Walter Williams - The Rift

Charlie got his way. But as soon as he started putting the money on the market, the regulators noticed his vulnerability and began calling in margins, and he had to call Dearborne for money. Which led to even more anxiety on Dearborne’s part, and more phone calls.

“The margin calls are signs of success,” Charlie kept telling him. “It means the market is moving our way.”

But it wasn’t moving Charlie’s way all the time: it jittered up and down on an almost hourly basis. Charlie took advantage of the upswings to sell as many of his hedges at a profit as he could, then buy more short options. Which led to more margin calls, more aggravation. More phone calls from Dearborne.

On Thursday night Charlie drove home after reconciliation, planning on nothing more exciting than eating some Chinese takeout and having a long soak in the spa, only to find an urgent message from Dearborne on his answering machine.

“Turn on your TV!” Dearborne shouted from the tinny speaker. “The chairman of the Fed is on!”

The chairman wasn’t there when Charlie looked, so he switched to CNN and ate orange peel beef from the cardboard container while he waited for the financial report. Right at the top of the report was the chairman of the Federal Reserve, with a strange gnomic smile pasted to his face, announcing that the Fed was cutting interest rates a full point. Announcers were treating it as if the chairman had just turned water into wine.

Fuck, Charlie thought. Fuck I am so screwed …

And then, as if on cue, the phone rang. Charlie didn’t answer. He just waited for Dearborne’s voice to come out of the answering machine.

It didn’t say anything that Charlie hadn’t already imagined.

*

The President choked on laughter at the sight of the chairman of the Federal Reserve making his announcement. The unnatural grin, on Sam’s reserved and owlish face, looked more like the product of a jolt of electricity than a result of fiscal confidence.

“I love it!” he whooped. “Damn, I am some kind of slick son of a bitch!”

The First Lady gave him an indulgent look from over her reading glasses. She sat in a lounge chair in their drawing room, a glass of sherry by one hand, briefing books in her lap. Her husband was not the only person doing homework for the economic summit.

“Sam’s peculiar behavior is not unanticipated, I gather?” she said.

“Judge Chivington gave him a little phone call. But I didn’t think it would work so soon, or so fast. And I sure as hell didn’t think it would work by a whole interest point.”

The First Lady looked down at her briefing book and with a marking pen drew a thick pink line along a critical factoid. “You think we can sustain this rally?” she said.

“Barring some unforeseen disaster.” He grinned at the television analyst who was urging fiduciary caution upon his audience. “I won’t have egg on my face at the economic summit, anyway.”

“Let’s just hope,” the First Lady said, returning her gaze to her briefing book, “there isn’t a market adjustment while we’re in London.”

“We’ll have to hope,” said the President, “that we’ve put it off.”

*

All day Friday, Charlie felt as if he’d fallen during the running of the bulls at Pamplona. Except that it was the bulls of Wall Street that were stomping him into the pavement, one sledgehammer hoof after another. Every kick to the kidney, every hoof to the spleen, and he was bleeding dollars. Buoyed by the Fed chairman’s apparent optimism, the market was on a big upswing, regaining practically all the ground it had lost over the last week.

Dearborne didn’t help, not with his panicky phone calls. “It’s false optimism,” Charlie said. “Stay the course.”

“Over thirty percent of Tennessee Planters’ capital is committed to backing your positions,” Dearborne said. “We are a risk-averse institution. You told me you’d be hedging every single minute.”

“I have hedged. I just cashed in ten million dollars’ worth of Eurodollar futures. I made you money!”

“You haven’t hedged enough. That’s what I’m saying.”

“Stay the course,” Charlie said. “It’s not as bad as you think.”

It’s going to be worse, he thought. Even though prices fell at the end of the day, as people started taking their profits, the S amp;P had gone up five whole percentage points.

After the markets closed, Charlie helped Megan with the process of reconciliation. Before they were completely finished, Megan sent her other employees home, then took Charlie into her office and closed the door. She looked at her monitor, and Charlie could see the green columns of figures reflected in her eyes.

“If you liquidate now,” she said, “your S amp;P futures will have lost sixty-two point five million dollars.” Charlie’s heart gave a lurch. “Sixty-two and a half,” she repeated. “Now you’ve purchased these options for forty million, and your Eurodollar hedges gives you another ten, but what’s going to happen to you first thing Monday morning is a twelve-and-a-half-million-dollar margin call. I’m amazed you haven’t got it already-probably the computers haven’t caught up to the day’s trading.” The strain of maintaining her low, cultured tones turned her voice husky. “If you don’t liquidate, my dear, your losses are unlimited.”

Charlie licked his lips. He could feel sweat breaking out on his forehead. “You’ve got to help me hide it,” he said.

She stared at him. “Hide twelve and a half million? Are you out of your mind?”

Charlie spoke out loud as calculations rattled frantically in his skull. “Not that much. Just eight or nine. We can’t hide all of it, they’ll be expecting some loss. So we give them a loss, okay? Just help me make it an acceptable loss- three or four million, something like that. And put the rest of it- where?” His mind spun through a mental list of his clients.

Megan stared at him. “Charlie, that’s fifteen ways illegal.”

“What drives markets?” Charlie asked. “FIG. Fear, Ignorance, Greed. The directors at Tennessee Planters are ignorant of the securities marketplace. They really don’t understand what I’m doing. I have to stroke Dearborne every second to get him into line, and I can’t stroke all of the directors all of the time. Once they see our current position, fear will take control of their minds. They’re going to try to take charge of TPS, and ignorance and fear will have them doing the wrong thing. We don’t dare panic them. If they panic, they could order me to liquidate, and those millions of losing positions will turn into millions of real losses.”

Charlie could tell from the look on Megan’s face that she understood all too well what might happen.

“What have we got in the error account,” Charlie said, “a couple hundred thousand dollars? Just put the losses there instead of the real account. Who’s going to check the error account?”

“The figures in the error account get reported just like everything else,” Megan said. “All Dearborne or anyone else has to do is just call it up on the screen.”

Good, Charlie thought. She was responding to the problem. She was starting to think of ways to do what he needed.

“We can’t put it in my account. My profile is too high.” He looked at Megan. “Your account?”

Megan’s answer was a flat stare.

“Right,” Charlie said. “So we put the loss in one of my client accounts. Sanderson- no, he’ll smell something wrong. Caldwell.” He grinned. “Caldwell. Caldwell’s on vacation. He won’t even notice. And he has sufficient collateral to cover any margin calls.”