Moral Hazard (11 page)

In essence, at least according to Mike, this was the strategy of one hedge fund in particular; its traders bet on spreads converging and stuck with the bets, borrowing vast sums to keep them in business until they won. A daddy of a double-or-nothing urge. You will have heard of the fund because it became the financial world’s Icarus. The fund’s partners were notoriously secretive, even for hedge funds, which are accountable to no one. After its wings melted, debate raged about who outside the fund knew the extent of its borrowing, the nature of its ill-judged bets.

Mike knew, as I found out that day. An old Harvard friend who worked at the fund had let slip the degree to which the fund was in the hole and some of the positions they were taking. “Lunacy,” said Mike. “They’re leveraged thirty to one. They have around $4 billion in assets, which means they’ve borrowed $120 billion. That’s not nosebleed leverage. It’s hari-kari leverage.” Leverage: perfumed word for “debt.”

“That’s not counting derivatives. Their derivatives book is around $1.25 trillion. You know what their ambition is? To have zero capital and infinite leverage. Wouldn’t we all! Pah!”

“So? Who cares if the rich fall on their faces? Lose a billion or two?”

“This is too big.
Way
too big. Sure, if things stay in their favor, they’ll keep making gazillions. If they don’t—one of those fat-tail events—they’ll go bankrupt quicker than a snake disappears down a hole. But with those sums, so will anyone who’s invested in them, anyone who’s taken the other side of their trades. That means most of the banks on Wall Street.”

“You’ll tell ——, of course.” I named the CEO.

He didn’t hesitate. “No. I won’t. I want to see what happens.”

I was dumbfounded. Catching my expression, Mike said, “At heart, you’re a goody-two-shoes, aren’t you? He wouldn’t listen to me, anyway. Risk managers are for show, you know. I’ve told you before”—he gestured toward the deserted bench and empty marina—“VAR and Raroc are full of holes. More flaws than our president.” As much as the cold allowed, he smiled. VAR—Value at Risk—and Raroc—Risk-Adjusted Return on Capital—were the financial models on which Wall Street was dependent for calculating possible losses. “We’re window dressing, just like the speeches you write. We keep shareholders and banking analysts happy. We’re Snoopy blankets.”

He paused. Mike had gone over the edge. Flipped. He returned to the subject of the CEO. “Listen, Cath, I can’t believe he doesn’t know. If I know, he knows. But I gotta tell you, he thinks these guys can walk on water. They
all
think that.” Expansive gesture to include all of Wall Street.

Flipped.
Should I bring this up with Horace? Hardly my place. Flustered, I changed the subject. “We should go work for Philip Morris. I bet they allow their employees to smoke inside.”

“You’d work for one of the merchants of death?” Mike was momentarily sidetracked.

“Yeah, why not.” I didn’t mean it. I was just practicing repudiating the last of my principles. “We’re only at one remove from companies like that. We provide the financing for all sorts of dubious enterprises.”

While Mike lit up a second cigarette, I tried another conversational gambit. “Sad about our free lunches.” In the name of cost-cutting, the Big Toe had done away with our free lunches, in-house medical services, and flowers in the lobby. “That’s made the natives restless. Some are saying it’s the beginning of the end. We’ll be sold before the year is out.”

Mike ignored me and started up about how there should be limits to the amount of credit extended to hedge funds. My mood turned cranky. Oh, go and volunteer at a nursing home, get some perspective, I felt like telling him. It occurred to me that Mike’s ever-increasing, ever-more-shrill prognostications of doom were a martingale of sorts: One day he’d hit payola. If he didn’t get fired first.

At the first opportunity, I told Horace what Mike had said about the hedge fund. Call me a corporate suck-up, an imperialist running dog. Call me craven.

At Mike’s expense, I was trying to impress Horace, demonstrate that I was “in the loop,” understood the subtleties. Speechwriters have an anomalous place in corporate hierarchies, near the center of power and yet of no real account. Also, for all my railing about city-states and occupied territories, I’d come not just to like Horace but to trust him, in a fashion. I worked with him every day; familiarity wasn’t breeding contempt. And not only him. In one part of my mind, I couldn’t believe that these men were operating entirely out of self-interest. I would never have admitted it, but I had begun to buy into the propaganda I wrote. It had crossed my blood/brain barrier. Maybe Hanny was right:
You’ll become conservative working here. You wait and see. Everyone does.

