The Last Trade
Authors: James Conway
The
LAST
TRADE
a novel
Jame Conway
Â
DUTTON
DUTTON
Published by Penguin Group (USA) Inc.
375 Hudson Street, New York, New York 10014, U.S.A.
Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of Pearson Penguin Canada Inc.);
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Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England
Published by Dutton, a member of Penguin Group (USA) Inc.
Copyright © 2012 by James Conway
All rights reserved
REGISTERED TRADEMARKâMARCA REGISTRADA
LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA
Conway, James, 1964â
The last trade : a novel / by James Conway.
p. cm.
ISBN 978-1-101-58457-6
1. International financeâFiction. I. Title.
PS3603.O56476L37 2012
813'.6âdc23 2011036278
Printed in the United States of America
Designed by Nancy Resnick
Title page photograph © Diseñador / Fotolia
PUBLISHER'S NOTE
This book is a work of fiction. Names, characters, places, and incidents either are the product of the author's imagination or are used fictitiously, and any resemblance to actual persons, living or dead, business establishments, events, or locales is entirely coincidental.
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Â
For Patricia Helen Conway
and Judy
In an effort to slow or temporarily halt catastrophic financial disasters, demonstrated by a sudden broad and steep decline in the markets, the New York Stock Exchange relies on a series of Circuit Breakers, each of which addresses a different level of decline in the Dow Jones Industrial average. For instance, these are the NYSE Circuit Breakers for the second quarter of 2012: In the event of a 1350-point decline in the DJIA (10 percent) before 2
P.M.,
there will be a one-hour halt of trading. In the event of a 2100-point decline in the DJIA (20 percent) before 1
P.M.,
there will be a two-hour halt of trading. In the event of a 3150-point decline in the DJIA (30 percent), regardless of the time, markets will close for the day, if not longer.
*Â *Â *
The
Hindenburg Omen
is a technical analysis pattern that portends a major stock market crash. It is named after the crash of the German zeppelin
Hindenburg
on May 6, 1937. The rationale is that on a given day, under “normal conditions,” a substantial number of stocks on the NYSE will set new annual highs
or
annual lows. A
Hindenburg Omen
occurs on those rare days when there is a simultaneous presence of substantial new highs
and
lows. Soon after, according to the data, a major to catastrophic market decline is likely to follow. It is a known fact that every major U.S. stock market crash of the past seventy-five years has been preceded by a confirmed Hindenburg Omen.
“Derivatives are financial weapons of mass destruction.”
âWarren Buffett
“The moment a person forms a theory his imagination sees in every object only the traits which favor that theory.”
âThomas Jefferson
Contents
Prologue
Las Vegas
March 12, 2008
T
he world is on fire and they are spraying champagne on it. Pissing on it. Laughing at it. Puffing the smoke of five-hundred-dollar cigars in the white-hot center of it.
They are in a ten-thousand-square-foot mansion, the former home of a suddenly bankrupt mortgage broker, having a party, a bash, an all-American bacchanal celebrating the antithesis of bankruptcy.
Celebrating a windfall now in the billions while the country is in the midst of losing trillions.
Rick Salvado bought the mansion a week ago just for this moment. He bought it as much for the outdoor shooting range, four hot tubs, twin swimming pools, and first-floor dance club replete with two DJ booths and four stripper poles as he did for the irony. Because this “event,” an exclusive gathering for the top-tier clients and executives of Salvado's hedge, the Rising Fund, was bought and paid for because The Rising was one of the few funds to see it all coming. The sub-prime mortgage debacle, the chaos at Bear and Lehman, and the collapse of the U. S. and world marketsâthey were one of the few to see it, bet on it, and profit from the devastating misery of many.
No one is more intimate with this fact than Drew Havens, the twenty-eight-year-old stat-arb quant who designed the elegant computer model that foretold this inelegant mess. He's the one who has made Rick Salvado an overnight multi-billionaire media darling and a lot of people, including himself, rich. Havens stands off to the side of the dance floor, sipping Diet Coke and watching the revelry. He's exhilarated and exhausted, fascinated and more than a bit mortified. Once Salvado was certain that things were going to break right, he secured the mansion, fired up the Gulfstream, and whisked dozens of them out here on a flight filled with booze and sex and coke. Havens, a happily married man with a newborn girl, was more spectator than participant. He had a few glasses of in-flight Dom Pérignon but otherwise stayed on the periphery.
