A Week in December (9 page)

He might have a quiet talk with the imam at the mosque in Chigwell. He was a wise man and would give good advice. If he was tongue-tied, Her Majesty would consider him dull, which would be wounding to his family and his faith. From what he understood, he had two months before the announcement and then it could be another six before he went to the palace, so he had time enough to do a crash course in English literature. No one - not even Queen Elizabeth - should say that Knocker al-Rashid was not a cultured man.

All day long he found himself picturing the scene that must have prompted the letter from the 'obedient servant'.

Her Majesty, on the occasion of her approaching birthday, sat upon her throne, raised on a platform. Below her, also seated, the Prime Minister pored over a sheaf of papers.

'We come now, Your Majesty, to the case of Mr Farooq al-Rashid.'

'Ah yes, indeed,' the Queen replied. 'It is high time we recognised his services to our country and ourselves.'

'An Officer of the Order of the British Empire, perhaps?' The Prime Minister looked up over his spectacles.

'At the very least,' said Her Majesty. 'Send for the Obedient Servant and command him to despatch a letter.'

Knocker's pleasure at the thought of the OBE was tempered by his anxiety at looking foolish when he came to meet the Queen. He had very little time in which to get an education. Sitting in the back of his car one day on his way to Dagenham, he had a sudden, clever thought. A year earlier, at a political fund-raising dinner, he had met a man called ... What was it? Knocker may have had trouble with what was written down, but spoken words and names lodged easily in his sober memory ... Tranter. That was it. Sophie Topping, the hostess that night, whose husband was hoping to be elected an MP, had given a party to show off potential donors like Knocker to the party grandees. Among the guests had been this man Tranter. He was a book reviewer or critic (Knocker was not certain of the distinction) who once a month was paid to 'moderate' the discussions of Sophie Topping's book-reading group. Tranter was neither a politician nor a potential backer, just someone Mrs Topping was proud to know and who, she clearly thought, would raise the tone of her gathering.

In the course of the evening, Tranter had revealed a wide knowledge of books, talking confidently about living and dead authors (he seemed to prefer the latter). So far as Knocker could understand, he was someone who was able to exist by reading books and having views on them. A newspaper hired him to give his opinion and others paid to read it. This was so far from any way of earning a living Knocker had previously encountered that he had to talk himself through the logistics of it a few times to make sure it all made sense. In the end, he decided, the cash flow and productivity, the supply and the demand, didn't really matter; what counted was that this man Tranter was the one to help him in his destined meeting with the Queen of England.

At the Dagenham factory, he asked Mrs Hine, his secretary, to track down Sophie Topping and find out how to reach Tranter. Before long, Mrs Hine had sent an e-mail to [email protected]. 'Dear Mr Tranter, please forgive this message from out the blue, my employer a very distinguished gentleman is desirous of making a business connection with you in regard of a Literary matter and would be most obliged if you would telephone the above telephone number in the strictest confidence and ask for Mr al-Rashid. Your truly, Mrs Doris Hine.'

II

John Veals walked down the steps of the sixteen-seater PetJet at Zurich airport. He had a rental share in the plane, and if he booked ahead and filled it up - two families going on holiday, for instance - it was no more expensive per head than buying good seats on an airline. His last-minute travel decision, however, meant there were only three other passengers, so the flight was expensive. Sometimes you had to spend to earn. After immigration, he found the modest grey car that was waiting to take him to Pfaffikon, a discreetly drab town that might have been invented to help people like him make large trades away from prying eyes.

There was grey snow along the edges of the streets, neatly shovelled by municipal workers in the early hours. Veals met Kieran Duffy, the head of High Level's trade execution team, at the usual coffee shop, well away from the insipid food and high prices of the restaurants designed for their kind. Veals had first met Duffy in New York, where Duffy had worked for twenty-five years for a rival bank. Duffy was one of the few competitors they had really feared; what he didn't know about shafting the client could be written, according to Godley, on the sharp end of a golf tee. Despite his name, Duffy was Jewish and had always been known to Veals as O'Bagel, O'Shlo or even once, when he'd messed up, as O'Kike. (There had been an awkward moment early in Veals's and Godley's partnership when Godley had wondered whether Veals, being at least nominally Jewish, if irreligious, himself, would mind the banter of the office. 'Don't be fucking feeble, Steve,' Veals told him. 'Most of my best friends are anti-Semites.')

