‘Exactly. These original sub-prime mortgage bonds, a boxful of iffy mortgages, were mostly rated overall BBB. Fair enough. But when the banks bought them, they turned them on their side and sliced them like a loaf of bread. Then they asked for different ratings for the different slices. And clients could buy the slice of their choice, according to their appetite for risk. At this point of course it ceased to be a simple mortgage bond and became a synthetic bond. And then the bank asked the agencies for a rating for all the different slices, because some loans were naturally riskier than others – even in a crock of shit, some shit smells worse than the rest. So the agencies give them a range of ratings, and in a way that was fair enough. But the problem was that while the ratings may have reflected the internal differences between the tranches, the whole lot was overrated by comparison with other products.’
‘But why were the agencies so bullish overall?’
‘Because they had the wrong computer models. They just couldn’t get their heads round the fact that many of these loans were worthless. Their computer model simply misweighted the possibility that house prices could fall. Ever.’
‘So now you had dangerous product with a safe rating,’ said Wetherby.
‘Yes, but it’s even better than that, Simon. Even the AA tranches which you’d expect to pay out modestly are giving the investor the high return he’d normally get from risking his cash on a BBB. So Goldbag has for a moment actually squared the circle. It’s exciting. They’re selling respectable-sounding instruments with disreputably high returns. And don’t forget that because all the loans are basically sub-prime, the house owners, the unshaven hobos, are having to pay a penally high rate of interest. And it’s that rate of interest that gets passed through to the new investors, who are therefore getting a massive B-style yield from an A-rated risk.’
‘It sounds as though the banks were flooding the market.’
‘No, they were responding to a demand for shit. A ravenous demand from their customers. Many of whom, incidentally, were credulous Europeans who trusted the ratings agencies.’
‘Then what happened?’
‘They ran out of stock. No more houses, loans or buyers to be found.’ Veals laughed. ‘It was a fucking Klondike and there was no gold left.’
‘So what did they do?’ Wetherby grimaced. ‘Do I want to know?’
‘They created more stuff. Even dodgier stuff. Now Goldbag and Moregain cut out the mortgage-lender people, Out West or whoever, and send brokers out like door-to-door salesmen. Find a wetback or a hobo. Offer him a giant loan with a teaser rate or an introductory payment holiday. Get it back to Wall Street. Slice it up. Secure the dodgy rating. Sell it on. By now they’ve got a lot of these synthetic bonds on their books. But they’ve got one problem.’
‘What’s that?’
‘It’s costing Goldbag a lot to pay out the shit holders, the people with the worst tranches of the worst bonds at maybe ten per cent interest. And that’s when little Johnny comes knocking at Marc Bézamain’s door and says, “Would you like to short my market?”’
‘But how could you borrow it and sell it and—’
‘You couldn’t. It wasn’t like shorting a normal stock. What Johnny was suggesting was that we entered into a credit default swap on one tranche only of the bond. The worst part.’
‘So they sold you insurance against one section of the bond defaulting.’ Wetherby seemed to be struggling, Veals thought; perhaps he feared where this was heading.
‘Yes,’ said Veals. ‘Our bet was that it would default. They bet that it would hold up. Because it was the dodgiest slice, they charged a lot up front to buy the swap. The premiums to insure a paper house in a forest fire are going to be expensive. But they were still less than what it would have cost us to short the stocks in the usual way. And when the penniless sharecropper couldn’t make his repayments any more, the upside was huge. The full insurance payout.’
Wetherby shook his head. ‘But how did you pick which mortgage bonds to work on?’
‘The banks helped us. Johnny from Goldbag gave us a list of mortgage bonds from all over the US. You’d look for the worst lenders in the dodgiest states – Nevada or Arizona were particularly shit if I remember rightly. There’d be some kid who’d swum the Rio Grande and was earning fifteen grand a year pumping gas, couldn’t even speak English, and they’d lent him three quarters of a million bucks to buy a house with a pool. We were doing the kind of research the mortgage lenders should have done themselves but never did. Bézamain had three guys on it full time. We found the worst tranches of the worst bonds and took on a bet with Goldbag or Moregain that they’d default.’
