Wednesday morning, the last day of 2008, Barton was set to pick up more than one million dollars, selling his maturing oil options at between $100-$140 a barrel, far above the previous Friday’s closing price of $57 a barrel, as Wall Street bankers, producers and other investors lost their bets on a rise in price. He felt a little uneasy about his gain, preferring to think of it as a delayed Christmas gift. He saw his second major foray into derivative betting as not much different from gambling on property prices, though the speed of the transaction was greater as was the gain.
For a bet of just twenty thousand dollars up-front he had made a huge gain. It had been his second positive experience with derivatives. He realized his gamble had not been won by pure luck; he had received shrewd information from experienced insiders and had avoided the mistakes made by those who were stampeded by the market. Equipped with a computer, suitable software and accounts, he could buy and sell commodities or just about any other tradable product, tangible or intangible, from his villa in Dominica, from a hotel room in Bangkok or on yacht in the Aegean.
If the bet had gone the other way he would not have felt the same way, but oil could not have hit two hundred dollars in a declining world economy, and of course it did not. At precisely the same moment he collected his winnings he made another bet, this time on rise of oil. He now understood the age old adage about selling when the market was up and buying when it was down.
Placing his bets in hedge funds was another way of betting on future markets. Hedge funds employed the best analysts and had access to privileged information. Most of these funds were managed from three global locations. The most important of these was based in two small areas in and near to New York City. The first lay between the Upper East Side, from Park Avenue to the park, and the midtown Plaza district, and the second fifty kilometres to the north of the city in Greenwich. The extreme southwest corner of Connecticut was a quiet pleasant area known as the gold coast where the average home price was two and a half million dollars, and many homes worth twenty million and more.
Of the world’s three hundred and fifty or so hedge funds having more than one billion dollars in assets, more than one hundred and forty operated in those two areas. In terms of the money they handled they were comparable to small nations with over two hundred billion dollars in global assets.
London’s Mayfair and Kensington districts were the homes to the remaining hedge funds, with a few exceptions. Wherever they were and whatever their size the structure was the same. Whether a fund managed five hundred million or five billion dollars they were the same, very different to banks with thousands of staff working in glass towers, on the contrary they were composed of small highly specialized teams housed in the most desirable properties, close to their homes, and they boasted an enviable life style both at work and at play. Their managers, traders, fund-raisers, accountants, bundlers, raters and quants were paid anything from half to one and a half million dollars a year.
Curiously these hedge funds were in fact registered in offshore tax havens such as the Cayman Islands though they operated in New York or London. The Caymans whilst being the world’s leading offshore hedge fund jurisdiction, licensed the funds domiciled on their territory funds to operate on an international basis though with a limited activity in the Caymans itself.
With the crisis however things had changed and many hedge funds stumbled, suffering large losses, as numerous investors panicked and pulled their money out. The quiet town of Greenwich began to look even quieter and property prices as highly paid staff were caught up in the maelstrom.
In the last weeks of 2008 Wall Street had continued its stomach wrenching plunge as fear grasped the hearts of many fund managers, some of whom were so frantic they imagined apocalypse was just days away. Some even resorted to stockpiling food, buying generators, guns and high-speed inflatable boats.
The world’s financial system hovered on the brink of disaster after the collapse of Lehman Brothers and the government bailout of the insurance giant AIG. No financial institution seemed safe as the economy seized up as fear took hold.
Alarmed investors envisioned a Mad Max scenario, with fighting on the streets and hungry mobs raging across the country. Imagining a Hollywoodian end of the world scenario was not exaggerated given the fact the world economic system had entered a slow motion meltdown as the Bush administration underwent its last convulsions. Anything could tip the scale and plunge the world into an irreversible catastrophe: an attack on Iran by America’s surrogate Israel, a new Middle East war. Just one spark could set the tinder ablaze.
America’s last remaining hope was focused in one man …the President Elect Barack Obama. Could he rescue America and the world from economic collapse and disaster? It was unrealistic to imagine that Obama could change fifty years of foolishness in few months. The situation looked bad, even Batman would have recoiled at the task at hand with the Joker in guise of Madoff taking the rich for a hellish ride, thumbing his nose at the world from his luxurious penthouse apartment on East 64th Street. At the same time petty criminals were dragged before American justice, hands and feet fettered, for selling crack in their squalid tenements or palming off dud twenty dollar bills to naive tourists on Times Square.
In 2008 both old rich and nouveaux riches had experienced bad times. In spite of the hype the pickings at the much publicised Millionaire Fair in Moscow had been slim. The stock of second-hand business jets doubled in a month and the nouveaux riches were keeping a low profile. Perhaps the New Year in London would be the last fling for many throwing their money away on extravagantly priced caviar and Champagne.
Russian oligarchs were suddenly looking like an endangered species. How many could still afford to spend a million to throw a party on the Riviera or a wedding in Paris? Certainly a few, but hard times were coming and those who lived in those extravagant villas on the outskirts of Moscow would forced to scale back their spending if they did not want to end up outside a Moscow metro station like the desperate aging babushkas seen selling vodka to passers-by.