At the age of forty-nine, Duffy had retired from Wall Street to stare at his millions in Connecticut. Veals gave him nine months to get bored, then offered him a job as chief of his own 'buy side': to be the man who no longer sold opaque products for an eye-watering commission but who had the power to decide when, what and from whom to buy. Duffy decamped to Zurich six weeks later. His wife was to join him 'in due course', and meanwhile he had set up house with a twenty-eight-year-old Italian girl he'd met in his last days on Wall Street.

Over dry croissants and strong coffee, Veals began to outline to Duffy his thoughts about Allied Royal Bank. He told him as little as was necessary for Duffy to begin to design the positions. Even in his own man, hand-picked, and with a strong record with High Level already behind him, Veals saw only risks. High Level's trades generated tens of millions in commission for the brokers and investment banks they dealt with; this meant everyone wanted to know Kieran Duffy and that he was the target of 'cash rebates' and other under-the-table favours. Veals knew that Duffy had banked enough not to be prey to such clownish temptation; that was one reason he'd hired him. Still, he had thought it wise to pay all of Duffy's annual salary and bonus in the shape of shares in High Level. Veals trusted Duffy all right, but - just to be sure - it made sense to lock him in for more than any bribe could match. 'Making certain our interests are aligned' was how Veals put it; 'Not throwing out a hospital pass' was Godley's term.

Veals was ever thrifty with details. 'I think silver's likely to get hammered,' he might tell Duffy on his orange cellphone from the alleyway off Old Pye Street. 'Put us in for five per cent of the fund by Friday.' It was up to Duffy to decide what market instruments to use; it went without saying, ever, that listed markets should be avoided. With what Veals had in mind for ARB, however, he needed face-to-face time with Duffy. It was going to take the lightest and most ingenious of touches by both men; it would involve all their experience and guile. If Duffy had started work in London or New York, the compliance officers would have asked if the amounts at stake were not in breach of the fund's own published risk-tolerance statements; in Pfaffikon he was more likely to be asked whether he fancied another glass of the fruity local Malvoisie.

The simple, but perhaps too simple, thing to do was to short-sell the stock. This meant first borrowing a vast number of ARB shares from an insurance company or some other registered owner who specialised in lending stock; then selling it at whatever the market would offer; and, finally, repurchasing it at a much cheaper price when the market had collapsed and returning it to its owner. The profit was in the difference between the price at which they'd sold and the lower one at which they had rebought. The exposure, the risk - if the stock price rose - was almost limitless. 'Shorting takes rugby-sized balls,' as Godley was fond of saying. But the ARB price wasn't going to rise, not in the long run - not with what Veals knew about the debt covenant.

The second obvious thing to do was to buy 'put' options on ARB stock. These gave them the right to sell the stock at a pre-agreed or 'strike' price. If the strike price was fifteen but the market price had fallen to ten, you bought a million at ten and sold them to the party who'd agreed to buy them at fifteen. Easy. The price of buying these 'puts' was determined by the strike price (and the further that was from the current price, the cheaper it was to buy the option); the 'time value' before the option expired; and the volatility of the underlying market. Each was given a Greek letter, and the relationships between them further Greek letters, so that some of the quants ended up with worksheets that looked like a page from the
Iliad
.

It was mostly, in Veals's view, absolute piffle. A trade was a trade, and it was driven by two things only: greed and fear. Gamma for Greed if you insisted on talking Greek, said Veals; but, well, 'The Greeks had no letter for F,' he had more than once remarked.

For two hours they discussed the virtues of 'puts' and 'calls'. Traditionally such instruments had existed as insurance: by limiting their exposure to future price fluctuations, companies could use them to smooth out their forecasts and their cash flows. But turn a safety mechanism upside down and, hey presto, you have a gambling instrument. Through 'calls', High Level could trade with people who took the view that the ARB price would rise, or were at least prepared to name a figure that would reward them if it did; through 'puts' High Level could express their own conviction that the price would fall. The danger in the dual strategy Veals outlined was that they were not using one position to 'hedge' against the other; on the contrary, the success of both trades relied on the same thing: they were simply doubling their bet on the chosen outcome.

