A Week in December (2 page)

John Veals, the hedge-fund manager, was meanwhile looking at one of the four flat-screen monitors banked above his desk. His office was in a tall, blank building in Old Pye Street - the only such block in an otherwise quiet, residential road in Victoria - with a view over to the miniature Byzantine domes and piebald brickwork of Westminster Cathedral, where the bells were tolling for early evening Mass.

The weekends allowed Veals time to be alone in his office, without interruption. This was when he tried to let his market instinct find its true north, with no e-mail or telephone or colleagues to break the spell. It was not that it was ever a noisy office; even during the busy week, most visitors remarked on its calm. Veals himself spoke little because he was so aware of security risks. Although the office was regularly swept for bugs, he had trained himself never to say anything that he couldn't bear to have overheard. Much of his most delicate business was conducted in the Folger's coffee shop in Victoria station, in the Moti Mahal beneath a sooty bridge in Waterloo or through one of his six cellphones in an alleyway that ran off Old Pye Street, behind the Peabody Buildings. Marc Bezamain, his man in New York, told him that ninety-five per cent of successful prosecutions brought by regulators stemmed from their reading of incriminating e-mail traffic.

Veals didn't do e-mail. To clients or counterparties too powerful to ignore, he offered the vague [email protected] as an address, but to make sure he couldn't reply even to the most provocative messages, he had had the back office disable his 'send' capacity. There was one other ruse. The company which supplied the screens and their data also offered an e-mail service; and this was neither stored nor checked by the authorities.

The secretaries at High Level Capital were chosen for soft-footedness. The managers worked in soundproof offices with solid doors; Veals did the rounds each day, but avoided large meetings. The analysts came and went, then wrote their reports on silent keyboards. All of them were thin. Veals couldn't stand fatness; it riled the ascetic in him. The men wore charcoal grey suits, never navy, and he stipulated no pink shirts; the women's skirts were knee-length, their nylons black. In summer the air conditioning was turned up high; in winter the radiators were too hot to touch. Veals took thirty per cent of his investors' profits annually; but he also took three per cent a year of the value of funds (before leverage) as a management fee, so even by doing nothing, no new trades at all, he could make many millions a year. The electricity bill was not an issue.

In his twenty-seven years in finance, one thing remained constant in Veals's view: the only way to make money was to have an edge. No trader, however brilliant or intuitive, could outperform the market over a sustained period. Veals had read all the books on 'rational' markets: he'd read the theories of Merton, Black and Scholes on the valuation of stock options; he'd weighed on the one hand their two Nobel prizes and on the other hand the trillion-dollar black hole left by the collapse and humiliation of the hedge fund for which all three had worked.

'Theory' was all, in John Veals's opinion, piffle. If you play blackjack every day for a year, the house will always win. Veals knew this for a fact since in his first experience of markets, at the age of fourteen, he
was
the house. His uncle was a bookmaker in Hendon and showed young John how to set the odds in a ten-horse race so that any outcome made a profit for the book. The keys, he taught John, were speed of reaction and constant recalculation. At the latter, John was a prodigious pupil. From the age of thirteen he could work out in his head what odds should be offered on an eleven-part yankee before his uncle could do it with paper and pencil. Horse racing taught him that the only way to beat the house was to have information. If you knew that Stardust Rosie had been held back by her jockey for three races till her odds were 18/1 for the next outing but on that occasion the jockey would give the horse her head, then you really could beat the bookie by backing her to win. No computer model, no algorithmic forecast, could outperform such knowledge.

Veals was viewed as old-fashioned by his peers in believing that the 'real economy' of mills and factories and making things did still have a function - which was to generate a deal flow for the financiers. And these deals, he pointed out, did generate real revenue, which in turn generated tax (some tax anyway, depending on how efficient your tax-avoidance department was) for hospitals, roads, all that.