‘But what was in it for the banks now?’ Wetherby said.
‘Easy. The premiums I paid to buy the insurance pretty much covered the bank’s outgoing interest payments to the BBB holders. Then the bank was laying off its own risk anyway. And they still had plenty of buyers for this shit, some of whom were happy to take it in derivative form. So for the bank the dodgy part is now cash-neutral and risk-free.’
‘This is a fantasy,’ said Wetherby.
Veals’s lips twitched, as though they wanted to smile. ‘That’s not all. Now this is the tricky bit, Simon. Concentrate. Get through this and you can go and ring Susanna Russell from HSBC and take her out to lunch. After this bit, it’s all laughs. OK. The thing is that every time Johnny wrote me or others like me an insurance on a triple B bunch of shit, he effectively created a new security. Then he put all these securities – the credit default swaps – into a new synthetic bond, which he could then trade on! More commission, more profit, and the market goes on. It’s fantastic.’
Simon Wetherby was starting to grow pale. ‘But surely these new securities didn’t have any reference obligations? There was no additional house, no actual new loan, no actual mortgage involved.’
‘You got it,’ said Veals. ‘They replicated the original mortgage bond, but with one crucial difference. There was no house. The only asset backing this synthetic bond was my side bet with the bank. Trouble was, there seemed to be no liquidity in these synthetic CDOs. They stuck to the banks’ fingers.’
‘Christ, John,’ said Wetherby. ‘It sounds like this fantasy football game my son plays. Does your son do that?’
‘I don’t know,’ said Veals. He looked thoughtful for a moment. ‘But I think you’ve got the point, Simon. This is Fantasy Finance. It wasn’t enough to have poor people borrowing money they couldn’t repay to buy houses they couldn’t afford. By writing credit default swaps, the banks could leverage the real market many times over. That’s why the overall losses are going to be so much greater than the losses on the actual mortgage loans they reference. And of course that’s how we hedgies could make a killing on the losses.’
Wetherby had turned white; tiny bubbles of sweat stood in a line on his freshly shaved upper lip. Veals smiled inwardly when he noticed: this was the younger man’s way of showing shame.
‘But surely,’ Wetherby said, ‘this can’t have been signed off by the accountants. When they inspected the balance sheets?’
Veals snorted. ‘Ah, the Big Five ... Big Four nowadays. No, they were happy to sign it off.’
‘But why?’
‘I don’t know, Simon. I’m not a chartered accountant. Perhaps they didn’t understand. Or perhaps they did.’
‘Well, I certainly don’t understand,’ said Wetherby.
‘Think about it. If Lemon Bros or Bare Stern goes down with billions in complex instruments needing to be sorted out, who are the liquidators going to call in? Pricewaterhouse or one of the other four. They get tucked into the carcass from day one. They can bill north of £4 million a week to go through the books. It would probably take two years minimum. By the time they’ve finished there’ll be nothing left on the skeleton for the investor. But why should the accountants care? They’ve trousered £400 million.’
Simon Wetherby was swallowing hard. ‘But we’re all right in all this, aren’t w
e, John?’
‘Of course we are, Simon. We were able to exploit one or two market inconsistencies for the benefit of our investors. It’s what we do.’
‘Yes, I know, but by shorting the banks’ own market, by buying the swaps, weren’t we creating the liquidity to keep the whole terrible thing going?’
‘Yes,’ said Veals calmly. ‘At the invitation of the banks.’
‘Knowing it would blow up in their faces?’
‘Not their own faces, Simon. Johnny Dickhead, age twenty-eight, he doesn’t care. He’d get his commission and his fat bonus on the mortgage bonds. Then he took commission for selling and managing the synthetic bonds. Anyway, by the time it blew up, he’d have moved on.’
‘But couldn’t it bring down his whole bank?’
‘Conceivably. Look here.’ Veals typed the abbreviated name of one of the investment banks into his keyboard and turned the screen to face Simon Wetherby’s pale, traumatised face. The graph was sinking.
‘But what about the investor in all this?’
‘Oh for Christ’s sake, Simon.’ Veals was beginning to tire of this interview. ‘The bank doesn’t give a fuck about the investors.’