I’m underplaying this about-face, I know. Embarrassed, of course, by the sniveling ease with which I betrayed Mike in order to ingratiate myself with Horace. I could rationalize it by saying you had to be there, caught up in Horace’s force field, to understand. But that would be truly spineless, truly disingenuous. As it is, there is no shortage of disingenuity on Wall Street. Thick on the ground as mud on a farm in winter. I won’t add to it.

Horace showed no surprise. He picked up a fountain pen from the vast collection arrayed on his desk, took off the cap, examined its nib. He gazed at the orchid that was currently gracing his office. He checked his watch—a Swatch. He had a thing about Swatches. “I’ll look into it,” he said, “but I have every faith in ——and ——,” naming two of the principals of the hedge fund. “We go back a long way.” Horace was loyal to his friends, more loyal at times than he was smart.
Bankers are just like anybody else / Except richer.

Niedecker’s managing directors, many of them ordered back from vacation, filed into the auditorium. When all the seats were taken, they lined the walls, crowded the doorways. Russia had done the unthinkable: devalued, defaulted, refused to honor its coin. Not even the sleaziest Latin American dictatorship had stooped to that. To make matters worse, the IMF had balked at pumping more money into Russia; their last loan had landed in Swiss and Channel Island bank accounts without passing Go. Investment banks and hedge funds, up to their necks in derivative contracts involving Russia, had to pay the piper.

Mike was as happy as a pig in mud. This was the mayhem he had predicted. He had phoned me the day before, hooting in his glee. “Finally,
finally
, the IMF did the right thing. Took away the safety net. Invoked moral hazard. Maybe the banks will begin to think twice about where they dump their money. Lift up the carpet and see what’s under those
innovative
derivatives contracts.” In our brochures and speeches, we never used the word “derivatives” without qualifying it with “innovative,” hence the sarcasm.

“How’s your hedge fund doing?”

“
Major
trouble. They’re being disemboweled, dismembered. Their money is running out.” He paused to catch his breath. “Fiscal hygiene at last. It’s gonna be interesting to see what gets flushed out.
Who
gets flushed out. Because it won’t stop with them.”

“As you told me. Have you sounded the alarm?”

“For you to guess, me to know.”

“Good luck. Just remember, the dice are loaded. Everybody knows.” A reference to his Leonard Cohen song.

“Not this time.”

And then an emergency meeting to rally the troops. Horace was in the front row, along with other members of executive management, pictures of gravity, dispensing with their usual minuet of affability. I could make out the back of Mike’s head in the second row. Chuck, Bart, and Hanny sat in the middle of the auditorium, Chuck smiling, Bart scowling, and Hanny swelling like a puffer fish at being included in an important occasion. I stayed out of everyone’s way at the back in case my presence was questioned.

The CEO took the stage: “Recent global market turmoil has tested Niedecker people in unprecedented ways, under conditions never before experienced. What Russia did was much worse than even the most bearish prediction envisaged. What happened was inconceivable. It broke all the rules.”

Normally, the CEO’s face was as inexpressive as, well, a big toe. This day, though, he looked—there is no other word for it—gob-smacked. And his burly body, the kind that occupied every inch of space available to it, sagged.

He offered up pap about the firm’s ability to add value for clients in turbulent times. He asked “his team” to keep a long-term perspective. He used “impact” as a verb seven times. The words “robust” and “opportunity” were noticeably absent from his vocabulary. The bankers, usually expert at hiding nerves, responded in a variety of ways: fiddling with the fat knots of their Hermès ties, putting two fingers between the collars of their shirts and their necks to allow the blood to flow, checking creases in trousers, twisting wedding bands, smoothing hair. One even pinged his braces. Busier than kindergarteners. Yearly reviews were on the horizon, along with “envelope day,” when they learned the size of their bonuses.