Where Veals gained an edge on most of his rivals was by knowing that the word 'inside' in the phrase 'inside information' had a surprisingly strict legal meaning. He had known many bankers who hadn't properly understood how much 'inside' information they were legally permitted to acquire, and had thus unnecessarily handicapped themselves. He didn't tell them. They, too, could have studied the book if they'd chosen to. There was kosher inside and iffy inside. 'Know the rules' was Veals's own favourite rule.

The second obvious step towards getting a sustainable edge was to stay away from regulation. In his years as a futures trader and a banker Veals had chosen to operate in areas where regulation was either minimal or non-existent. It was only a matter of time in his own mind before he moved into the world of hedge funds, because here legal supervision was at its lightest: sophisticated investors needed flexible arrangements, not fussy inspectors.

Another obvious precaution, taken by most senior people he knew, was not to pay tax. When it came to running his own hedge fund, he naturally, therefore, based it offshore. He had chosen Zurich, because it was under the jurisdiction neither of the Financial Services Authority in London nor of the European Union. The large profits of High Level Capital were kept in the fund and rolled up abroad; it was structured so that it generated no taxable income. Vanessa, John Veals's Anglo-American wife, was for tax purposes not domiciled in Britain, and there were legal ways of making sure that the income they needed each year should be classified as foreign earnings in her name. A remittance of funds from abroad could alert the taxman, it was true, but the Veals family didn't need much income: John had no power boats or polo ponies; no collections of Sumerian stone tablets or early Picassos; no mortgage, no hobbies and no interests outside work. He hadn't even dug out the basement of his house to stick in a swimming pool. Petty cash could be also bled out of the fund through a web of trusts held in the names of his two children, Bella and Finn. Well, it wasn't his fault; he didn't make the laws.

He disliked the famous remark made by a New York billionairess that taxes were for the 'little people'. It sent out the wrong signals. John Veals did, however, share the more elegantly phrased view of many of his senior colleagues in the London hedge fund and banking world that 'income tax is voluntary'.

As the bells tolled, he closed his eyes and contemplated the magnificent good fortune of his life. The quiet in the office was wonderful. Two senior colleagues worked abroad, Duffy in Switzerland and Bezamain in New York, where how they behaved was their own affair (Bezamain wore espadrilles to work and sang French folk songs under pressure). But in the cathedral calm of Old Pye Street, Veals's partner Stephen Godley was the only person allowed to be voluble; he siphoned off the tension from the others: the billion-dollar sweats bloomed only in his armpits. Since the day they'd met at a New York investment bank in 1990, Veals had seen in Godley's open, sporting jollity something he himself was lacking: clients warmed to him in a way that no one ever warmed to Veals. He talked to them in sporting metaphors ('I think we'll put the other side in to bat first'), and he was the only Englishman in New York who seemed genuinely to understand baseball and gridiron as easily as he did golf and cricket. In the course of raising funds to start their hedge fund in 1999, Veals had learned to let Godley do the talking. Who cared what madman was in the attic so long as the door was firmly locked and the key was in smiling Stephen Godley's pocket?

The long association meant Steve Godley knew the details of each trade made by John Veals for more than fifteen years, which allowed him to make unamusing jokes about bodies and where they were buried. On the other hand, Veals had seen Godley build his first personal PS10 million at the bank by exploiting (first to his employers' advantage, then, through annual bonuses, to his own) the information that leaked through the bank's flimsy Chinese walls and by putting on his own trades a fraction before exercising identical ones requested by a client. This was regarded as simple exuberance, the fog of war; it was nothing like the distasteful insider dealing of the bond department. Everyone did it. Chinese people, as Godley remarked, tend to be short, and their walls are easy to look over.

Veals brought his mind back to the present. High Level had had a difficult six months. One of the fund's perennial problems was its sheer size (it had over PS12 billion under management, of which about a quarter was Veals's own reinvested money): it was often hard to find market inefficiencies so glaring that they could make a real impact on returns. Then they had, frustratingly, not been able to profit from the mortgage market that was causing tremors in America. After much consultation with Marc Bezamain in New York, Veals had been convinced in 2005 that American mortgage companies had dangerously oversold mortgages to poor people ('sub-primers') who would be unable to make the monthly repayments if anything - anything - went wrong.

