girls that always seemed to flock to Stanford’s shows. Dominica being small with many of its European residents no longer very young limited Stone’s scope of action. He was a gambler, not the kind that frequented island casinos, which he found unsophisticated and full of low grade tourists betting on mere numbers. He preferred stock markets, where he knew he could win money from every imaginable kind of deal, deals that challenged his mental skills, especially short-selling, betting on the fall of a companies shares and delighting in their collapse, and as some believed even rigging the market.
When the Financial Services Authority took the unprecedented step of banning the short-selling of stock in publicly quoted finance companies it was not good news for Stone, he would have to find another way of making the kind of money he had made short selling Lehman Brothers. For him there was nothing wrong in short-selling, he told those who cared to listen that the Phoenicians probably did it, though many of his investor friends assumed they, the Phoenicians in question, were investors of some kind, a hedge fund or an offshore bank.
He spent a good part of his time tracking stock markets and his instinct had told him that there was a golden opportunity when the crisis started to look serious at the beginning of 2008. He had put his finger of the root cause, investment bankers — Wall Street investment bankers. He knew from the spectacular development of hedge funds that something was about to give and he got his timing right. It was not an idle bet; his research had uncovered weaknesses that were so blatant it was difficult to know why others had not spotted them earlier.
‘Personally I prefer short selling,’ he told the attractive blond in her mid-twenties he had cornered at the buffet. She, knowing little or nothing about the game, thought he was a cricketer, talking about the finer points of the match. ‘Let me explain, if for example a rumour builds up about a group in difficulties and short selling builds up, is this dishonest or are you doing investors a favour? Especially if the rumour turns out to be founded.’
‘Who do you play for then?’
‘What?’
‘What club.’
‘Oh, I see, my own.’
She looked nonplussed.
‘I’m a businessman.’
‘Oh,’ she said a little disappointed.
‘I sailed over in my cruiser to see the match.’
‘Cruiser,’ she said. It was not a question. It was just that cruiser sounded perhaps more interesting than he being a cricketer.
‘Where do you live?’
‘A couple of islands away.’
‘And you?’
‘I’m in real estate.’
‘Selling?’
‘I’m with Malcolm Smeaton promoting the Emerald Island Development on Dominica.’
‘That’s funny, how come we’ve never met before.’
‘I’ve only been there for a few months,’ she said a little embarrassed.
‘I’m Elliot Stone,’ he said holding out his hand. ‘I live in Dominica, I’m a friend of Malcolm’s.’
‘Sarah Kavanagh.’
‘From?’
‘London.’
‘I thought so from the accent.’
‘So you’re a trader,’ she said brightly.
‘If you like. I bet on the market. Let me explain, I play with what we call put and call options.’
‘Oh.’
‘They’re contracts that let traders like me buy or sell shares, at specified prices by a given date. Calls work on the rise in the price of shares. With puts you can make a profit from a fall in share prices.’
‘I see.’
‘For example, an investor holding a put for a stock that declines in price is able to sell the stock at the higher price quoted in the put, profiting by the difference the stock declines from the put price.’
‘Complicated,’ she said wondering how she could change the subject.
‘Yes it is. Let me give you an example. Before 911 a lot of puts were made on United Airlines and American Airline. The puts were based on a price quoted just before the date of the attack, which allowed the holder to sell the shares at that specific price within a certain period of time. When markets opened again after the attack the shares in these two companies had fallen more than fifty percent, so the buyers were obliged to pay the pre-attack price and those who held the put options pocketed the different. In other words they bet on the decline of the airline’s shares.’
‘They must have been in the know.’
‘Sure, though my point is the system of puts and calls is a way of betting on the rise and fall of share prices.’
‘That’s what they call insider trading?’
??
?Clever.’
Sarah smiled pleased with herself.
‘But the problem is insider trader is illegal,’ he replied a little uneasily, ‘you’re not supposed to use insider knowledge. In other words a gamble can only be made based on knowledge that is public in the market.’
‘Then those who bought the airline shares must have known what was going to happen?’
‘So it seems.’
‘Then it was insider trading.’
‘I suppose you could call it that,’ he said ignoring the implications, which were of little interest to him.
It was the early Clinton presidency that had led to the victory of free marketers. It was the beginning of hedge funds and unregulated investment houses. In this freewheeling environment short-selling allowed investors to hedge bets by selling shares, commodities or some other intangible financial instrument, which the seller did not own in the expectation they could be bought back later at a lower price.
‘Do you know Elliot Stone?’ Sarah asked Barton.
‘Yes, I’ve met him, one of Smeaton’s friends.’
‘Stone said he specialises in short-selling.’
‘He a bucket shop specialist,’ he said disparagingly.
‘A bucket shop?’ asked Sarah puzzled.
‘Yes,’ Barton said laughing, ‘after the American Civil War ordinary punters bet on shares without actually owning them through what we would now know as betting shops.’
‘Like in London?’
‘Yes, but in the kind of shops I’m talking about people bet on shares that were in fact owned by the shops. So if a lot of punters were betting that a share would go up, the shops would sell it and the price would go down, on the other hand if punters were bearish, the shops would buy. So the punters were swindled whatever way the went. This came to a head in the Panic of 1907, which resulted in bucket shops being banned.’
‘Interesting, pity we can’t do that now.’
‘We do, it’s called short selling!’
Globalization