When they touched down on a private strip outside Vegas, the bender continued. Salvado had a convoy of Land Rovers take them to a makeshift shooting range far out in the desert, where, armed with everything from 50-cal machine guns to a nineteenth-century Gatling gun, and provisioned by scantily clad ammo hostesses, they blasted an assortment of targetsâincluding life-sized cutouts of everyone from Osama bin Laden and Barry Bonds to Rosie O'Donnell and the head of the SEC. For the SEC leader, Salvado had a surprise. His handlers set up the cutout inside a Toyota Corolla one hundred yards away. They then towed up a twelve-foot-long T8 90mm antitank cannon.
Havens is looking at his BlackBerry at the latest pictures his wife, Miranda, sent of their daughter, Erin, who is waving good night, when his friend Tommy Rourke approaches. While Havens is all about numbers, Rourke is all about relationships. He's the fund's top rainmaker when it comes to landing high-net-worth prospects. Rourke slaps Havens on the back. “What's up, egghead?” It's a name the staff of The Rising had taken to calling the shy and numbers-obsessed Havens, at first disparagingly and now, post-windfall, with reverence.
“The egghead is doing all right,” Havens answers. “Other than having a busted eardrum from that goddamn cannon this afternoon.”
Rourke laughs. “Rick's a crazy bastard. But you gotta love the guy . . . right?”
“No complaints here,” Havens answers. On the dance floor Rick Salvado is bumping and grinding to Chris Brown's “Take You Down” with no fewer than three female “entertainers.” Nodding at Rourke's glass of sparkling water, Havens continues, “So no strippers, coke, and single-malt for you?”
Rourke shakes his head. “Someone's got to watch over this ship while the captain lets loose.” They clink nonalcoholic glasses and watch the spectacle on the dance floor and on the TV monitor hanging from the walls, where grim-faced anchors and manic scrawls predict Economic Armageddon. Unlike the others, they're the only ones who seem to be paying attention to the screens. “Crazy shit, huh?”
“Only gonna get crazier,” Havens answers as numbers and models whistle through his head and he attempts to make some kind of emotional sense of what has come to pass.
*Â *Â *
Here's what happened. In the early spring of 2007, little more than a month into his new job as a desk quant in the real estate sector, Havens received a surprise cube visit from Salvado and the man who discovered him, Tommy Rourke.
“Rourke here tells me you are a freak with numbers,” Salvado said. “But not exactly a people person.”
“This is true.”
“Fine by me,” Salvado replied. “We didn't recruit you to be the face of the company. We recruited you because of your analytical skill, which I have been told is borderline genius. I say borderline because you haven't made us rich yet. Do that and you get to be called whatever kind of genius you want: Mad. Evil. Whatever.”
Havens smiled. Fair enough.
Salvado continued, “So, I was impressed by your thoughts on the housing market. You really think it's gonna tank?”
“To say definitively, I'd have to dig much broader and deeper.”
“But your gut tells you it's a bubbleâand a big one?”
“Scary big.”
“Good enough,” Salvado said. “I want you to hunker down here in your quant cave and eat, breathe, and sleep the data. I want you to put together the pieces, test the hypotheses. Model the fuck out of it. Do not come back to me until you have a verdict. I wanna know the total circumference and volume of this bubble and, more importantly, the precise nanosecond it's gonna burst.”
Havens dove in. He lived for that kind of work. For some in finance, numbers quantify risk and reward. For Havens, they quantified the mysteries of life. “My Quant in Captivity,” Salvado began to call him, and Havens did not have a problem with it.
Three months later Havens emerged from the data cave and told his boss that his hunch was valid. The sub-prime mortgage situation in the U.S. housing market was worse than he had thought possible. Worse than anyone had imagined.
“In other words,” Salvado replied that afternoon, “it's better than we ever could have hoped for.”
Havens didn't have an answer. He'd never thought of it that way.
*Â *Â *
Havens checks his watch. He promised Miranda he'd call an hour ago. He wants to hear all about the baby's day and to get away from the others. He feels as if he's done more socializing in the past twentyfour hours than he's done in the previous twenty-eight years. But it's been almost impossible to get away from Salvado, Rourke, and company.
“So, this is quite the change from working in the back office for Citi out in fucking Queens, ain't it, egghead?”
On the dance floor two of the three women with Salvado have taken off their tops. The third is trying to take off Salvado's. As bizarre and excessive as this is, Havens can't help but feel proud. After a lifetime being called an antisocial nerd and an egghead, it's nice to get a bit of respect. “Yeah,” he concedes. “I couldn't have predicted this in a million years.”
“But the funny thing is,” Rourke says, “you did.”