High Level therefore bought hundreds of millions of dollars of 'put' options on the relevant housing index, the ABX. The 'puts' gave Veals the right to sell the index at a pre-agreed price in the future if he so chose; his profit was to be on the difference between that price and the much lower level to which he was convinced the market would fall. But the index didn't move. It seemed impossible. People were losing their jobs, defaulting on their payments; interest rates and thus monthly repayments were set to rise - but still the index wouldn't fall.

One of the marks of a good manager, everyone agreed, was to know when he is beaten, and in the summer of 2006 Veals had ditched the trade. It took another nine months for the index to collapse. He took no pleasure in being proved 'right' eventually about the fall and still thought he had been wise to pull out: the market's ability to behave irrationally had outlasted his patience, and he had done the professional thing. He recouped some of his losses by short-selling two individual mortgage providers, but even here he closed the position and returned the borrowed stock with the price twenty points above its final nadir. This could happen.

Yet could he now be sure, in the cold December darkness, that he was not being influenced, even minutely, by a vestigial wound to his pride? He gazed from the window towards the cathedral and screwed up his eyes. This long introspection was a ritual. Not until he was sure that his motives were pure - driven in other words only by an unemotional and rigorous assessment of profitability - would he commit himself.

Somewhere in the passageways of John Veals's mind, beyond the thoughts of wife, children, daily living, carnal urges, beyond the scar tissue of experience and loss, there was a creature whose heart beat only to market movements. He couldn't be happy as a man if his positions weren't making money. For John Veals, the analysis of a potential position was therefore more than a business or a mathematical problem; it involved something painfully close to self-knowledge. His life depended on it.

II

In the rear carriage of Jenni Fortune's Circle Line train Hassan al-Rashid sat staring straight ahead. Normally, without a book to read, he would move his head up and down so that the reflection of his face in the convex window opposite would develop panda eyes, elongate like an image in a fairground mirror and then pop. But this was not the day for such frivolity: he was on his way to buy the constituents of a bomb.

Two white-skinned teenagers opposite him were kissing, sticking their tongues out and laughing when they touched. Although they were absorbed by one another, there was a challenge in their public intimacy. A black-skinned youth with feet in padded white trainers the size of small boats was leaning forward. From his earplugs came a hissing, thumping noise. Hassan could sense that this youth's eyes, though looking down, were ready to lock on to those of anyone who caught them, so he was careful to keep his own gaze somewhere to the left of the hunched shoulders.

To Hassan's left, in the standing area by the central doors, were Japanese and European tourists. It was Sunday, Hassan thought; most of these people should have been in church, but these days Christians viewed cathedrals as monuments or works of art to be admired for their architecture and paintings, not as the place where they could worship God. Their final loss of faith had happened in the last ten years or so, yet in the
kafir
world it had passed with little comment. How very strange they were, he thought, these people, that they had let eternal life slip through their hands.

Where Hassan had grown up in Glasgow, the Christians (he hadn't by then adopted the word '
kafir
') blasphemed and drank and fornicated, though most of them, he knew, still more or less believed. They were unfaithful in hotel rooms, but they got married in churches. They went on Christmas Day or when they buried a friend; they took their babies to be named there, and when they were dying they still sent out for a priest. Now you could read statistics in newspaper surveys which confirmed what anyone could see: that they'd given up God. And barely a
kafir
seemed to have noticed.

The conviction that the rest of the world lived in a dream was one that grew in Hassan each day. With the exception of those in his group and some of the more committed members of the Pudding Mill Lane Mosque, he viewed everyone he knew as deluded. It was perplexing to him that people paid so little heed to their own salvation; he was puzzled by it in the way he might have been by the sight of a mother feeding whisky to a baby. There might have been some short-term benefit in the respite from crying, but it wasn't something that a reasonable person would do. Yet the truth of life, and of life after death, was not exactly hidden.