John Schettler - Fallen Angels - 9 Days Falling, Volume II

But it wasn’t the news from the troubled Caspian superfields or the outbreak of fighting in the Black Sea that was vexing the bankers now. This time something had happened in the wine dark sea of derivatives, where Goldman’s exposure was astronomical. Word was that the Chinese were backing out of derivatives contracts, en masse, simply ordering their people to default and describing the whole scheme in the clearest possible terms—fraud. It was deemed part of their ‘war effort’ but the fact remained that it was now going to have a tremendous effect on the financial markets.

One by one other counterparties to the extensive web of derivatives agreements began to follow suit, emboldened by the statements emanating from Beijing. For years these trades had been accomplished in “dark pools” where pricing, transparency and reporting requirements were virtually nonexistent. As long as the right hand did not know what the left hand was doing, the Goldman magic act could continue unabated. But now someone had called them on the sham they had made of securities trading, and the game was over.

Goldman was in trouble. Puts became calls, and razor thin margins melted away. They needed cash to offset their leverage and staunch the gaping wounds in their trading schemes. The firm was teetering at the edge of the abyss and desperately seeking a financial support. And since they basically ran the U.S. government as it was, Uncle Sam was being called in once more as the patsy buyer of last resort.

A run on other independent broker dealers like Morgan Stanley or even majors like Citigroup was now a distinct possibility as the shadow banking system, the other dark energy supply driving the nation, was also effectively ‘shut in’ just like the oil, with a paralysis gripping the derivatives trading desks. The dark pools had gone cold and stagnant. The financial system had relied on these unregulated trades to keep the wheels turning. Many investment houses were leveraged at impossible ratios, some as high as 80 or 100 to 1, but Goldman’s position was far worse. As these positions became more and more untenable, the unwinding was ravaging the meager real capital base that supported the shadow trades.

So as Houston sat in the dark, the Gulf of Mexico bled oil, and the Russians moved on the Kashagan superfields, the Fed once again convened emergency meetings with the heads of all major Wall Street firms trying to find a way to prevent the avalanche of default that threatened to tear the system apart. The counterparties had to be persuaded to keep their stakes in the game at all cost, but that cost would soon be seen to be beyond the means of all of Wall Street’s most venerable names, beyond even the power of the government itself to forestall the inevitable collapse. The whole system shuddered, like financial pipelines shutting down, one after another.

The dark matter of derivatives comprising the shadow banking system amounted to over $680 trillion dollars, a sum exceeding the gross domestic product of the entire nation for the next 60 years. The energy flows had come to a near complete halt, with nervous investors unwilling to risk capital. Banks stopped lending to other banks. Loans became almost impossible to arrange. It was a freezing deflationary scenario, potentially much worse than the Great Depression, but no one really knew what the consequences would be, and with war looming as a real event now, no one cared either.

The massive derivatives market opened in a rare weekend session to allow investors to try and limit their exposure to damage should Goldman fall into bankruptcy the following Monday. Good money was scrambling after bad money, in a desperate effort to stop the losses.

The average person on the street knew little of the real danger. They were lined up behind the cash registers at Wal-Mart with shopping carts full of the last shipments of junk that would arrive from China for the foreseeable future. Robert read the news intently that morning, wondering if he should act immediately to protect his own meager investment portfolio. He had a substantial slice of Goldman, and sent in a sell order to an old pit buddy, hoping to get out the back door in cash just before the building collapsed.

Somehow, images of those few survivors coming down the stairwells in the World Trade Center just before the first tower fell played on a haunting canvass in the back of his mind. He wanted to be one of them. What a metaphor, carved in reality now, he thought. But Jimmy, his contact in the trading pits this morning, wouldn’t let him down.

When the call came in from the trading desk, he answered his cell phone quickly.

“Jimmy, my main man! I hope you’ve got some good news.”

“Hey, Robert. Things are really dicey down here, brother. I’ve got sell orders stacked up from here to Cleveland, and no buyers in sight.”

“But you got me out, right? You sell it all?”

“That’s just it,” there was a harried edge to the other man’s voice. “I can’t move shit right now. Fat cats are three rungs ahead of me on the trading ladder, front running like crazy. I’ve got banks, insurance companies and fund managers hogging the wire. Every time I key something I get a bounce. These buggers have the whole system damn near locked up. And this is just a two hour special trading session. The big Boyz have the inside track.”

“What do you mean locked up? Come on Jimmy, I‘ve got too much riding on this. I need to unwind this shit right now!”

“Hey, man. I’ll do whatever I can, but this is some serious fuckin’ shit going down here this afternoon. Never seen anything like it, not even when Lehman got thrown to the wolves. Gotta go, man. Somethin’s up!”

Robert heard a chorus of pit shouting just before the line went dead. He sat there staring at the screen on his cell phone, stunned. If he couldn’t unwind this position he was definitely going to crash and burn. He’d lose everything!.

He awoke that morning, safely cocooned in his Quantum Sleeper , but the bad news was still filtering through the stereo speakers, through the endless commercials interlaced with the constant flow of advertising that never seemed to stop, and it had finally hit home.

His pit trader friend never called him back. Jimmy let him down. The news that Goldman had failed spread like a toxin, and fund after fund had taken staggering losses, some losing 90% of their nominal value in a matter of hours. The near two thousand point drop in the markets that followed further decimated Robert’s meager stock positions. As the radio announcer yammered on about one special offer or another, he found himself simply losing himself in the media stream, the commercials washing over his weary mind one after another like old familiar friends…

Still ahead! The biggest little sale of the year… Final clearance! No payments and interest until February. Free delivery, usually in 4 hours or less! Don’t wait call now! And now this…Aqua Fresh whitening power is even better! Use every day for whitening teeth… Then…Tonight--A distillation of the very best, the weirdest, the wildest on NBC…

The commercials piled one on top of another, with one presenting a saccharine pastoral scene of a grandfather playing with a toddler and dog while a voiceover intoned a litany of horrific drug side effects for the latest concoction being foisted on the public. What happened to the simple, direct interrogation of the dairy industry commercial, he thought. It was just two words—Got Milk? A quiet tone interrupted the commercial stream, and the volume lowered 30%. The digital messaging system in the Quantum Sleeper had a message for him from the other room.

“Good morning,” the voice intoned in the smooth, soft tones of a fresh young co-ed, and quietly announced that there was a fault reading on the central AC unit in the basement. “A quick service call should take care of it today!” the voice concluded. The Sleeper was hard wired to a device that checked on all his major appliances, letting him know when anything needed attention.