'Shit.' Duffy seldom swore. 'Do you know something I don't know, John?'

'Trust me,' said Veals.

Duffy stared into his coffee, saying nothing for a minute. Eventually he lifted his head. 'OK, John. It's not my fund. It's your baby. I'll do what you ask.'

Veals nodded. 'But I'm worried that we might blow out the counterparty. I don't want one of them to collapse and default on the trade.'

'We have to spread it across the whole industry,' said Duffy. 'It's time we called in a few favours. You've got every prime broker in the world as well as half the hedge funds gagging for a bit of the action. I can get some special terms. Then people will see the banks' names not ours listed on the trades. They won't know it's us they're dealing with.'

Veals ordered more coffee. 'If ARB goes down,' he said, 'it's possible the amount of bad debt in all the other banks will make their share prices plummet too. The whole banking sector could be in trouble. There'd be panic on the high street. Mrs Smith's PS10,000 life savings. Queues round the block. The government would have to guarantee the savers. And to do that, they'd have to increase their own borrowing by half overnight.'

'And that would have a huge effect on the price of government debt,' said Duffy.

'Yes it would,' said Veals. 'On gilts. So we take a position on gilts.'

Duffy smiled slowly. 'And then,' he said, 'there's the currency. The extra government debt would mean that sterling gets hammered - even against a shaky dollar.'

'Well,' said Veals, putting down his cup. 'I think we have the makings of something.'

He almost smiled. The reason he particularly liked the sterling aspect of the trade was that the currency market was almost completely unregulated.

'Do you want lunch?' said Duffy. 'We could go to that Spanish place I'm always telling you about.'

'What? And be seen by a whole lot of hedge-fund managers? For fuck's sake, Kieran. I'm not hungry. My car's outside. I'll get him to take me back to the airport. I'll call tonight at five. On your cellphone.'

'All right. What are we going to call this trade, John?'

Veals and Duffy always had code names for sensitive trades, just as an extra protection.

'I suppose,' said Veals, 'in view of all the pension business we could call it ... What about "Rheumatism"?'

'Fine. Rheumatism it is. So long, John. Been nice seeing you.'

Kieran Duffy stood outside the steamed-up coffee shop and watched the lean figure of John Veals crunch a homburg on to his head and climb into the grey saloon.

Some hedge funds had narrow specialisations, but Veals and Godley always intended to deal across the whole financial
carte
. Veals dreaded boredom and he feared missing any opportunity.

To begin with, until they found their feet, they did some easy deals in his old bank speciality: debt. This seemed an obvious way of 'getting our eye in', as Godley put it; there was the further attraction to Veals that bank debt was not regulated. You could pass on market-sensitive information without a problem; what would have got you three years in prison for insider trading if you dealt in equities was quite permissible when discussing bank debt, and here was Veals's preferred position: the kosher edge.

An early coup came when he noticed that one of the Eastern European countries was owed PS30 million by a former French African colony. Veals discovered that the Slavs expected little or no return on what they'd rashly lent the Africans and they were delighted to get the whole debt off their hands to Veals in return for PS5 million.

When the Jubilee 2000 movement for the cancellation of debt persuaded the G7 countries to write off the African debt, Veals at once sued the African government in the London High Court for repayment of the PS25 million shortfall. The judge expressed distaste at the action, but said his hands were tied by law. Veals owned the bonds; the Africans were obliged to reroute the G7 refund straight into Veals's recently opened private Allied Royal bank account in Victoria Street, London SW1. It was a happy result for High Level Capital in its infant days.

There was a large industry in London which existed to exploit the 'rights' of junior debtors in companies on their deathbed: it involved taking extreme legal positions of doubtful morality. Veals viewed it as a boring and mechanical trade, with irritating lawyers' fees, but admitted it was a dependable revenue earner; it was, as Steve Godley put it, 'a club we need to have in our bag. A handy seven iron.'