‘But why did they do it?’ Wetherby was now growing plangent. ‘They must have known it could only end in disaster.’
Veals had had enough. He stood up and went over to where Wetherby was sitting.
Then he leaned over and spoke slowly: ‘They do it because they can. They do it because the government encouraged it. They do it, Simon,’ he said, gripping Wetherby tightly by the forearm and lifting him to his feet, ‘because it’s what they do.’
‘I see,’ said Wetherby uncertainly, as Veals ushered him to the door.
At the threshold, he rallied a little and tried to bring the meeting to a dignified conclusion. He coughed and pulled himself up.
‘They do it,’ said Simon Wetherby, ‘because they’re bankers.’
‘No,’ said Veals, pushing him out into the overheated corridor, ‘they do it because they’re a bunch of cunts.’
IV
For Shahla Hajiani, Tuesday was just another day in which she couldn’t see the world for the obstruction that lay so close to her face. When she awoke, before she remembered who she was, everything seemed possible – daylight, friends, work – as she felt the first stir of hope quickening her limbs; but in a second it had all returned: the knowledge that she was stuck headfirst in a narrow tunnel, unable to turn back.
Oh God, she thought, as her vision was once again blocked. Hassan. She knew that through the day there would be small somatic signs: a headache that by tea-time would need the relief of pills from the corner shop, a tremor in the hand, a rash on the inside of her elbow. None of these, admittedly, amounted to much in itself; none of them compared to the continuous twist of anxiety in her gut, but all of them served as reminders – as if she was likely to forget.
Why on earth, she thought, as she dressed, drank coffee and made her way on to the street, did people imagine that such a state of mind was elevated or desirable? What was to be commended in going through a day quite blind to the lives of others, deaf to the news on the stand, merely blinkered by the narrowness of her own dead end? Oh, Hassan, you silly boy. They called it ‘love’, but it felt more like confinement. Even Paul Éluard, the subject of her PhD, as radical and clear-thinking as a poet could be, had found himself locked up by it, his breakthrough book of love poems even called The Capital of Pain ...
On the top deck of the bus, Shahla pushed her long hair back from her face and put on the reading glasses she wore for an astigmatism. Ah, well. Enough of this, she thought, her lips mouthing the words in her determination. She ploughed on through a morning in the library, lunch in the canteen and an afternoon meeting in which she outlined her plan for the French Society’s proposed trip to Verdun. No one would have known, she believed, from her bright and practical manner, that her mind was wholly occupied elsewhere.
After an early shift on the District Line, Jenni Fortune went home to Drayton Green. She whisked through the flat, straightening and tidying, then texted Tony to see when he would be home. ‘6.30. 2 late 4 t?’ he replied. ‘No. fine. Pie?’ ‘xx☺’ She set about cooking. Twice a week, Sunday dinner and one other time, she tried to do proper cooking with fresh food. She’d collected steak and kidney from the butcher on the way back from the Tube and now set about making pastry while she listened to drive-time radio. She got the pie in the oven and peeled some potatoes to go with it; she’d given up making greens for Tony, but there was a packet of salad in the fridge that she could have.
The furnishing of the flat meant a lot to her. She looked at celebrity magazines, not at the faces of the soap stars or weather girls but at the background of their houses, to see if there was anything she could copy or adapt. She even bought specialist monthlies, though she didn’t like the pictures with stainless steel and toneless colour schemes that looked like a factory; she preferred a cosier look with bright fabrics that suggested somewhere you’d actually want to live. The look of a room through a half-open door and the way the light fell were more to her than house-keeping; they suggested stories and lives: they awakened a longing in her.
That was almost as much reality as Jenni wanted. She ran a bath, lit a scented candle and slid beneath the surface with the winner of the ’05 Café Bravo. The novel was still very thin to her way of thinking. The words didn’t seem to make any sort of music, they just told you facts, like a manual; but she didn’t like to give up on books once she’d started and she plunged once more into its watery gruel. The characters were called Nic and Lilli. The whole thing was, like, tinny. Couldn’t one of them just be called Jake or Barbara, she thought, something with a different sound? Even that would have helped.