Soviet Russia’s welfare state was a long forgotten memory. The rouble had shrivelled overnight and certain market experts predicted oil still had a long way to fall before it recovered. It was an astonishing turnaround following the arrogance displayed by certain Russians on Barton’s Aegean jaunt that summer. In the space of a few short months many oligarchs had seen a dramatic reversal in their fortunes.
Barton was certainly not shedding any tears for them, if they had put their money to work, rather than throwing it away like the nouveau riche they were, they could have been credited with having simply made bad investments. However buying up London’s West End, football teams and luxury yachts had contributed in no small way to the demise of many of the nouveaux riches.
It was not only the oligarchs who had colonised London and the Riviera, there were also many lesser rich Russians, the kind that Barton had met in his year long odyssey, anonymous modestly rich individuals who formed Russia’s new entrepreneurial class. Tony Blair’s New Labour and Cool Britannia had drawn many of them to London with the lure of luxury and low taxes, where they could enjoy their newly found prestige, bolstered by Putin bellicose chest beating and Russia’s newly discovered role as the world’s leading oil and gas exporter.
After euphoria of the years that had transformed John Major’s tedious nation into Tony Blair’s Cool Britannia, the dream had now turned into a nightmare. The Russians had overextended themselves borrowing huge sums of money from British banks, speculating in overpriced property with many of them confronted with the humiliation of repossession and bankruptcy.
Later that day, Michael Fitzwilliams, about to leave his office, shivered as he fixedly stared at the neo-classical Bank of England edifice that lay and one hundred and eighty metres below him and three more to the west along Threedneedle Street. On New Years Eve the future looked more uncertain than ever. How many more shocks were to come in the year ahead?
The stock market had fallen over t
hirty percent during the twelve months elapsed. The failure of Lehman Brothers had stunned the City and the Madoff scandal undermined any remaining credibility. Fitzwilliams struggled to come to terms with the unimaginable consequences the disasters waiting in the wings would have for the financial world and more especially his bank.
Like so many others, he was forced to confess he had lived in a make believe world heeding the words of economists like Ben Bernanke who had told the world: ‘The increased depth and sophistication of financial markets, deregulation in many industries, the shift away from manufacturing toward services, and increased openness to trade and international capital flows are other examples of structural changes that may have increased macro-economic flexibility and stability.’
The accumulation of disasters that had brought the world’s financial system to close to catastrophic collapse flashed through his mind. The crisis broke with New Century Financial filing for bankruptcy protection in April 2007. Three months later Bear Stearns informed investors — as its CEO played golf — they would get little, if any, of their money back from two of its leading hedge funds. In early August the French bank BNP Paribas told investors they would be unable to withdraw money from of two of its funds following the total disappearance of liquidity in the market. The crisis then pulled down the Northern Rock in what became the biggest run on a British bank in more than a century. In October it was the turn of the Swiss bank UBS with losses of over three billion dollars. Some days later, the Citigroup admitted to sub-prime related losses of three billion, which then ballooned a further six billion before finally reaching forty billion dollars. Others followed including the investment bank Merrill Lynch.
Finally in December the US Federal Reserve and other central banks were forced to intervene with billions of dollars in loans whilst Standard and Poor’s downgraded a whole series of bond insurers.
Little relief came with 2008. The crisis reached apoplexy when Lehman Brothers was allowed to fail and insult was added to injury with the revelation of the Madoff scam and there was no end in sight.
Fitzwilliams felt the burden of his responsibility as he soberly thought of the battles ahead. His task was to rebuild the bank by whatever means he could muster. The idea of it failing under his direction was unacceptable.
On the other side of the Atlantic, Barack Obama, the president elect, voted in as saviour of the nation, was facing a gargantuan challenge. Whistle blowers had gone unheeded and America rushed headlong towards the precipice. The system that had given birth to modern capitalism had ceased to function and was seemed incapable of finding a solution to the problem.
Optimists insisted it was not the first time the nation had faced a crisis and had survived. But times had changed the answers of the past would not solve the problems posed by the almost sudden appearance more new competitors who had invented a new paradigm. A new form of totalitarian capitalism where decisions were imposed unhindered by the never ending wrangling of the West’s declining democratic system.
It was the end of an era that had commenced towards the end of World War II. The soon to be victorious allies met at Bretton Woods in New Hampshire and created the International Monetary Fund setting up a system of rules, institutions, and procedures to regulate the international monetary system. After three decades of extraordinary economic growth in the West, in retrospective almost a golden age, the economic world gravitated towards globalization. The collapse of Communism and the emergence of fledgling economic giants, destined to transform the balance of power that had favoured the West for well over a century, had changed the equation.
Not even ten years into the third millennium, the world, notably the West, found itself struggling to recover from an almost catastrophic failure of its economic system, a disaster that took the world by surprise, the effects of which continued to reverberate across Europe and the US in an unprecedented debt crisis compounded by a monumental imbalance of trade between China and the US.
Continued in THE PLAN
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