Horace’s turn to speak. He began with a joke of sorts: “We financiers like to think we are in control. The events of the last week have shown us how untrue that is.” Subdued laughter. He talked about financial models failing despite far-seeing stress testing. He reminded us that no one is master of the markets, no one can outwit them. He alluded to the IMF money now in secret bank accounts. His message: Faulty models, headstrong markets, the Russian oligarchs—they were at the root of Niedecker’s woes. As if bankers were innocent bystanders and not the markets’ puppeteers; as if they had not constructed the models with the express intention of taming the markets, harnessing them, stopping the head from rearing; as if they had not joined the scramble to take advantage of Russia for fear of being left out of a killing. As if elves at the bottom of the garden were responsible. Shame on Horace. He sounded for all the world like an alcoholic who blames the bottle and not himself.

Questions from the floor. Niedecker corporate events were scripted down to a fare-thee-well, as stylized as a Noh drama. The questions were scripted, too, by Hanny, planted by Chuck and Bart. This day, things did not go as planned. A banker standing to the side flagged the CEO and asked a genuine question, an event as unthinkable as Russia’s default: “Why was so much of our capital invested in a country that has never had a market economy, never had the civil institutions that make a market economy possible? Not only that, a country run by gangsters. This is not a secret. Anyone who reads the
New York Times
knows it.” He had a slight Southern drawl.

The assembly squirmed as one. The CEO, his stolid demeanor and square shoulders resurrected by this impertinence, took his time in answering: “First, we had no reason to believe that Russia wasn’t attempting serious reform. All the indicators suggested this, as did our field research.” A double negative, to be avoided at all costs in the corporate world, where the spin is to accentuate, relentlessly, the positive.
Always
use the active voice,
never
qualify. As for the field research, even I was aware that Niedecker’s research team in Russia consisted of a midlevel government employee who ducked out from her job to report from a hotel-lobby phone. “Second,” he continued, “it’s a risky world. Always has been, always will be. That’s how we make money, how we sometimes lose it.”

The banker who asked the question was
dead.
Knowing that, he persisted. “With all due respect”—involuntary titters, choking coughs—“for a long time now, the word on Russia, the joke about Russia, has been that it was a submerging market, not an emerging one. How is it that we were so exposed?”

They did know about Russia, some of them, sort of. Financial services companies aren’t seamless, their PR notwithstanding. They are an agglomeration of fiefdoms. The left hand doesn’t always know what the right hand knows. Another way of looking at it, courtesy of Mike: The information available to firms like Niedecker is shallow but wide. What traders know is deep but narrow. A recipe for trouble.

The CEO hunched over the lectern and grasped it with both hands as if he were a quarterback and the season depended on him. “After the last infusion of money from the IMF, we saw trouble on the horizon and cut our positions aggressively. And we’ll keep doing that. This is not easy because these positions are very knotty, very complex”—
you have to understand the subtleties—
“but we will be successful. We
thrive
in times of challenge.” He finished with a non sequitur, of which he was fond. “We are an organization with a global culture and a global value system.” He strode offstage, heading for the safety and silence of the executive floor.

The bankers filed out, no more reassured than when they went in. Surely, in their heart of hearts, they had to admit to the real nature of the global financial markets: perilous, jerry-built, mortared with spit and cupidity, a coat of self-serving verbiage slapped on to tart up the surface and hide the cracks.

Bailey was hemorrhaging. The night nurse stuttered this news into the phone, apparently unnerved by the amount of blood. I pulled on clothes and arrived at the home just as they were bringing Bailey out to an ambulance. He was glassy-eyed, clammy, swooning; the medics were jovial. It was two in the morning, crisp and cold. His time to die.

The ER at St. —— is disorderly, crowded, ungentle; any New Yorker will tell you that. Walls, ceilings, floor tiles—they are impregnated with fear.

“He’s in the final stages of Alzheimer’s,” I told the triage team. “He’s DNR. Make him comfortable, please, but nothing else.” The words came out clumsily. I was surprised to hear them. Let this person, who is dearest to me, who is my family, die.

They paid me no heed. I might as well have been invisible. They consulted his medical records, which had come with him from the home. A plump bag of blood appeared and was attached to an I.V. pole.

“What are you doing? Why are you transfusing him?”

They were deaf. I asked for the doctor in charge. He had a damp, limp handshake. He didn’t bother to hide his impatience.