Steven Gore - Absolute Risk

In Harris’s stiffening face Wallace saw that Harris knew that was not entirely true, that Harris knew about the private meeting in which President McCormack himself had warned him about Manton Roberts.

Wallace ignored it and asked, “What did he want you to pass on?”

“That you should be prepared to finish out his presidency.”

Wallace drew back. “That’s not what-“

“He doesn’t think he’ll make it.”

“Of course he’s worried,” Wallace said, “but I-“

“It’s not that. He’s had his doctors minimize the seriousness in order to give you breathing space, to reduce the pressure on you by making the public see you as a caretaker for as long as possible.”

Harris leaned forward in his chair. “He realizes that he made a mistake in how he’s treated you over the last few years. Isolating you. I think, and this is just my opinion, that increasingly powerful vice presidents over the years have created an unnecessary imbalance. And in righting it, he’s afraid he overcompensated.”

Wallace used a nod of understanding for his response. It wasn’t an I-told-you-so moment.

“He now realizes that you’ll need time to get your own team together,” Harris said. “Usually new presidents have months for a transition, not days.”

“Is he asking you to help me?” Wallace asked.

Harris shook his head. “I think part of the reason he picked me to meet with you is because he knows I’m in no position to help, or interfere for that matter.”

“Because of Relative Growth?”

Harris nodded. “It’s a mess. I made a serious mistake in getting involved with those people. And as soon as this flurry dies down, I’m getting out.”

Ibrahim had remained silent all through Gage’s recounting of how he’d spent the days after he’d been called to New York by Milton Abrams.

“Abrams is driven by questions not only about Hennessy,” Gage said, “but about Relative Growth Funds. He thinks it’s a fraud and that they’re using your academic work as a kind of camouflage.”

Gage expected a protest. Instead, Ibrahim nodded.

“He’s right. It was all nonsense. I was doing what everyone else in academia and Wall Street was doing back then, descending into the occult. There’s no objective reality that matches phrases like ‘two-step binomial trees,’ any more than you can take a stroll down the block into the seventh dimension to buy a pack of cigarettes.”

“Then what did Minsky and Relative Growth want from you?”

Gage guessed the answer before he’d finished the question, and suspected that Abrams would’ve guessed it, too.

“Magic,” Ibrahim said. “You have all of those quantitative analysts on Wall Street and in hedge funds who pray to a mathematical god that speaks in equations. They needed one of their own. More even than money, they needed the magic and the mystery and the miracle. Minsky isn’t an economist. He’s barely a mathematician. But he’s a master psychologist. Untrained, but innate. Like a professional gambler or a mega-church evangelical minister. Newton said that he could ‘calculate the motions of heavenly bodies, but not the madness of people.’ Minsky can do both, but only some of the time.”

“Which means you set him up.”

“Of course. And very personally. It’s his own fault that he began to believe in his own magic. He deserves what’s coming to him.”

“And what’s that?”

“Humiliation.”

Gage shook his head. “Hennessy wasn’t worried about Minsky’s possible humiliation. It was something else.”

Ibrahim pointed at Gage’s flowchart. “It’s right there.”

“You’ve got better vision than I do.”

“Are there more boxes than you’ve shown me?”

Gage drew the rest from memory.

Ibrahim reached over and tore it up.

“Hennessy was close, but didn’t get it quite right.” Ibrahim then drew a new one.

Gage looked it over and said, “I take it that the arrowed lines are investors’ money going into Relative Growth?”

Ibrahim shook his head. “Not only money. The G12 put in something else. And that something else is the foundation for almost everything Relative Growth did.”

“China only has one other asset: U.S. treasury bonds.”

“Bingo. We have a winner. And they dumped every single one into Relative Growth.”

Gage inspected Ibrahim’s face, looking for a sign that the claim was hyperbole or exaggeration. There was no way China could’ve unloaded a trillion dollars’ worth of U.S. debt without anyone in the financial community realizing it.

“When you were in Marseilles,” Ibrahim asked, “did you notice the China-NexCo Towers?”

Gage nodded. The twin structures, slick glass and matte gray, had just risen fifty stories tall next to the container port. Like the Great Wall, they were large enough to be visible from space.

“The construction financing was provided by Relative Growth Funds,” Ibrahim said.

“It was in the news,” Gage said. “No one was hiding it. The money came from investors in the hedge fund.”

Ibrahim leaned toward Gage. “But what secures Relative Growth’s loan to NexCo for the construction?”

“What always secures loans, the land and the building. If NexCo defaults, Relative Growth forecloses and takes the property. No different than a home mortgage.”

Ibrahim shook his head, then grinned with owner’s pride and said, “The loans are secured by U.S. treasury bonds.”

Ibrahim paused to let Gage repeat the phrase in his mind. Only on the second time through did the reality of it hit him: The loan wasn’t secured by the hard asset, but by soft paper, by no more than a promissory note.

“And that’s not the only one,” Ibrahim said. “It’s the same thing with the tens of millions of acres they’ve bought in Africa for bio-fuel production to free themselves from their dependence on Middle East and Russian oil. Same for mines and platinum futures and currency speculation. If NexCo or any other Group of Twelve investment defaults on a loan, the Group of Twelve simply surrenders the treasury bonds to Relative Growth.”

Gage felt the vertigo of free-falling off a cliff. “And when the financial community discovers that China has dumped all of its bonds-“

“The bond value plummets and Relative Growth is left having to make good on the loans, but they won’t have the cash to do it. Their investors will lose trillions of dollars and the banks that Relative Growth borrowed money from will lose trillions more. The entire U.S. economy will collapse and take Western Europe with it.”

The assumption that China needed a strong U.S. economy and needed to support the dollar and the prices of treasury bonds had disintegrated.

Even worse. Gage remembered once listening to Warren Buffett on the radio as he was driving to an appointment in San Francisco. Buffett saying that it was impossible for the Chinese to dump their bonds because they’d just have to exchange them for dollars and if they didn’t, the bond prices would collapse faster than they could sell them since there would be a rush to sell by all of the world’s bondholders.

If Ibrahim was right, Buffett was wrong. Fatally wrong.

Buffeta-buffeta-buffeta. The secret had been in the ramblings of Hennessy’s deteriorating mind. It wasn’t the sound of a motorcycle, but the sound of wrenching chaos.

“It doesn’t make sense,” Gage said. “Why would they do something like that? The U.S. is their biggest customer.”

“For how long? The Chinese government came to the conclusion that the U.S. economy would eventually collapse under the weight of its debt-not just the mortgage-driven debt and the government debt, but the money Americans spent on junk. iPods, plasma TVs, and SUVs.”