After tea with Tony, Jenni did what she had been looking forward to all day: she logged on to Parallax. She knew that Jason Dogg wouldn’t be online till later, but there was a lot to do first.
She loved being back in Parallax. The game’s owners and regulators (a syndicate of twelve Chinese Californians, Jenni had read) seemed to have solved one of the persistent problems of such worlds: the so-called ‘uncanny valley’ effect. People can identify with humans photographically reproduced; they could also be interested in stick-figures or cartoons. But as representation of humans moved from rough towards complete there came a sudden loss of empathy: the graph started and finished high with stick-man or photo, but dipped badly in the middle. Most manufacturers lacked power to push on to verisimilitude, so pulled back towards the crude, thus reclimbing the empathy line. The Parallax geeks, however, had managed to harness something close to the technology used in epic cinema; their coup was to have done it at real-life speed and at a reasonable cost.
So when Miranda went for a walk or met her neighbours or did some shopping, it was like interacting with people from the movies, real people, if a little smaller. She could bring their faces into extreme close-up and see the pores of their skin. It wasn’t like playing a children’s computer game; it was like being a star in your own improvised film.
Miranda herself looked almost like one of the three entry-level female maquettes. This was deceptive. While she dressed in off-the-shelf jeans and tee shirt, Jenni had in fact incorporated features from a large number of different True Life actresses, singers and models. Her eyebrows, for instance, were based on those of Pamilla, a cute singer in Girls From Behind. She had a ‘celebrity walk’ that was a fusion of the Hollywood star Juliana Richards and the Ethiopian model Zhérie, who had recently married the footballer Sean Mills. Her eyes were the shape of Evelina Belle’s and the colour of Jennifer Cox’s famous dark hazel/chocolate glow-lamps.
Much of this subtlety, expensive to buy, was wasted on the muscle-bound, gun-toting warriors she encountered in the shopping malls. But Miranda, like Jenni, didn’t really dress for men or male maquettes; she dressed for fun. Now, what would Miranda like to wear to a night of clubbing and a first date?
Afte
r a couple of hours wandering up and down the virtual emporia, Miranda emerged with a black dress of mid-thigh length, with pink high heels and a pink leotard from Mary Lou’s Fashion Girl Boutique in Porta Cascarina. By Parallax standards, it was restrained (many girls danced topless or with miniature tigerskin thongs), but it was much riskier than anything she wore in TL.
She had only been in the new outfit for a minute when she received a message asking if she wanted to be airlifted. It was from Jason. ‘You bet,’ she said, and a few moments later she was by his side in Purgatorio, one of the newer clubs. The guest DJ played techno, hip hop, trance ... a variety of stuff streamed from illegal Internet sites in TL. The setting was spectacular, with a kind of indoor cascade lit from underneath by purple lights; people were actually swimming in it! Jenni bought drinks for her and Jason with 100 vajos she’d transferred in from her credit card and they danced on a floor that was open to the stars.
You could begin by clicking on a few buttons beside the dance floor, but what they offered was a bit like what your gran did, so Jenni had bought a number of moves, such as Cover Girl, Saturday Shake, Caramel Poison and Hip Shiver; with these Miranda did look cool. When she swung and twirled, the dress rode up to show her shiny pink gusset and she thought it looked sexy, but also proper, like a ballet dancer. Jason had no money left, so Jenni bought him beer, and litre after litre of fresh spring water for herself.
At about eleven, Jason suggested they go to a strip club. Here, in a bright overhead light, various females were gyrating on poles. There was a ‘tip jar’ next to the stage, and Jason said, ‘Will you put in some vajos?’ As a result, the dancer took Jason into a large red room behind the main stage and Miranda followed, uncertainly.
The dancer performed gymnastic actions in front of Jason Dogg, who had now taken off his clothes.
The dancer messaged Jason, ‘Last man had forgot to buy dick.’
‘Lol,’ Jason replied. Laugh out loud. The basic maquettes were not provided with genitals, though they could be purchased at a price. Jason Dogg, Miranda noticed, had equipped himself with a doughty black one, which didn’t go with the colour of his other skin, though it stuck out tenaciously as the dancer attempted to manoeuvre herself into a position to accommodate it.